On October 4, representatives from EU member states voted to approve the final draft of an anti-subsidy ruling targeting electric vehicles (EVs), primarily those imported from China. This vote highlighted the EU’s varied stance on the issue, with 10 member states voting in favor, five opposed, and 12 abstaining.
The finalized tariff rates include a 7.8 percent tariff on Tesla, 17 percent on BYD, 18.8 percent on Geely, and 35.3 percent on SAIC, while other EV manufacturers under investigation that were not sampled individually face a general rate of 20.7 percent. With Europe’s standard car import tariff at 10 percent, Chinese EV manufacturers now face entry tariffs as high as 45 percent.
The European Commission initiated its anti-subsidy investigation into Chinese EVs at the end of 2023 and introduced provisional tariffs in July 2024. The imposition of these final tariffs underscores that high-level engagements and negotiations between China and the EU, ongoing since May, have yet to alleviate tensions. Notably, the finalized tariff rates reflect only a modest reduction of 1-2 percentage points compared to the draft released in August.
On October 9, China announced temporary anti-dumping duties on European brandy, marking the official escalation of the tariff dispute between the two regions. To anticipate potential developments and provide strategic insights for academic analysis and business planning, it is useful to assess the next steps and policy tools available to both the EU and China as this trade conflict unfolds.
China’s NEV Exports Must Forge Ahead Despite Challenges
China’s drive to expand its New Energy Vehicle (NEV) exports requires a “press on” approach, especially as a tariff dispute with the EU over NEVs has become almost inevitable. These tensions stem from recent economic shifts within both regions. China faces sluggish economic growth and persistent overcapacity, compelling many domestic automakers to pursue exports to alleviate internal pressures. Meanwhile, in the EU, the automotive sector’s decline and rising international competition have led the bloc to adopt more protectionist trade policies.
In China, although the government has recently rolled out various stimulus measures – including monetary easing by the central bank and market support initiatives aimed at boosting consumption and investment – structural issues continue to hinder a full economic recovery. Consumer confidence remains low, leading to cautious spending behaviors. This backdrop has affected the NEV sector, where, despite modest market growth in 2023, profitability remains elusive.
According to the China Passenger Car Association’s July 2024 data, the NEV market saw growth last year, but most manufacturers reported losses. Profit margins in the automotive industry have declined by 3.7 percent since 2015, and overcapacity continues to plague the sector. For the first four months of 2024, domestic industry profit margins were a mere 4.6 percent, marking a seven-year low.
Traditional automakers are showing signs of strain. For instance, SAIC, which has held the title of China’s largest automaker for 18 consecutive years, reported a 12.8 percent year-on-year decline in total revenue and a 6.5 percent drop in net profit for the first half of 2024 – results that came as a surprise. In a candid statement on May 10, Great Wall Motor’s chairman, Wei Jianjun, acknowledged that the EV sector’s losses had deepened in 2023. He cautioned that the intense competition would likely persist for the next three years, warning that sustained losses could undermine the sector’s long-term development.
The data also indicates an emerging stratification within the Chinese auto industry. As the market becomes increasingly saturated and profit margins narrow, many small and medium-sized enterprises may struggle to survive, potentially exiting the market in the near future.
Amid slowing domestic demand and intensifying competition, expanding abroad has become an imperative for China’s automotive industry. The government increasingly recognizes that promoting NEVs internationally not only addresses domestic overcapacity but also serves as a strategic tool for “overtaking on the curve” and bolstering public confidence.
NEVs are viewed by China’s leadership as a new pillar of economic growth. More importantly, given the backdrop of technological decoupling from foreign markets, the government is emphasizing NEVs as a key element of national technological advancement and industrial upgrading – a strategic achievement to showcase on the global stage. The 2024 Government Work Report mentioned NEVs five times, underscoring goals such as “consolidating and expanding China’s lead in smart and connected NEV industries” and “boosting smart and connected NEV sectors.” Thus, despite tariff pressures from Europe and the United States, Chinese NEV manufacturers are compelled to press forward with exports, driven by a complex blend of economic and political motivations.
China’s Policy Options Amid EU Uncertainty
In swift retaliation against the EU’s tariffs, China announced anti-dumping measures on EU-produced cognac, a move likely to impact some French spirits producers. However, China’s primary motivation for this response seems to stem from a need to “save face”; despite high-level diplomacy, such as the Spanish prime minister’s visit to China and Commerce Minister Wang Wentao’s trip to Europe, the EU proceeded with imposing high tariffs on Chinese products. This pressured Chinese leadership into making a direct response.
That said, it is clear that China is not interested in igniting a full-scale trade war with the EU. First, with domestic economic stimulus efforts yet to yield significant results, it would be unwise for China to strain relations with such an important trading partner. Second, the evolving U.S. 2024 election landscape suggests a potential return of Donald Trump, which could foreshadow further deterioration in China-U.S. trade relations and possibly a resurgence of global protectionism. In this context, China is unlikely to escalate tensions with the EU unnecessarily.
