WHAT can be said of a policy of tariffs to protect an industry that does not want those tariffs? That is the bizarre fate that has befallen the European Union’s carmakers, who, from July onwards, are supposed to be protected by duties against Chinese-made electric vehicles (EVs).
In another apparently puzzling development, the stock prices of most Chinese EV makers rose after the tariffs against them were announced on June 12.
How can we make sense of this?
First, the backstory: After nine months of investigations into China’s subsidies to its manufacturers of EVs, the European Commission decided to impose tariffs of up to 38% on them. The tariffs, the quantum of which varies from carmaker to carmaker, are provisional, and open to being revised later in the year after negotiations with the Chinese government, but until then, they will remain in place.
The proponents and defenders of the tariffs claim that they are needed to give EU carmakers breathing space to become more competitive vis-a-vis Chinese EV makers, whose models are at least 20% cheaper. They cite the experience of the European solar industry which was decimated by Chinese competition. “We would be wise not to make the same mistake twice,’’ said Mr Markus Ferber, a German member of the European Parliament. The tariffs are “not an act of protectionism,” he added, “but rather a measure that levels the playing field.”
There are also concerns that with Chinese EVs having been shut out of the US by the 100% tariffs imposed by the Biden administration, China’s carmakers will flood the EU market – the next biggest – where, as of now, their share is only about 8%.
Widespread opposition
But Germany, which is home to the EU’s biggest carmakers, opposes the tariffs. In a statement reported by Associated Press, Chancellor Olaf Sholz said: “Isolation and illegal Customs barriers ... ultimately just makes everything more expensive, and everyone poorer.
“We do not close our markets to foreign companies, because we do not want that for our companies either.”
Some green activists also criticise the tariffs, which they say will have the effect of delaying Europe’s green transition. Its target of achieving zero emissions for cars and buses by 2035 will be harder to meet if EVs become more expensive.
Nor do German carmakers want the tariffs. In a LinkedIn post, VW China’s CEO Ralf Brandsatter wrote: “Countervailing duties are generally not suitable for strengthening the competitiveness of the European automotive industry in the longer term. Rather, they are merely a quick-fix medicine.”
More forthrightly, BMW’s CEO Oliver Zipse pointed out that tariffs are “the wrong way to go... The negative effects of this decision outweigh any potential benefits for the European and especially the German automotive industry.”
European carmakers, especially those from Germany, have good reasons to fear the tariffs. Mercedes-Benz, BMW and Porsche export huge numbers of high-end cars to China, where some of them, as well as VW, Renault and Stellantis, also have large manufacturing and sourcing operations, which enable them to not only sell domestically but also export to Europe. Moreover, they benefit from subsidies, which the Chinese government has extended to all EV makers, local and foreign.
Retaliatory actions by Beijing – either in the form of tit-for-tat tariffs on car imports from Europe or a withdrawal of subsidies – would hurt them badly. As BMW’s Zipse suggested, the net effect of the tariffs on their bottom lines would likely be negative. They are evidently prepared to deal with tougher competition at home to preserve their position and privileges in China, which is the world’s largest car market.
The Chinese government had been opposed to the EU’s anti-subsidy investigation from the start, which it decried as an act of protectionism. The announcement of the tariffs that have followed has only reinforced this view, although it has not triggered any retaliatory action so far.
Bearable pain for Chinese carmakers
Chinese carmakers obviously don’t like the tariffs either, but can live with them. They sell their cars in Europe at about double the price they charge in China, and some, like the biggest carmaker, BYD, will be hit by a tariff of only 17.1%. So, they have room to absorb the extra costs. The tariffs will reduce their profit margins, but will not shut them out of the market, like in the US.
But Chinese carmakers will also now have more incentives to produce cars in Europe, so they can avoid the tariffs. BYD is already building a €500mil (RM2.5bil) EV plant in Hungary, while Chery is investing €400mil in a plant in Spain through a joint venture with Spanish firm EV Motors. More are likely to follow.
Chinese battery maker CATL – the world’s largest – is investing in battery manufacturing operations in Europe and several other Chinese firms are building out other parts of the EV supply chain.
Chinese carmakers and their suppliers will, of course, face higher costs in the EU than they do in China – they will have to pay European wages, land costs and energy prices and won’t get the subsidies they enjoy back home. But they will be able to more easily access the world’s third-largest car market and still turn a profit.
Their operations will benefit EU carmakers too, not only through an expansion of the EV supply chain, but also by speeding the take-up of EVs by consumers, which would grow the market for all.
Tariffs usually have unintended consequences, but in this case they may be positive. Provided China does not retaliate, over the medium term the EU’s moderate tariffs on Chinese EV makers might, surprisingly, end up being a win-win for both Chinese and EU carmakers, as well as consumers. – The Straits Times/Asia News Network
Vikram Khanna is a senior columnist at The Straits Times.
