The European Commission’s plan to impose countervailing duties on Chinese electric vehicles (EVs) narrowly passed a vote by the Council of the European Union on October 4.
Five EU countries voted against the obligation, including Germany, which abstained in the previous vote. Spain was also expected to vote against the tariffs after Prime Minister Pedro Sánchez called for a reconsideration during a visit to Shanghai in September. But Spain ultimately abstained, perhaps because Mr. Sánchez realized there was insufficient support to block the tariffs.
China launched anti-subsidy and anti-dumping investigations into cognac, pork and dairy products, while pressuring major countries to vote against the tariffs. China has also threatened to cut foreign direct investment (FDI) in EV manufacturing in the EU.
China’s response to EU tariffs has been more aggressive than the U.S. and Canada’s response to 100% tariffs on Chinese EVs, but China has launched an anti-dumping investigation into Canadian rapeseed.
China’s response to the EU’s measures is noteworthy. It is clear that China has a large influence on the EU compared to the rest of the world, and this contrasts with the EU’s large market size for Chinese EVs (55% of China’s EV exports % is directed to the EU).
China’s influence stems from two major weaknesses in Europe. First, the EU is unable to speak with one voice even on trade, its most concentrated mandate after monetary policy. Second, the EU is far more dependent on China than the US or Canada.
The EU’s main dependence is on imports, especially for components critical to the digital and energy transition. Furthermore, some of Europe’s largest companies rely on the Chinese market.
Despite the EU’s plans to “de-risk” from China, i.e. to manage the risks associated with economic and technological dependence, the situation has not improved. On the contrary, the EU’s dependence on China continues to increase, and the opposite is true for the United States.
The EU’s dependence on China also stems from Europe’s long-standing investments (mainly in Germany) in China’s auto industry. European automakers currently export EVs from China to Europe, exposing them to countervailing duties from the EU.
It seems logical that companies (including European companies) that enter the EU market with foreign subsidies should be penalized to avoid unfair competition, but on October 4 Japan resolved to protect these car manufacturers in the single market.
The fact that the EU’s largest country is prepared to make such a move should raise alarms about how much influence some major European companies with presence in China are having on the EU’s trade strategy. .
This also adds to the urgency of mitigating the EU’s risks from China if it wants to maintain its independence in economic policy-making.
Risk aversion and financial security undoubtedly come at a cost, but so does doing nothing. To reduce costs, the EU needs to move away from relying on defensive measures such as countervailing duties on EVs and instead move towards proactive action to increase competitiveness.
Thanks to China’s impressive technological advances and huge economies of scale, the cost of producing EVs in China remains lower than in other countries, even without taking into account subsidies.
Most analysts focus on the former as the main barrier for the EU to compete with China in green technology, but that may not be the case. In fact, some of the technology embedded in much of China’s green technology originated in the EU or the US, but remains unprofitable and without government support.
The United States is clearly trying to change this with a major industrial policy push through CHIPS and the Science Act and the Suppression of Inflation Act. It is still unclear whether these policies will be successful.
In contrast, the EU is still struggling to develop a credible industrial policy program that makes its innovations commercially viable. For the EU, this is particularly important. Because compared to the United States, it lacks the capital markets needed to scale innovation.
Unless a true single market is developed, China’s vast economies of scale will be much harder to emulate in Europe. In addition to strengthening the single market, the EU needs to build and rebuild partnerships more quickly with other major economies, especially those in the Global South.
We need partnerships that go beyond markets and procurement. It would also help reduce the cost of potential retaliation from China for defensive actions such as new tariffs on EVs. The main tool for this is the coordination of economic security measures, primarily with the G7 and other like-minded economies.
Overall, the European Commission’s obligations towards China’s EVs signal that the days when China-EU relations were primarily dominated by engagement are over. With China and the EU now competing for the same types of products in third-party markets, it is more important than ever that the rules of the game are fair.
Alicia Garcia-Herrero is Chief Economist for Asia Pacific at Natixis and a Senior Research Fellow at Bruegel & Co.
