The EU and China are on the verge of a retaliatory trade war over EVs. China has the upper hand

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The European Union wants everyone to drive electric vehicles by 2035. It just doesn’t want them to be Chinese EVs, which rather complicates achieving the goal of delivering the internal combustion engine to the gallows pole. Chinese EVs are cheap compared with those made by Tesla, BMW, Mercedes, Volkswagen and Stellantis and could be hot sellers throughout Europe. That’s the point – they are too cheap.

Last week, the European Commission, the EU’s executive arm, announced an investigation into the state subsidies applied to Chinese EVs exported to Europe. If they are found to be lavish, the EU could impose punitive tariffs on those vehicles. “Global markets are flooded with cheaper electric cars,” EC president Ursula von der Leyen said, referring to the potential Chinese onslaught.

The current EU tariff on Chinese vehicles is 10 per cent. The tariff charged by the United States is a hefty 27.5 per cent – high enough to keep the vast majority of Chinese models out of the American market. The tariff was set during the Donald Trump administration and kept intact by President Joe Biden.

Don’t assume the Europeans will launch a trade war against Chinese EVs with the same gusto as the Americans. Chinese retaliation could be fierce and damaging to the European automakers, who book enormous profits in China, the world’s largest auto market.

The EU has set itself a legally binding target of achieving net-zero greenhouse gas emissions by 2050. Since transportation accounts for a quarter of emissions (power generation is the first), achieving that goal will be highly difficult to impossible as long as gasoline and diesel vehicles clog the roads. That means European EVs will have to fill the showrooms in a hurry. But they are only now trickling into them, just as Chinese EVs hit the export market. Their sales are accelerating fast, in good part because of their price advantage. Forvia, one of the world’s top automotive technology companies, calculated early this year that Chinese car makers can build an EV for €10,000 less than their European counterparts.

So bring on the cheapo Chinese EVs for the sake of meeting the EU’s net-zero target? Forget it, because keeping the European automakers alive evidently beats climate goals.

Europe is haunted by the wholesale eradication of its solar-cell industry about 20 years ago. Attracted by European subsidies, dozens of solar companies set up production lines in Germany and elsewhere. Almost all of them, including Canada’s Arise Technologies, went bankrupt or were forced to close their European plants by 2012 as cut-price, yet high-quality, Chinese imports overwhelmed the market. Brussels fears the Chinese EV makers, with their enormous price advantage, could turn European EVs into pariah products.

The Chinese market is crucial to the European automakers, especially those from Germany. They worry that a tariff war that would protect them from Chinese EV competition in Europe would expose them to punitive retaliation in China. At least a third of the car sales of BMW, Mercedes and Volkswagen are in China. