Is a trade war looming? The European Commission has made its move by increasing tariffs on electric vehicles produced in China. China is already responding with strong rhetoric. Nonetheless, Beijing will likely limit its reaction to a carefully measured, face-saving response.
China simply cannot afford an escalation at the moment. The country’s economy is already struggling. For many important product categories, foreign markets like the US are closed off. The EU remains the most open market. China needs the EU as an export market. Therefore, China’s response will be calibrated to convey that it won’t tolerate everything while avoiding provoking the European Commission into further trade restrictions.
China’s claim that the EU is acting in a protectionist manner is pure fiction here. China itself may not have imposed any new tariffs, but it is a world champion in market-distorting interventions. Support for its own economy is so deeply embedded in the DNA of the Chinese system that it is often not even visible. Industrial policy is not an exception there, as it is in Germany, but the normal model within the framework of the planned economy.
At its core, China’s economy remains a state economy with market elements added over the past decades. However, the move towards market liberalization has stagnated in most areas for the last ten years. Conversely, there are almost unlimited funds available for state-favored projects. Provinces compete fiercely, often disregarding losses, to create their own manufacturers and market leaders through industrial policy.
Historically, almost everything in China has been cheaper than in Europe, but the imbalance is becoming grotesque. With Russian gas and oil, energy and fossil fuels are particularly cheap, significantly lowering the material costs for manufacturing cars. Vehicles are primarily made of plastics and steel, which are major cost factors in Europe. Additionally, other location factors in China are substantially cheaper. Unemployment is high, making engineers easy to find, while Germany suffers from a shortage of skilled workers. On top of that, there are direct subsidies of various kinds, which the Commission used as the basis for setting the tariff. These subsidies have led to the existence of electric vehicle manufacturers in almost every Chinese province, leading to a ruinous price war. They can produce far more cars than are in demand domestically.
The German industry is divided over the tariff increase. Those manufacturing in China tend to oppose tariffs, especially the three major car manufacturers who have made it clear that they can do without the well-meaning protection from the European Commission. They have two main arguments: They fear retaliatory measures from China and point to the small number of Chinese cars imported from China so far.
Retaliation is not just about Chinese tariffs on European exports like expensive cars or French cognac. It primarily concerns disadvantages that international players face within China. This includes companies like Volkswagen, which are practically Chinese companies in China, employing 100,000 workers and operating 33 plants with partners. These companies are directly exposed to the influence of the Communist Party. Currently, market shares for originally Chinese brands are more desirable than for the “sinified” German ones. Therefore, it is less about love for free trade and more about fear of the local bully that motivates German car manufacturers.
China itself is not gentle in trade matters, traditionally playing very tough. It protects its own industry without scruples and very consistently. When industries there are not developed enough, foreigners are not allowed in; prime examples include internet services and insurers like Allianz, which have barely received sales licenses. For a communist state, a free economy is not a value in itself. China already imposes a 15 percent tariff on cars from Europe.
At the same time, Beijing always loudly cries “protectionism” when the other side responds with its own measures. Western politicians and business representatives are easily swayed by this.
In the current case, it is crucial to understand that these are not “punitive tariffs”, as they are often called. They are tariff increases calculated to offset China’s industrial policy advantages. They do not block market opportunities for the Chinese industry – its products remain highly competitive even with the higher tariff. BYD, Nio and others will continue to gain market share in Europe and contribute to the transformation of powertrains.
It is unfortunate that the EU had to respond with tariffs, which goes against the spirit of globalization that has enriched both sides. Even from the Chinese government’s perspective, the emergence of overcapacities is more a systemic issue that they have often faced helplessly over the past decades. No economic policy maker or company wants high overcapacities – unless the goal is to dominate the world market with the lowest prices. Whether intentional or not, the Commission could not simply stand by and watch as China attempted to export its overcapacities and unemployment to Europe.
