Photo: Alexander Migl, CC BY-SA 4.0, via Wikimedia Commons

Punitive tariffs on Chinese electric cars could prove ineffective

The European Commission wants to make a decision soon on higher punitive tariffs on Chinese electric cars. However, this could have unintended consequences.

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In October 2023, the EU launched an anti-subsidy investigation into China to determine whether domestic investors in China are being subsidised by the state in a way that does not comply with WTO rules to keep prices artificially low. The investigation was not initiated without reason, and the allegations are not unfounded.

A Kiel Policy Brief, “Foul Play? The amount and scope of industrial subsidies in China,” written by IfW Kiel, shows how heavily Beijing subsidises its domestic industries, especially in the areas of green technologies such as electromobility or wind power.

It is estimated that China spends three to nine times as much on corporate subsidies as Germany, for example.

“China’s subsidy policy has been a controversial topic for years: European industry is often no longer price competitive against competition from China. Without China’s subsidised technology, the products that Germany needs for the green transformation would also become more expensive and scarce,” says Dirk Dohse, research director at IfW Kiel and co-author of the policy brief.

According to the study, over 99% of listed companies in China received direct government support in 2022. Beijing is also said to be using other anti-competitive measures, such as preferential access to critical raw materials, forced technology transfer, and preferential treatment in public procurement and administrative procedures, to make domestic companies more competitive.

One of the biggest beneficiaries of such subsidies is the electric car manufacturer BYD. While the direct subsidies amounted to 220 million euros in 2020, the company was already supported with 2.1 billion euros in 2022.

Based on sales, this corresponds to an increase from 1.1% to 3.5%, according to the authors of the report. In addition, BYD is said to have received far more purchase bonuses for electric cars in China than other manufacturers, such as GAC, Tesla, or VW’s joint ventures.

The EU wants to prevent these unfair practices in the near future by increasing punitive tariffs. According to insiders, these are expected to be in the range of 15-30%. This means that the increase would not be as drastic as in the USA, where anti-dumping duties will rise from 25% to 100% from August. Nevertheless, the measures would have far-reaching consequences.

Prices for electric cars would rise

IfW Kiel recently created simulation calculations of what concrete effects taxing imports of Chinese electric cars at 20% would have on bilateral trade and production in Europe.

According to the evaluation, the number of imported electric cars from China would fall by 25%, i.e., by around 125,000 vehicles worth almost $4 billion, if the import figures for 2023 are taken as a reference value. However, German car manufacturers that manufacture in China would also be affected.

Furthermore, the authors estimate that sales in the EU internal market would increase by $3.3 billion. However, the prices for electric cars would also rise, as production in the EU is more expensive due to various factors.

“For consumers, this is likely to mean higher prices for electric cars because production within the EU is significantly more expensive than in China, due to higher energy and material prices and, above all, significantly higher labor costs,” says Julian Hinz, trade researcher at IfW Kiel, who carried out the calculations. “It is by no means certain that European car manufacturers will fill the gap. Chinese manufacturers like BYD could also meet local demand with new plants in Europe,”

The introduction of higher tariffs could also impact demand for inputs for production from the EU. The authors estimate that EU exports to China in the “cars and auto parts” segment could fall by 0.6%, or $237 million, and overall EU exports to China could fall by over $600 million.

A blow for the German auto industry

The anti-dumping tariffs are a double-edged sword and would also hit German automakers, which have a broad presence in China, hard. Shortly before Chancellor Olaf Scholz’s visit to China, Ola Källenius, CEO of Mercedes-Benz, and BMW boss Oliver Zipse warned against a political reaction and the creation of trade barriers.

The Association of the Automotive Industry (VDA) also warns of a trade conflict, because it should not be forgotten that Germany exports 300,000 vehicles to China every year.

The anti-subsidy investigation was already viewed critically in China and described as “politically motivated.” Retaliatory measures from Beijing are inevitable if the EU introduces higher punitive tariffs.

Target could be missed

The American think tank Rhodium Group is also of the opinion that the tariffs at the current level would have no effect: Chinese manufacturers are so profitable due to their significant cost advantages that they would continue to export to Europe and make high profits.

In order to make the European market unattractive for Chinese electric car manufacturers, tariffs of 40-50% would be necessary; for BYD, the bar would have to be even higher, the think tank emphasises.

Rhodium Group therefore advocates considering additional measures, such as stricter cybersecurity requirements or adjustments to purchasing incentives, to limit Chinese imports. The new EU law proposal to ban products made with forced labor could also have an impact.

Photo: Alexander Migl, CC BY-SA 4.0, via Wikimedia Commons