EU-China EV tariffs: German carmakers concern backlash

The European Union is expected to publish a provisional list of planned import duties on Chinese electric vehicles in June, following an investigation launched last October into whether Chinese carmakers have received market-distorting subsidies to the detriment of EU carmakers.

The European Commission, the EU’s executive arm, says it has found “sufficient evidence” that the imports of new battery electric vehicles from China had increased sharply by 14% since it launched its investigation, and that many of those imports had received government subsidies in the form of tax breaks or direct transfer of funds.

If the EU goes ahead with imposing tariffs, how high would they need to be to have a perceptible impact and deter Chinese EV exporters?

One study by the Rhodium Group, an independent research firm, suggests those levies would have to be in the range of 40-50% for that to happen. However, the EU is assessing its potential countermeasures based on World Trade Organization rules which puts the probable scope of tariffs at 15-30%.

EU imports of EVs from China jumped from $1.6 billion (€1.5 billion) in 2020 to $11.5 billion in 2023, accounting for 37% of all EV imports in the bloc, the Rhodium Group said.

What does this mean for German carmakers?

German carmakers, who are extremely reliant on the Chinese market, are particularly vociferous in their opposition to EU countermeasures out of fear they could prompt swift Chinese retaliation.

“You could very quickly shoot yourself in the foot,” BMW CEO Oliver Zipse recently told reporters.

BMW imports Chinese-made Mini EVs and the iX3 into Europe and is reliant on the revenues generated from its Chinese business. China is BMW’s largest single market, accounting for nearly a third of total sales in the first quarter of 2024.

“We don’t think that our industry needs protection,” said Zipse in a meeting with analysts, adding that operating on a global basis gives major automakers an industrial advantage. “You can easily endanger that advantage by introducing import tariffs.”

BMW’s German rivals Volkswagen and Mercedes-Benz are also heavily reliant on revenues from their Chinese business.

Volkswagen warned that potential duties generally carried a certain risk.

“There’s always some sort of retaliation,” Thomas Schäfer, CEO of the Volkswagen brand, told the Financial Times’ Future of the Car Summit in May.

Is overcapacity to blame?

Zipse has rejected the idea that Chinese overcapacity was at the heart of the dispute.

“The anti-subsidy probe against China is the opposite of what we expect,” he said. “Over half of Chinese car sales in Europe are from non-Chinese companies. Tariffs are protective measures that essentially harm us. The market share of Chinese manufacturers in Germany and Europe is less than 1%. Europe is not being flooded with Chinese products and out of fear we are trying to close the borders.”

Beatrix C. Keim, director of Business Developments & China Projects with the Center Automotive Research (CAR), agrees that overcapacity is not an issue.

“The Chinese car market is still not saturated, and now with a swap to new energy vehicles (NEV) the production capacities will be transferred from internal combustion engine cars to NEV,” she told DW via email.

She pointed out that the Chinese government has also taken steps to restrict production licenses, which, along with the disappearance of several NEV startups, “is an indication that the government is putting a stop to certain companies.”

EU-China tit-for-tat measures?

There’s a growing fear among European carmakers that punitive measures targeting China could set off a spiral of tit-for-tat reprisals. Given the dependency on China and the exposure that comes with it, EU policymakers appear increasingly under pressure to carefully weigh their response to avoid any escalation.

“The pros and cons go into the direction of saying no to tariffs on EVs from China because of the danger that China could retaliate,” Gabriel Felbermayr, director of the Austrian Institute of Economic Research, told DW.

And it appears that the tit-for-tat game is already underway. In a statement posted on X, the China Chamber of Commerce to the EU lobby group, said it had received information that the Chinese government could impose tariffs as high as 25% on imported cars with large engines.

 The higher tariffs would hit BMW and Mercedes-Benz, which export luxury SUVs and sedans to China.

However, CAR’s Keim said Chinese countermeasures would not necessarily target European cars, but rather “automotive components or other industrial sensitive areas,” such as machinery.

In addition, she said, there could be “an increase in tariffs for luxury imports which indeed would mostly hurt German original equipment manufacturers.”

Edited by: Ashutosh Pandey