Business Intelligence: International trade is a complex beast—but beware

Business Intelligence: International trade is a complex beast—but beware

ECG — 2024-06-11

News from ECG

The tit-for-tat and boom-for-bash playing field of tariffs and quotas, subsidies and dumping, are never a level playing field. But as vehicle exports from China continue to grow, scrutiny is intensifying. In the first four months of the year a total of 1.83 million new vehicles have been exported from China. March exports alone hit 502,000 and April exceeded the record at 504,000 units, as per data from the China Association of Automobile Manufacturers (CAAM). Overall year to date exports are now up 33.3%.

However, China’s Minister for Commerce, Wang Wentao argues that only 12.6% of China’s domestic production of vehicles are earmarked for exports. Of these, only 5% are exported to the EU or around 470,000 units in 2023. But in terms of value of vehicles exported to the EU from China the growth is staggering as higher spec models are also produced in China destined for European shores, often by Western OEMs. In 2021 the value of vehicles imported into the EU 27 from China hit USD 5.5 billion as per data from the Geneva based International Trade Centre (ITC), rising to USD 10.8 billion in 2022 and USD 19.3 billion in 2023.

But the segment with the highest surge in value of vehicle imports was electric passenger cars. In 2021 the EU 27 imports of electric passenger cars from China reached USD 3.7 billion, rising 91.8% to USD 7.2 billion in 2022 and further to USD 15.1 billion in 2023, a year-on-year increase of 111%. This has caused eyes to roll and heads to turn.

What is often a penalty for one, becomes a boost for the other and where one product is drawn attention to and penalised, another arbitrary product then takes the brunt. In no way, however, is international trade between major players possible without forms of trade embargoes and protectionism—it's just all part of the game.

Leveraging a 15% tariff on electric vehicles from China, in addition to the current 10% on all passenger vehicles imported into the EU (with the exception from the UK), would mean a 25% tariff on the price of battery electric vehicles brought directly from China to the EU. Would this deter consumers? The question is would the additional 25% be absorbed by the OEM? Today’s sweet spot in terms of the price for a new electric car is €20,000. Almost every incoming OEM maintains that, even if tariffs are increased, they will still maintain €20,000 for the price of their entry battery electric car.

At the annual ECG General Assembly & Spring Congress in Baveno (Italy), ECG’s Business Intelligence Unit shared the latest updates on ‘Vehicle Exports from China’ and ‘Policies & Protectionism’, highlighting the current scenario where OEMs from China have already begun localisation strategies in Europe, whether through joint ventures (JVs), wholly owned foreign enterprises (WOFEs), acquisitions or contract manufacturing. Start of production plans are imminent although it will take time to ramp up volume production even when using existing facilities as new brands in Europe need market penetration to warrant higher volumes. The drive has begun to accelerate manufacturing back to European shores.

But if tariffs are raised beyond the 25% mark, as the US has done, the retaliation might just be far too painful. And that bite might hurt other products. Already the EU cognac industry is struggling to bring back volume exports to its largest global market - China. Restrictions and scrutiny into the high-end brandy market were a measured response by Beijing to the interrogation into EV exports from China to the EU. The problem going forward would be, what other products could be used in the tit-for-tat, boom-and-bash playing field of international trade? As they say, beware the beast you help create.

We all wait to see the new set of EU tariffs that will then be backdated to 7 March.

ECG Members can access the ECG Business Intelligence report on Policies & Protectionism, presented in Baveno, here.