The Impact Of EU Tariffs On China And Its Strategic Response Options – Analysis
On June 12 this year, the European Commission (EC) announced plans to impose temporary anti-subsidy duties on electric vehicles (EVs) imported from China starting July 4. On August 20, the EC disclosed a draft decision to impose final anti-subsidy duties on pure EVs from China, with minor adjustments. BYD, Geely, and SAIC Motor would face tariffs of 17.0%, 19.3%, and 36.3%, respectively. Other cooperating companies would incur a 21.3% tariff, and all non-cooperating companies would face a 36.3% tariff. Tesla, as a Chinese exporter, would have a separate tariff rate set at 9% for now. Notably, these rates are added on top of the existing 10% tariff in the EU.
The EU is concerned that significant subsidies from the Chinese government may artificially lower the production costs of EVs, thereby distorting market competition. They fear that an unrestricted influx of Chinese EVs into the European market could ultimately drive local manufacturers out. To address this market distortion caused by unfair subsidies, the EU launched an anti-subsidy investigation last October. The EC concluded that the value chain of China’s battery-powered electric vehicle industry (BEV) received unfair subsidies that could harm EU’s EV manufacturers economically.
Although member states like Germany and Hungary opposed the EU’s proposed tariffs, it was approved in a vote on October 4, meaning these tariff measures will officially take effect next month and last for five years. China firmly denies the EU’s accusations and has announced plans to impose tariffs on EU dairy products, brandy, pork, and the automotive industry. Subsequently, both sides continued negotiations. According to an announcement from China’s Ministry of Commerce on October 12, there have been eight rounds of talks since September 20, but significant differences remain, and the Chinese negotiating delegation has returned from EU headquarters. Previously, the EU rejected China’s proposal to set a minimum export price of EUR 30,000 for EVs. “A full-blown trade war looks more and more likely if nothing changes,” said Jens Eskelund, the chairman of the European Union Chamber of Commerce in China
It is important to note that Europe is a key export market for Chinese EVs. Therefore, the EU’s imposition of tariffs could have a significant impact on the industry for China. A report from the Kiel Institute for the World Economy indicated that even a 20% tariff could reduce China’s EV exports to Europe by approximately 25%. With an estimated export volume of 500,000 units in 2023, this would mean around 125,000 units affected, resulting in an estimated trade loss of about USD 4 billion. Analysts believe that the EU’s tariff policy could lead to a short-term decline in Chinese EV exports. Considering that about 40% of China’s EV exports go to Europe in 2023/24, rapidly adjusting export routes will be a significant challenge.
There is significant market attention on how China will navigate its “tariff battle” with the EU. According to ANBOUND’s founder Kung Chan, several strategies could be considered by China. One option is to impose reciprocal tariffs on each other’s vehicle imports, targeting similar industries. However, since only Germany has a notable automotive presence in China, this could lead to further reductions in German investments. Another strategy involves formal trade negotiations to assess the EU’s conditions and seek practical solutions, helping to prevent the politicization of trade. Alternatively, China might opt for asymmetrical retaliation by symbolically targeting a few vulnerable sectors rather than seeking a fully equivalent response. Mobilizing trade organizations and engaging various business chambers could also be another option, although these efforts should not focus solely on exerting pressure. Additionally, Chinese automotive manufacturers should prioritize technological advancements over low-cost sales, as well as adhere to fundamental market principles. Increasing foreign investment in Europe would be essential for building partnerships and potentially mitigating tariff impacts. Finally, China could opt for investing in politically aligned but lower-cost countries to set up production facilities, helping to avoid EU tax pressures.
These are all normal responses in a trade war and reflect lessons learned from centuries of global trade history. Researchers at ANBOUND believe that China could adopt the third approach: asymmetrical retaliation. The main reasons for this are twofold: first, the nature of China-EU relations differs from that of China-U.S. relations, so China should take a strategy of being softer with Europe and firmer with the U.S. Second, when selecting areas for retaliation, China should avoid sectors where economic ties with Europe are strong, particularly the automotive industry. On one hand, European automotive giants have quickly criticized the EU’s anti-subsidy tariffs, effectively providing a moral defense for Chinese automotive exports. On the other hand, these companies have significant economic interests in China, and China will need them to continue advocating on its behalf in the future.
During a routine press conference in June, the Chinese Ministry of Commerce was asked about reports indicating that the Chinese industry is lobbying the government to launch anti-subsidy investigations into EU dairy products and anti-dumping investigations into EU pork products. In response, spokesperson He Yadong stated that according to relevant Chinese laws and regulations as well as WTO rules, Chinese industries have the right to request investigations to maintain normal market competition and protect their legitimate rights and interests. If an industry submits a request, the investigating authority will review it according to the law. If the conditions for filing a case are met, the authority will initiate the case and publicly disclose and announce the decision. Additionally, on October 8, the spokesperson addressed questions about the temporary anti-dumping measures on EU brandy, stating that based on Chinese laws and WTO rules, China has decided to implement temporary anti-dumping measures on imported brandy originating from the EU. The spokesperson also revealed that China is studying measures to increase tariffs on imported high-displacement gasoline vehicles.
Researchers at ANBOUND believe that the information disclosed indicates that the Chinese government is likely to favor asymmetrical retaliation measures, specifically targeting sensitive areas in the EU, such as pork and other agricultural product exports, for precise trade countermeasures. This serves as a warning to the EU while also providing favorable leverage for future negotiations between China and the EU, creating conditions for further diplomatic mediation.
Final analysis conclusion:
Following a year-long anti-subsidy investigation, the EU’s imposition of tariffs on Chinese electric vehicles is increasingly imminent, signaling the onset of a trade conflict between the two sides. While this action clearly exhibits elements of protectionism aimed at curtailing the competitiveness of Chinese automotive companies, it remains essential for these companies to persistently pursue market expansion in Europe. From this perspective, China might consider implementing asymmetrical countermeasures, targeting key sensitive areas within the EU as potential points of leverage. This approach not only serves as an effective means of exerting pressure on the EU but also enhances China’s negotiating position for future discussions, thereby facilitating conditions for diplomatic engagement.