Punitive import tariffs on Chinese-built cars: a good idea turning bad?

The European Union (EU) has recently announced plans to impose tariffs of up to 38.1% on electric vehicles (EVs) imported from China, in addition to the existing 10% duties on all imported EVs. This barrier must prohibit Chinese brands from flooding the EU market with affordable models made through cheap national labor costs and unfair state subsidies.

These tariff hikes are the result of an investigation led by EU officials. Depending on the degree of cooperation from the Chinese automakers, they face a lower or a higher tariff. Supportive brands could get away with 17.4%, but refusal triggers levies as exceptional as the 38.1% mentioned above. In total, five stages are set to step into force. It’s worth noting that the EU hasn’t made a final decision yet. As negotiations with Beijing are ongoing, both parties aim to reach a mutual agreement. So far, the EU intends to install the new tariffs provisionally as of the 5th of July 2024, while its survey concludes only in November.

On average, 20% cheaper

According to data from the European Commission, Chinese brands currently have an 8% share in the European market, which is projected to almost double by 2025. The momentum is gaining as electrification is incentivized in many European countries. At the same time, an average electric car from a Chinese brand costs 20% less on average. Affordability is key to success in the switch to electromobility, and this is precisely the challenge for Western car makers facing lower access to battery materials, higher wages, and restricted to non-existent government aid.

It is a good idea to block manufacturers who benefit from an unfair headstart. Economies need regulation, but the question is, at what reach? The United States, where Chinese brands have yet to embark, bar a few exceptions, inspired these tariff hikes. President Joe Biden already imposes a peak tariff of a whopping 102.5% on Chinese-built vehicles, making them twice as expensive. If anything, the trade war is growing globally, and protectionism is rising, with major economic strongholds on a collision course.

Espionage from the EU?

However, European auto makers find themselves in a substantially different economic street compared to their American counterparts. China is the top-selling market for the premium names in the auto industry, especially from Germany. They fear retaliation levies from Beijing, which could severely hurt their sales performance. The Chinese newspaper Global Times rpeorted that an alliance of Chinese automakers already asked the authorities to raise tariffs on foreign-made models featuring engine blocks of more than 2.5 liters. These Chinese companies claim they did their best to cooperate and reacted in shock and disbelief about the decision by the EU. They answer that the information detail demanded from the European survey was unprecedented, beyond limits, and even ‘espionage’.

Western brands have an additional worry. They must respond to Chinese companies or business entities that belong to their shareholders. Finally, many European brands assemble some of their EVs in China with local partners and export them to the EU. These cars aren’t exempt from the new duties; some are even punished by the highest tariff categories, regardless of the trusted badges on their hoods. All these drawbacks do not apply to domestic car makers from the U.S.

The way around import tariffs

The best way to look at the tariffs is as temporary measures for strengthening local production. To circumnavigate their competitive loss, Chinese brands will start constructing factories in Europe, but can also do so in countries with whom the EU has a favorable trade agreement. Morocco and Turkey keep a keen interest in these developments, as they are positioned close to the EU and offer tangible benefits such as low labor costs. In anticipation of protectionist efforts, several Chinese car manufacturers have already announced the construction of factories in Spain and Hungary to supply European customers. These cars will be offered without a tariff hike. As many established assembly sites are being winded down over the electrification switch - putting an electric driveline together demands much less staffing than a fossil fuel powertrain -these new investments could be a welcome pat on the back for the European car industry

As mentioned, Europe seeks to reach a diplomatic solution with China. However, the question remains whether Beijing is a reliable negotiator. The ‘elephant in the room’ for the Asian powerhouse is an internal market with an overcapacity problem - denied by China’s leaders. To water down its EV overstock, export markets worldwide are activated, a strategy still in its infancy. Beijing has no plans to cap its automotive production, meaning flooding foreign markets is a decisive part of its strategy.