The European Commission has decided on provisional additional tariffs on Chinese electric vehicles. Starting in early July, there will be an average of over twenty percent additional duties, the Brussels authority announced on Wednesday. The Commission’s investigation found that the manufacturers benefited from unfair state subsidies, harming the European industry. “It is in the EU’s interest to offset the consequences of the unfair trade practices we have identified,” the Commission stated on Wednesday afternoon.
According to the EU investigation, the entire value chain in China benefits from these subsidies. The Commission has contacted the Chinese side to resolve the situation amicably. The EU already imposes a 10 percent tariff on Chinese EVs. The new tariffs are in addition to this.
The additional tariffs had been expected for weeks, but the European Commission postponed the announcement until after the European elections so that the issue would not play a role in the campaign. The provisional tariffs will take effect on July 4. By November, the Commission must decide whether to convert them into permanent duties, which are typically in place for five years. Only purely battery-powered EVs are affected.
Beijing responded immediately: The Chinese Foreign Ministry announced that it would consider all measures to decisively defend its interests. Special tariffs by the European Union on EVs would violate market rules, said spokesperson Lin Jian. These would also be against the interests of the EU. The Chinese Chamber of Commerce to the EU expressed its “shock, deep disappointment and dissatisfaction with this protectionist trade measure”. The investigation was politically motivated and non-transparent, the Chamber accused the EU Commission.
The state newspaper Global Times has repeatedly quoted experts and insiders to indirectly announce what Beijing might be planning. In a post on X, formerly Twitter, Global Times stated that Chinese companies were urging authorities to initiate anti-subsidy investigations against the import of certain dairy products from the EU. There were no further details provided on the insider-based information in the post.
At the end of May, Global Times suggested tariffs on combustion engines with more than 2.5-liter displacement. EU exports of agricultural products or spirits like cognac could also be affected.
The German economy now fears a trade conflict. Volker Treier, head of foreign trade at the German Chamber of Industry and Commerce, said the EU Commission’s decision would not be without consequences for Germany’s export-oriented economy: “While the tariffs also affect German car manufacturers in China, China’s already announced countermeasures signal further trade barriers for the German economy. The EU must be careful not to get caught in the geopolitical crossfire between its two most important trading partners.”
Although competitive distortions are an issue Europe should address, Treier emphasized, “The best response is good local conditions and striving for open markets and competition, for example through significant reduction of bureaucracy and new trade agreements that noticeably improve market access in the Indo-Pacific and Latin America. Further trade conflicts must be avoided, as should a stronger isolation of Europe.”
There was support from the scientific community. The additional tariffs were a bold move by EU Commission President Ursula von der Leyen, who is seeking a second term as President after the European elections, commented Noah Barkin, Fellow at the German Marshall Fund and Senior Advisor at consultancy Rhodium Group.
“German Chancellor Olaf Scholz, whose support von der Leyen needs for her return as President, opposed the tariffs,” wrote Barkin. Berlin had launched a massive campaign in recent weeks to keep the additional tariffs low. Other economists also consider the tariffs sensible to balance out the price pressure from China’s overcapacities.
The EU is not the first to impose additional tariffs on Chinese EVs. The US had announced a 100 percent tariff on Chinese-made EVs as part of a package of measures. Turkey also plans to impose an additional 40 percent tariff to protect domestic car manufacturers, as the Turkish Ministry of Trade announced on Saturday.
The decision for provisional tariffs is just the beginning of a negotiation drama, where the Chinese side could try to convince some European capitals to reject the tariffs. If the EU Commission proposes permanent tariffs in November, the proposal will still need to be voted on by the member states.
However, to abolish the tariffs, a qualified majority is needed: 15 member states representing at least 65 percent of the EU’s population must vote against the proposal. The EU Commission can also suspend the process if the identified subsidies are withdrawn. Besides Germany, Hungary and Sweden are considered opponents of the additional tariffs, while Spain and France are strong supporters.
