The advantages of EU fines levied against Chinese electric vehicles
In present-day "Germany, the land of collective grumpiness," as referred to by Chancellor Olaf Scholz, discontentment is palpable due to the European Commission's decision to impose tariffs on imported Chinese electric vehicles. But what's the true situation?
As per the European Commission's estimations, the market share of Chinese brands in Europe has soared from less than 1% in 2019 to 8%, with prospects of reaching 15% this year. This rise is largely attributed to the affordability of Chinese EVs, which are, on average, 20% cheaper than their European counterparts. The EU Commission voices concerns about China's alleged unjust subsidies to its automakers, suggesting that it could lead to long-term unfair competition, potentially endangering the survival of the European auto industry, resulting in factory closures and job losses. Volkswagen's announcement to scrap the "sacred" dismissal protection and the idling of two plants provides validity to this scenario.
Subsidies for All?
As the highest European trade authority, the EU Commission has significant sway over trade policies. Following allegations from certain automakers, the EU Commission has been investigating China's EV sector since October 2023, concluding that the Chinese government is "unfairly" providing subsidies to its automakers through loans, land, or battery raw materials at below-market prices. However, Stella Li, Europe chief of BYD, the leading global EV manufacturer, and a dominant player in China, recently stressed that subsidies have been made available to all manufacturers, including companies like Tesla in Shanghai. The extent of subsidies received by German manufacturers in China, which all have operations there, remains a mystery, with German automakers maintaining an unexplained silence on the matter.
Widespread Opposition
To counteract these subsidy and competitive advantages, Brussels has levied tariffs effective from 1st November. These tariffs are valid for five years and are romanized for each manufacturer based on the presumed subsidy level. The German government and the automotive industry association VDA opposed this, citing potential trade war with China and the possibility of retaliatory measures from China, the world's second-largest economy.
All major German automakers, including global supply titans, joined the opposition. The manufacturers have compelling reasons: Although the Chinese share of imported BEVs in Germany almost doubled last year to 130,000, more than half of these 130,000 EV imports were self-imports by German manufacturers from their local factories. This is offset by the export of 241,000 German luxury combustion engine vehicles to China as a risk volume.
France and Italy vs. Germany
Germany, the most populous EU country, voted against the tariffs but failed to secure the majority required for rejection. Ten EU countries, including heavyweights France and Italy, paved the way for EU tariffs on Chinese EVs. Consequently, what are the repercussions?
The EU Tariffs Have Twofold Impact on German Car Makers: Firstly, They Push Up the Cost of Imported Electric Vehicles from China, Further Hindering the Flatlining Domestic Sales of BEVs. Secondly, They Endanger Losses in Their Previously Profitable Internal Combustion Engine Market in China, Which Is Also Shrinking. For instance, More Electric Vehicles Than ICE Vehicles Were Sold in China in August. China's Leadership Responded to the EU by Threatening Tariffs on Imports of Vehicles with Over 2.5 Liter Displacement if Negotiations Fail.
Should a Trade War Break Out, Germany, due to its reliance on China for imports and exports, would incur the most economic losses among European economies.
In Theory ...
The Tariffs Appear to Go Against the Classical Economic Theory of the Benefits of Free Trade. This Theory, Based on Comparative Cost Advantages, States That Trade Between Two Countries Benefits Both When Each Produces Goods That It Can Produce Relatively (Not Absolutely) More Efficiently Than the Other.
This Theory Held True in the 18th Century, But Only to a Limited Extent in the 21st. Now, There Is No Discussion of Resource Dependencies, State-Guided Economies Constantly Focusing on E-Mobility, or Aggressive, Politically Backed Global Market Conquest and Displacement Strategies by Industrial Companies.
The Era When It Made Sense for Portugal to Produce Wine and England to Produce Cloth, Both to Their Mutual Benefit, Has Passed. In Brief: China Can Now Produce Both, Thanks to Western Know-How Transfers, and Can Produce Practically Everything, Just Less Expensively, Except for Bananas and Pineapples.
An Unbridled Dragon Could Crush Its Rivals! Therefore, Today's EU Tariffs Are Primarily a Signal and a Protective Measure in the Classical Sense, Emanating from Necessity, Not an Economic Welfare Optimum. They Should Thus Be Temporary. During This Period, the European Auto Industry Has a Respite to Prepare for the Emerging Chinese Auto Competition. There Will Be No Permanent Protective Tariffs for the European Automobile Industry, Nor "Unfair" Trade Practices and Subsidies in China for Their Automakers.
In response to concerns about China's alleged subsidies in the electric mobility sector, the EU Commission is investigating potential unfair competition, threatening long-term harm to the European auto industry. Stella Li, Europe chief of BYD, a global EV leader, claims that subsidies are available to all manufacturers, including companies like Tesla in Shanghai.
The implementation of EU tariffs on imported Chinese electric vehicles by Brussels has faced opposition from the German government and automakers, citing potential negative impacts on their domestic sales and the profitability of their internal combustion engine market in China.
