Europe’s tariffs on electric vehicles China GIS Reports

In its rush to electrify transportation, Brussels is pushing Europe’s prized automotive industry into a competitive trap.

The electric vehicle (EV) revolution has cast a long shadow on the future of Europe’s automotive industry. As the European Union has committed to a rapid transition to renewable energy, including the electrification of transport and banning sales of new passenger cars with internal combustion engines by 2035, its car manufacturers have discovered that they are no match for their Chinese competitors. 

This unfortunate situation is the result of a series of poor strategy decisions by EU authorities. First, they assumed that trying to prevent climate change would be preferable to adapting to worsening atmospheric conditions. Next, Brussels thought that a crucial part of the solution would consist of radically eliminating carbon dioxide (CO2) emissions and that Europe should lead the effort. (In 2021, the EU area accounted for less than 10 percent of the world’s emission of that greenhouse gas.) And finally, Brussels’ ruling technocrats have decided that the climate mitigation efforts should focus on the automotive and construction industries. 

Not surprisingly, the cost of this transition is far from evident, but it has been clear from the start that it would be immense. The expense of designing electric propulsion systems and erecting new factories to build them is considerable. In 2022, it was estimated that producing an electric vehicle would be 50 percent more expensive than making a conventional car. Over time, showroom prices will undoubtedly rise, and the new global competitive picture will create winners but also claim many victims – including those who will not have the means to acquire personal transportation. 

The probable motives of governments in other parts of the globe aside, there is not much doubt that the EU strategy makes little economic sense.

Anatomy of the blunder

However, the European Commission launched an investigation into Chinese state support for its electric vehicle industry in 2023, citing concerns that Beijing is dumping subsidized vehicles on the European market. Preliminary findings indicated that tariffs of 50 percent on EVs made in China would be needed to inflict tangible pain on the Asian exporter. 

In June, Brussels finally decided to impose an additional tariff on electric vehicles made in China and imported into the EU of up to 38 percent, and followed up by opening the possibility of increasing it further to 48 percent.

The probable motives of governments in other parts of the globe aside, there is not much doubt that the EU strategy makes little economic sense. It can be understood as an effort to justify the presence of large technocratic bodies in search of a policy-making role and new agendas. Such developments deflect attention from critical issues that officials in Brussels have been unable or unwilling to tackle (public finance and immigration), from goals they have been unable to promote (such as free trade) or from crises that they have created themselves (price inflation and overregulation). 

Read more on trade issues

To be sure, carmakers share part of the blame. The European auto industry is a textbook example of an effective lobby. It is highly concentrated and involves vast amounts of money. Its members are few enough to allow effective coordination. Their prospective profits and losses are large enough to encourage them to create and protect their privileges, and their size in terms of employment, turnover and tax revenues cannot be ignored by national governments. However, the industry initially decided to accept the EU climate change mitigation vision without putting up much of a fight. 

Short-sighted calculations

Two lines of reasoning contributed to that decision. One was about the industry’s access to significant subsidies – direct or indirect, depending on whether the immediate beneficiaries were the producers or the consumers. The other involved protectionism – should non-EU competitors acquire new market share in Europe? One may also speculate that a few European carmakers were trying to have the best of both worlds: pocketing subsidies from Brussels while taking advantage of a protected European market and circumventing regulatory constraints by moving production away from the old continent.

What went wrong? 

Overall, the European car industry is in relatively good shape – for now. According to 2023 data, the EU is a net car exporter to the world. Its share in global automotive production in that year was 16 percent, behind China’s 33 percent but ahead of both Japan and the U.S., at 10 percent each. Last year, new car sales rose in almost all European markets, Germany being the most notable exception. 

European producers are falling behind: their technology and their speed of technological innovation are disappointing, and the costs are too high. 

The big news, however, is that exports of Chinese cars are soaring. Last year in Europe, auto imports from China rose about 40 percent in volume and slightly less in value. Moreover, and in contrast with what Brussels expected, overall sales of battery-powered vehicles declined, especially in Germany. At the same time, Chinese producers’ market share in this segment in Europe has risen from 1 percent in 2019 to 8 percent early this year. It is expected to reach 15 percent by late 2025. 

The data shows that subsidies have been insufficient to persuade European producers and consumers to move to fully electric vehicles, and European producers are falling behind: their technology and their speed of technological innovation are disappointing, and the costs are too high. 

Is the news hidden in Europe’s soaring car sales bad enough to explain levying tariffs on Chinese car imports to Europe? Also, what can one expect to transpire? A significant issue needs to be addressed first, and the range of possible answers will define future scenarios. 

The car industry’s belated protests

In an interesting twist, significant European automotive manufacturers, including Volkswagen, Mercedes-Benz and Stellantis, recently criticized the new tariffs. This reaction comes a little late, but it is understandable given that EU producers have invested heavily in Chinese clean energy technologies. Many have also developed joint-production agreements that would enable them to stay competitive, albeit dependent on their Chinese partners. 

Trade barriers have now become a tool to punish all global companies and those who choose to relocate outside the EU.

Profits would come from China-based facilities and partnerships, and subsequently, the Chinese cars would be moved through the European carmakers’ dealer networks. The European Commission is damaging European consumers, who will pay higher prices for their vehicles. It has also probably turned sizable European investments in the Chinese car industry and clean technologies into money losers and exposed European exporters to likely retaliation by Beijing. 

Fortress Europe

One explanation for this self-defeating protectionism and the belated reaction from the big businesses involved is that the European carmakers somehow failed to anticipate the likely European Commission decision.

The commission, in fact, aims to strengthen “Fortress Europe,” and tariffs kick in almost automatically when a foreign exporter reaches a threshold in a vital sector. The justifications for Fortress Europe are well-known. It is meant to protect European jobs, prevent “delocalization” (moving economic activity from Europe to more business-friendly locations) and – a true stretch – create European industry champions regulated by a central technocracy. 

Therefore, according to the EU’s thinking, the June tariffs are justified: They shield European companies from harm at the expense of those who develop CO2-intensive production overseas and try to kill European jobs. 

For industry-specific scenarios and bespoke geopolitical intelligence, contact us and we will provide you with more information about our advisory services.