Is a trade war looming? The European Commission has made its move by increasing tariffs on electric vehicles produced in China. China is already responding with strong rhetoric. Nonetheless, Beijing will likely limit its reaction to a carefully measured, face-saving response.
China simply cannot afford an escalation at the moment. The country’s economy is already struggling. For many important product categories, foreign markets like the US are closed off. The EU remains the most open market. China needs the EU as an export market. Therefore, China’s response will be calibrated to convey that it won’t tolerate everything while avoiding provoking the European Commission into further trade restrictions.
China’s claim that the EU is acting in a protectionist manner is pure fiction here. China itself may not have imposed any new tariffs, but it is a world champion in market-distorting interventions. Support for its own economy is so deeply embedded in the DNA of the Chinese system that it is often not even visible. Industrial policy is not an exception there, as it is in Germany, but the normal model within the framework of the planned economy.
At its core, China’s economy remains a state economy with market elements added over the past decades. However, the move towards market liberalization has stagnated in most areas for the last ten years. Conversely, there are almost unlimited funds available for state-favored projects. Provinces compete fiercely, often disregarding losses, to create their own manufacturers and market leaders through industrial policy.
Historically, almost everything in China has been cheaper than in Europe, but the imbalance is becoming grotesque. With Russian gas and oil, energy and fossil fuels are particularly cheap, significantly lowering the material costs for manufacturing cars. Vehicles are primarily made of plastics and steel, which are major cost factors in Europe. Additionally, other location factors in China are substantially cheaper. Unemployment is high, making engineers easy to find, while Germany suffers from a shortage of skilled workers. On top of that, there are direct subsidies of various kinds, which the Commission used as the basis for setting the tariff. These subsidies have led to the existence of electric vehicle manufacturers in almost every Chinese province, leading to a ruinous price war. They can produce far more cars than are in demand domestically.
The German industry is divided over the tariff increase. Those manufacturing in China tend to oppose tariffs, especially the three major car manufacturers who have made it clear that they can do without the well-meaning protection from the European Commission. They have two main arguments: They fear retaliatory measures from China and point to the small number of Chinese cars imported from China so far.
Retaliation is not just about Chinese tariffs on European exports like expensive cars or French cognac. It primarily concerns disadvantages that international players face within China. This includes companies like Volkswagen, which are practically Chinese companies in China, employing 100,000 workers and operating 33 plants with partners. These companies are directly exposed to the influence of the Communist Party. Currently, market shares for originally Chinese brands are more desirable than for the “sinified” German ones. Therefore, it is less about love for free trade and more about fear of the local bully that motivates German car manufacturers.
China itself is not gentle in trade matters, traditionally playing very tough. It protects its own industry without scruples and very consistently. When industries there are not developed enough, foreigners are not allowed in; prime examples include internet services and insurers like Allianz, which have barely received sales licenses. For a communist state, a free economy is not a value in itself. China already imposes a 15 percent tariff on cars from Europe.
At the same time, Beijing always loudly cries “protectionism” when the other side responds with its own measures. Western politicians and business representatives are easily swayed by this.
In the current case, it is crucial to understand that these are not “punitive tariffs”, as they are often called. They are tariff increases calculated to offset China’s industrial policy advantages. They do not block market opportunities for the Chinese industry – its products remain highly competitive even with the higher tariff. BYD, Nio and others will continue to gain market share in Europe and contribute to the transformation of powertrains.
It is unfortunate that the EU had to respond with tariffs, which goes against the spirit of globalization that has enriched both sides. Even from the Chinese government’s perspective, the emergence of overcapacities is more a systemic issue that they have often faced helplessly over the past decades. No economic policy maker or company wants high overcapacities – unless the goal is to dominate the world market with the lowest prices. Whether intentional or not, the Commission could not simply stand by and watch as China attempted to export its overcapacities and unemployment to Europe.
