The European Union moved Wednesday to hike tariffs, or import taxes, on electric vehicles made in China. EVs are the latest flash point in a broader trade dispute over Chinese government subsidies and the Asian nation's burgeoning exports of green technology to the 27-nation bloc.
Here are some basic facts about the EU's planned tariffs:
What did the European Union do?
The European Commission, the EU’s executive arm, said the preliminary results of its ongoing investigation into Chinese EV subsidies show that the country's battery electric vehicle “value chain” benefits from "unfair subsidization" that hurts EU rivals. It plans to impose provisional tariffs of up to 38.1% on electric vehicles shipped from China. That's on top of the 10% duties for all imported EVs.
The commission took aim at three of the biggest Chinese EV players in Europe, saying it would impose extra duties of 17.4% on electric cars from BYD, 20% on those from Geely and 38.1% for vehicles exported by China's state-owned SAIC.
Geely owns a stable of popular brands, including Polestar, British sports car maker Lotus and Sweden's Volvo, while SAIC owns Britain's MG, one of Europe's bestselling EV brands.
Other EV manufacturers in China would be subject to duties of at least 21%.
The commission said it has reached out to Chinese authorities to "explore possible ways to resolve the issues" but if those discussions don't result in an effective solution, the duties will take effect on July 4.
Why did the commission take action?
The value of battery-powered cars imported to Europe skyrocketed from $1.6 billion in 2020 to $11.5 billion last year, according to research firm Rhodium Group. Most of the imports are from Western automakers with factories in China, including Tesla and BMW.
But EU officials complain Chinese's homegrown automakers are gobbling up market share by undercutting European car brands on price thanks to Beijing’s massive subsidies.
EU officials fear unfairly subsidized imports will hurt Europe's manufacturers and the continent's green tech industries. European countries subsidize electric cars, too. The question in trade disputes is whether subsidies are fair and available to all carmakers or distort the market in favor of one side.
The planned tariffs are aimed at leveling the playing field by approximating the size of the excess or unfair subsidies available to Chinese carmakers. The commission didn't single out Western auto brands, but mentioned that Tesla might get an “individually calculated” rate if duties are definitively imposed.
How do the EU tariffs compare to ones announced by the U.S.?
The Biden administration is raising tariffs on Chinese EVs to 100% from the current 25% The U.S. currently imports very few Chinese cars, but like the European Commission, the administration worries that subsidies hurt domestic companies and cost jobs.
The U.S. tariffs block virtually all Chinese EV imports. In contrast, the European Union needs affordable electric cars from abroad to achieve its goals of cutting greenhouse gas emissions by 55% by 2030.
Just how cheap are Chinese EVs?
Chinese carmakers have learned to make electric vehicles cheaply amid ferocious price competition at home in the world's largest car market. BYD's Seal U Comfort model sells for the equivalent of 21,769 euros ($23,370) in China but 41,990 euros ($45,078) in Europe, according to Rhodium Group figures. The base model of BYD's compact Seagull, due to arrive in Europe next year, sells for the equivalent of around $10,000 in China.
As long as a competitive business environment is fair, cheaper Chinese cars benefit consumers and push European carmakers to lower their prices and improve their offerings, according to Niclas Poitiers, a trade expert at the Bruegel think tank in Brussels. “They are very cost-competitive and increase the pressure on other manufacturers that have been dragging their heels,” he said.
It’s the unfair access to subsidies that Europe objects to. “An EU green policy that would lead to the demise of domestic manufacturers because of unfair competition would not be politically sustainable,” Poitiers said.
How does China support its electric car industry?
In China's “market socialist” economy, state-owned companies play a leading role. The government also guides and supports privately owned companies to achieve Beijing's economic development goals.
For EVs, that includes orders for government fleets, low-interest loans from state-owned banks, cheap land for factories from local governments, tax breaks, and subsidized raw materials and parts from state-owned industries.
The various forms of financial help complicate the EU’s case because it’s difficult to gather data on some of the practices. The EU indicated it selected BYD, Geely and SAIC as a sample to calculate the duties. Other manufacturers in China that cooperated with the investigation but weren't sampled will face extra duties of 21%, while those that didn't cooperate will be hit with the 38.1% rate, the commission said.
What does this mean for European drivers and carmakers?
Chinese cars are likely to cost more, reducing pressure on European carmakers to keep their prices down. But Chinese companies are able to make cars so cheaply they might still be able to sell at a profit, even with duties as high as 30%.
European carmakers that manufacture electric vehicles in China might wind up as collateral damage. They get some government support in China but less than their Chinese competitors.
Five of BYD's six models would still earn a profit in Europe even at a 30% tariff, according to Rhodium Group calculations. Meanwhile a China-made Tesla Model 3 would sell at a loss.
Duties at the 15-30% level could “wipe out the business model for foreign players such as BMW and Tesla, which are using China as a base for exporting to Europe,” the Rhodium Group said in a report.
How is China likely to react?
China is almost certain to retaliate and to pressure European officials to negotiate. The China Chamber of Commerce to the EU warned that Beijing could raise duties on cars with engines larger than 2.5 liters, a move that could affect German luxury carmakers such as Volkswagen’s Porsche.
Beijing lashed out after the European Commission unveiled its plans. The higher tariffs are “a naked act of protectionism, creating and escalating trade friction, and ‘destroying fair competition’ in the name of ‘safeguarding fair competition,’" the Commerce Ministry said. It urged the EU to “rectify its wrongdoings immediately” and said while China would “resolutely take all necessary measures,” without elaborating.
Yet the impact may be smaller than feared, according to analysts at research firm Sanford C. Bernstein.
Mercedes-Benz, BMW and Volkswagen now make most of the cars they sell in China at factories there. Only 2% of Volkswagen’s China sales are imports and thus vulnerable to higher tariffs; it’s 15% for BMW and 19% for Mercedes-Benz.
European cars at risk of getting slapped with Chinese tariffs tend to be luxury vehicles that bring juicy profits, like Mercedes' S-Class vehicles and BMW's X6 and X7. However, such cars cater to rich customers who might be inclined to pay higher prices “as long as their purchase behavior is not deemed to be unpatriotic,” the Bernstein analysts noted.
Over the longer term, Chinese carmakers could avoid tariffs by making cars in Europe. BYD is building a plant in Hungary, while Chery has a joint venture to build cars in Spain's Catalonia region.
