POLITICO — 2024-05-14
Automotive Industry
Brussels insists on its own evidence-based methods, but risks ending up looking weak as a result.
The decision by US President Joe Biden to quadruple import tariffs on Chinese electric vehicles Tuesday, 14 May 2024, has overshadowed an ongoing investigation by the European Union that is likely to result in much weaker action.
The EU won’t match the US tariffs, as it sticks close to restraints put on international trade by the World Trade Organization.
Meanwhile, the French-German axis at the heart of the EU is creaking under the pressure, with Paris seeking greater protection from Beijing’s export drive and Berlin fearful that its carmakers could end up being shut out of the huge Chinese market.
As both Washington and Brussels seek to cordon off their markets, Chinese manufacturers will be tempted to set up shop inside the tariff walls.
In the case of the US, it’s Mexico — already a major supplier to the US auto industry — that could serve as a launchpad to skirt the Biden tariffs. In Europe, Chinese players like car maker BYD and battery producer CATL are establishing manufacturing bridgeheads in Hungary, while Great Wall Motors is also understood to be bidding for a new factory.
The US will raise tariffs on electric vehicles, clean energy technologies, computer chips and metals imported from China, the White House said Tuesday, 14 May 2024. Electric vehicles will face a new tariff of 100%, up from 25.
The EU investigation, launched in 2023, is meanwhile inching towards a conclusion. Preliminary duties are due by 4 July 2024 at the latest — but could come sooner. Since these duties are meant to offset the impact of any unfair Chinese subsidies, they will never reach the level of the — more political — US tariffs.
To achieve its stated aim of compensating for the expected level of state subsidies, the EU would need to slap a 50% duty on Chinese electric cars, think tank Rhodium recently calculated.
“The tariffs are, of course, a massive symbolic election present for US automakers,” David Kleimann, a senior trade expert at the ODI think tank said. Indeed, Chinese EV exports to the US are tiny. Based on Chinese customs data, Bloomberg calculated that only 1,700 Chinese EVs entered the United States in the first quarter of 2024.
Regardless, Biden’s bold action is bound to “overshadow” any decision the EU will make, expects EU-China relations expert Francesca Ghiretti.
“Since it is an anti-subsidy investigation — and not anti-dumping — many of us struggle to see the EU imposing the needed 50% tariffs on Chinese EVs,” Ghiretti, a non-resident fellow at the Center for Strategic & International Studies, told POLITICO.
Different strokes
Germany, the EU’s biggest economy and leading auto maker, has opposed the EU subsidy investigation all along. Speaking in Stockholm on Tuesday, Chancellor Olaf Scholz pointed out that at least half of EV imports from China to Europe were of locally-produced Western brands.
“We should not forget: European manufacturers, and also some American ones, are successful on the Chinese market and also sell a lot of vehicles that are produced in Europe to China,” he told reporters. “That is perhaps also a difference in the way we look at things.”
But fear-mongering about the height of the EU duties makes zéro sense, a French official told POLITICO.
“Let’s not kid ourselves: we’re not going to set a 100% rate that would eliminate access to the European market for Chinese EVs in general, but we do need to respond effectively,” they said, having been granted anonymity to speak freely due to this difference of opinions between EU capitals.
“The Commission doesn’t need any pressure on this issue, it is convinced that something needs to be done about EVs. This American decision only strengthens its resolve,” the official added. Paris was the chief backer of the EV case launched by Commission President Ursula von der Leyen in October 2023.
The EU way
The European Commission made clear on Tuesday, 14 May 2024, that the US move was not coordinated between Washington and Brussels, implying that the American steps are not aligned with WTO rules.
“Our understanding is that these tariffs that were just announced in Washington are a response — among other things — to American concerns on precisely overcapacity and unfair trading practices,” said trade spokesperson Olof Gill.
Crucially, he added the worries on either side of the Atlantic might be similar, but “we are addressing them through our own instruments that are in line with WTO rules.”
Despite the constraints, the Commission has virtually a free hand in deciding duties after rapping the three Chinese producers it was investigating for failing to cooperate with its investigation. But even with the resulting so-called “facts available” approach, the EU’s duties will need to be evidence-based.
While the US tariffs now target China, fears that Washington might target the EU’s own exports are justified. “One unavoidable question is if with a different administration, the EU may be the target of similarly significant unilateral measures,” Ghiretti, the CSIS expert, said.
Become less Chinese
This is especially true now that Chinese car makers are building multiple factories in Hungary — to build cars that would viewed as EU products — and on the US doorstep in Mexico, which is part of the North American trade agreement NAFTA.
All American or European tariffs will “just encourage Chinese companies to invest to be representing themselves as Mexican or Eastern European — or wherever they can go — to avoid the Made in China tariff,” expects Shanghai-based automotive expert Bill Russo.
For now, Hungary remains mostly a bastion of car production by German companies. But it does risk developing a new dependency on China, if the flow of investments keeps up, car sector researcher Ágnes Szunomár told POLITICO earlier this year (2024).
In the US, one manufacturing lobby group is already sounding the alarm. The Alliance for American Manufacturing released a report, entitled On a Collision Course, in which it outlines why Chinese car building south of the US is a bad bargain.
“The introduction of cheap Chinese autos to the American market could end up being an extinction-level event for the US auto sector,” the report wrote.
Even if that’s true, Russo argued tariffs are the wrong way to tackle this challenge, because entire supply chains could end up suffering collateral damage. “About half of the US auto production comes out of Mexico [so] these supply chains are are tightly woven together, right?” he said. “It’s not possible to isolate and eliminate China without adding inflation to the cost of the products that Americans or Europeans consume.”