China's electric cars face punitive tariffs, affecting industries considerably.

Consequences of Penalties for China's Electric Cars: Impacted Parties

The possibility of a trade war between China and the European Union appears to be on the horizon, with German car manufacturers expressing concern over tariffs placed on the importation of electric cars from China into the EU. These tariffs are intended by the Commission to lessen risks.

The EU Commission has provisional tariffs in place for the importation of electric cars from China, leaving German manufacturers, such as VW, BMW, and Mercedes, as well as their Chinese counterparts like SAIC, Geely, and BYD, affected. SAIC faces a 38% tariff, while Geely and BYD deal with tariffs of 20% and 17% respectively. While previously all electric car imports from China to the EU faced a 10% levy, German car manufacturers may now expect tariffs to be at least 21%.

Volker Wissing, the Federal Transport Minister, voices his concern over this potential trade war. "We don't want a trade war with China," he told German Press Agency, "It would be disastrous for Germany and not in the EU's best interest." Other economic ministers also share his sentiment, fearing harm to the domestic industry due to these tariffs. Bavaria's Economic Minister, Hubert Aiwanger, comments, "We think we're cutting the Chinese, but we may be cutting ourselves."

While many German politicians are confused by the EU Commission's decision, France advocates for the implementation of such tariffs, citing the need to diminish the risk of overreliance on major trading partners like China. French car manufacturers have less reliance on the Chinese market compared to German competition. In September, there was even an announcement by the Commission President Ursula von der Leyen that an investigation into China's state support for its electric car industry would be carried out.

A source from the Commission states that tariffs could have significant consequences for German buyers. "It would be a nightmare for German car buyers," they say. The subsidization of Chinese electric car production along the supply chain could lead to distortions in competition, endangering the sustainable production of electric vehicles in Europe and resulting in Chinese companies gaining higher profits on exports to the EU. These gains could be redirected into further investment in their own companies. In contrast, European car manufacturers could not sustainably compete in price due to their disadvantage in terms of state subsidies and higher costs.

It is believed that there won't be any price hikes for buyers of electric cars from China in Europe. Chinese companies are speculated to accept lower profits and not pass the higher costs on to European consumers.

Frank Schwope, an automotive industry expert, has a different opinion, however. He believes that tariffs would be a nightmare for German car manufacturers. He suggests import restrictions and their impact on the EU's auto industry and consumers. China has long been the primary sales market for German manufacturers. If EU tariffs are implemented, countermeasures from the Chinese government might burden German manufacturers significantly.

Chinese electric cars have not yet flooded the European market, with just 116,000 sold in Western Europe between January and April, representing a market share of 4.01 million vehicles where electric cars make up only 2.9%. When Chinese companies' self-branded models alone are considered, their market share shrank from 3.0% to 2.9%. This does not include vehicles manufactured for European brands in China and imported into the EU.

In Germany, there were 111,005 electric cars (BEV) registered from January to April, accounting for 11.8% of the market. Among these, 6,073 were Chinese electric cars, with a market share of 0.65%. The market leader BYD, with its European expansion, only sold 576 units in Germany during this period.

There is still uncertainty regarding the introduction of tariffs, with the Commission still negotiating with companies and China until early July. These tariffs could be implemented if no agreements are reached on alternative solutions. The Commission has not yet revealed what such alternative solutions might be. If negotiations fail, the provisional import restrictions are set to start on July 4th. However, these tariffs are not set in stone, and the Commission is capable of setting them without state approval.

The European Council of Leaders will cast their votes on whether to establish permanent tariffs later in November. To prohibit the implementation of long-term levies, a majority decision is required. Certain manufacturers remain unaware of the tariffs they will be required to pay. For instance, Tesla, a US car producer that manufactures significantly for the European market in China, may receive an individually calculated tariff based on the commission's statement. This company manufactures the Model 3 and partially the Model Y in its Shanghai factory for the European market. These models are the two most sought-after electric cars in the EU.

Critics argue that the European Commission is undermining the German auto industry through its de-risking methods, as per Ferdinand Dudenhoeffer, the director of the Center Automotive Research in Bochum, on ntv.de. By 2030, China is expected to be as crucial to German automakers as the US and the EU together. Dudenhoeffer emphasizes the significance of collaboration over isolation to advance technological advancements. China has tirelessly concentrated on building battery technology for three decades. If the EU opts for protectionism and disallows European manufacturers from learning through partnerships with Chinese organizations, "German companies won't be allowed to participate in these technological advancements," Dudenhoeffer claims. He also highlights China's dominance in autonomous driving and in-vehicle entertainment technology. The commission should instead consider the industry's counsel.

Fear of a potential Taiwan invasion is driving the Commission's de-risking strategy.

Von der Leyen has faced accusations multiple times for disregarding the commercial interests of German companies. Examples include her disregard for industrial concerns in her climate initiative, the Green Deal. Within her party, CDU politician Merz has frequently criticized von der Leyen for her environmentally-focused policy. If she were to be elected EU Commission President once more, Merz advises her to prioritize the economic welfare. In February, when she appeared alongside Merz, von der Leyen assured betterment. She aims to collaborate with the business sector to achieve environmental goals, she emphasized. "Planning and stability for investors" is valuable to her.

However, maintaining planning and stability for investors while cooperating with China's economy presents complications. Apprehensions about a potential Taiwan invasion by China are increasing globally. China has been harassing Taiwan, an unrecognized self-governing state. If China attacks Taiwan, the United States promises support. This raises the question of whether the US and its Western allies may be compelled to impose drastic sanctions on Chinese products at some point. A sudden withdrawal from the Chinese economy would negatively impact the EU more severely than the existing sanctions. Von der Leyen's de-risking strategy is aimed at weaning the European Union off its reliance on the Chinese economy to avoid a severe shock if a Taiwan conflict occurs.