The European Commission has decided on provisional additional tariffs on Chinese electric vehicles. Starting in early July, there will be an average of over twenty percent additional duties, the Brussels authority announced on Wednesday. The Commission’s investigation found that the manufacturers benefited from unfair state subsidies, harming the European industry. “It is in the EU’s interest to offset the consequences of the unfair trade practices we have identified,” the Commission stated on Wednesday afternoon.
According to the EU investigation, the entire value chain in China benefits from these subsidies. The Commission has contacted the Chinese side to resolve the situation amicably. The EU already imposes a 10 percent tariff on Chinese EVs. The new tariffs are in addition to this.
The additional tariffs had been expected for weeks, but the European Commission postponed the announcement until after the European elections so that the issue would not play a role in the campaign. The provisional tariffs will take effect on July 4. By November, the Commission must decide whether to convert them into permanent duties, which are typically in place for five years. Only purely battery-powered EVs are affected.
Beijing responded immediately: The Chinese Foreign Ministry announced that it would consider all measures to decisively defend its interests. Special tariffs by the European Union on EVs would violate market rules, said spokesperson Lin Jian. These would also be against the interests of the EU. The Chinese Chamber of Commerce to the EU expressed its “shock, deep disappointment and dissatisfaction with this protectionist trade measure”. The investigation was politically motivated and non-transparent, the Chamber accused the EU Commission.
The state newspaper Global Times has repeatedly quoted experts and insiders to indirectly announce what Beijing might be planning. In a post on X, formerly Twitter, Global Times stated that Chinese companies were urging authorities to initiate anti-subsidy investigations against the import of certain dairy products from the EU. There were no further details provided on the insider-based information in the post.
At the end of May, Global Times suggested tariffs on combustion engines with more than 2.5-liter displacement. EU exports of agricultural products or spirits like cognac could also be affected.
The German economy now fears a trade conflict. Volker Treier, head of foreign trade at the German Chamber of Industry and Commerce, said the EU Commission’s decision would not be without consequences for Germany’s export-oriented economy: “While the tariffs also affect German car manufacturers in China, China’s already announced countermeasures signal further trade barriers for the German economy. The EU must be careful not to get caught in the geopolitical crossfire between its two most important trading partners.”
Although competitive distortions are an issue Europe should address, Treier emphasized, “The best response is good local conditions and striving for open markets and competition, for example through significant reduction of bureaucracy and new trade agreements that noticeably improve market access in the Indo-Pacific and Latin America. Further trade conflicts must be avoided, as should a stronger isolation of Europe.”
There was support from the scientific community. The additional tariffs were a bold move by EU Commission President Ursula von der Leyen, who is seeking a second term as President after the European elections, commented Noah Barkin, Fellow at the German Marshall Fund and Senior Advisor at consultancy Rhodium Group.
“German Chancellor Olaf Scholz, whose support von der Leyen needs for her return as President, opposed the tariffs,” wrote Barkin. Berlin had launched a massive campaign in recent weeks to keep the additional tariffs low. Other economists also consider the tariffs sensible to balance out the price pressure from China’s overcapacities.
The EU is not the first to impose additional tariffs on Chinese EVs. The US had announced a 100 percent tariff on Chinese-made EVs as part of a package of measures. Turkey also plans to impose an additional 40 percent tariff to protect domestic car manufacturers, as the Turkish Ministry of Trade announced on Saturday.
The decision for provisional tariffs is just the beginning of a negotiation drama, where the Chinese side could try to convince some European capitals to reject the tariffs. If the EU Commission proposes permanent tariffs in November, the proposal will still need to be voted on by the member states.
However, to abolish the tariffs, a qualified majority is needed: 15 member states representing at least 65 percent of the EU’s population must vote against the proposal. The EU Commission can also suspend the process if the identified subsidies are withdrawn. Besides Germany, Hungary and Sweden are considered opponents of the additional tariffs, while Spain and France are strong supporters.
