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

The European Union (EU) has finally approved plans to impose extra tariffs of up to 35.3% 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 result from an ongoing 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 get away with 17.4%, but refusal and secrecy have triggered levies as exceptional as the 35% mentioned above. Variations depend on the level of information provided by the OEMs. Even though member states have officially backed the move, the negotiation door with Beijing is kept ajar as not to trigger a full-scale trade war. Without further agreements, the tariffs remain valid for five years.

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 as electric car sales are troubled by inflated prices, and this is precisely the challenge for Western car makers facing lower access to battery materials, higher wages, and non-existent direct government aid.

It seems a good idea to block manufacturers who benefit from such 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. The Biden administration approved 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?

But as the European automakers find themselves in a substantially different economic street compared to their American counterparts, not all car brands support the punitive tariffs designed to help them. China is the top-selling market for premium names in the auto industry, especially from Germany (which did not vote in favour of the ‘tariffs wall’), where they face dwindling market shares. They also fear retaliation levies from Beijing, which could further hurt that sales performance. The Chinese newspaper Global Times reported 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. The 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 a temporary measure 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. 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.

But ‘the elephant in the room’ for China is an internal market with an overcapacity problem - denied by the country’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 remains a decisive part of its strategy. Most Chinese brands have answered that they will absorb the tariffs, a reaction that points towards a financial leeway eventually not matched by the European levies, which, in the worst case, remain half as low as in the United States.