Finally, China remains concerned that the EU may further intensify its restrictions on Chinese NEVs, particularly as firms like BYD and Dongfeng are considering investments in the EU and neighboring regions, such as Turkey, to circumvent tariffs. There are already discussions within the EU about limiting Chinese greenfield investments or expanding tariffs on auto parts to safeguard critical infrastructure and address data security concerns. This indicates that the EU still has several other restrictive tools at its disposal, leaving China with legitimate concerns over potential further escalations.
Given China’s motivations and the current decision-making landscape, its primary approach is likely to involve continued negotiation with the EU to prevent further tariff escalations or an expansion of restrictions into the investment domain. Following a “frank and candid” discussion between European Council President Charles Michel and Chinese Premier Li Qiang on October 11, Michel indicated to Agence France-Presse that China must “adapt its behavior” to address the mounting tariff dispute with the EU, warning that the situation could escalate into a full-blown trade war.
In this context, the Chinese Ministry of Commerce will likely lead sustained efforts to enhance communication with EU stakeholders, exploring potential compromise measures, such as a “minimum price” scheme for imported Chinese EVs. Although Reuters reported on October 8 that Brussels had rejected a Chinese proposal to set a minimum price of 30,000 euros for Chinese-made EVs, Beijing may still aim to negotiate incremental concessions. Drawing on prior China-EU negotiations over solar panel imports, where extended talks eventually yielded import quotas and minimum price agreements, China could seek similar breakthroughs for NEVs over the long term.
Diplomatic and economic negotiations will thus remain the core strategy, with the Ministry of Commerce working alongside the Foreign Ministry, the National Development and Reform Commission, and the Ministry of Industry and Information Technology to engage in multi-level dialogues aimed at exploring compromise. While the EU may be limited in its capacity to offer major concessions, sustained diplomatic efforts may help moderate the EU’s responses. For instance, the recent visit to China by Spain’s prime minister, who shifted his stance from his July vote, suggests that China may find opportunities to leverage such diplomatic outreach. China might also consider relaxing certain restrictions on critical sector investments, offering the EU a trade-off to mitigate the NEV dispute. An example could be granting greater access to Europe in markets like core medical equipment components in exchange for concessions on the automotive front.
Second, China will continue to capitalize on the current window of opportunity to expand greenfield investments across Europe, aiming to establish a foothold before the EU potentially implements investment restrictions. In September 2023, NIO’s European energy plant in Hungary’s Pest County officially began operations. In January 2024, BYD announced plans to build an NEV manufacturing facility in Szeged, Hungary. SAIC, Changan Automobile, and Great Wall Motors also have plans for European factories. While discussions are underway about tightening regulatory oversight on greenfield investments, EU-wide investment controls are unlikely to materialize immediately, given the extended timeline for policy development.
In January, the European Commission released the European Economic Security Package, which proposes that EU member states include greenfield investments – such as new facilities or business establishments – within the scope of foreign investment review. This draft was opened for public consultation in the first half of 2024. Feedback has shown that many within the EU remain cautious about implementing broad-based foreign direct investment controls, with respondents questioning the need for new tools. Most also believe that any restrictions should only apply to new or ongoing transactions rather than existing investments. This response suggests that Chinese automakers still have some leeway to pursue European investments before any regulatory changes are finalized.
Moreover, considering the potential benefits of technology transfer, job creation, and economic growth, numerous EU member states may remain receptive to Chinese investment. By moving swiftly, Chinese NEV manufacturers can evade punitive tariffs and reinforce their presence in the European market by seizing this time-sensitive opportunity before regulatory shifts take effect.
If the EU adopts more stringent measures on tariffs and investment screening, China may cautiously consider limited counteractions to protect its interests and assert its position. However, these retaliatory measures are likely to remain modest in scope. First, China could impose temporary tariffs on high-end consumer goods from the EU. For example, it might levy additional duties on luxury vehicles with large engine capacities, impacting European premium auto brands and supporting domestic environmental goals by encouraging a shift toward NEVs. China could also consider expanding its tariff reach to other EU consumer goods, such as fine wines and cosmetics, which have substantial demand in the Chinese market. Such price increases could introduce some market volatility, providing additional leverage in negotiations.
China may also restrict exports of critical raw materials essential to the EU’s NEV sector, including rare earth metals, lithium, and cobalt – areas in which China maintains a dominant position in the global supply chain. These materials are crucial for EV battery production, and export restrictions could significantly raise supply chain costs for EU companies. Given the potential international repercussions of such measures, however, China would likely implement them with caution.
Additionally, non-tariff barriers could serve as an alternative response. China might intensify quality inspections and safety reviews on EU products, especially in the food and agricultural sectors, which are vital to the EU economy. EU goods like dairy, wine, and meat enjoy high demand in China, and imposing stricter regulatory requirements could reduce their market entry, thereby complicating the EU’s trade position. The General Administration of Customs could also adjust customs processing times, indirectly raising costs for EU products entering China by prolonging clearance procedures.
Overall, China’s countermeasures toward the EU will likely be calibrated to avoid escalating into a comprehensive trade war. While these actions may temporarily limit EU exports and investments, China’s approach seeks a balance that minimizes domestic economic impact and signals its resolve.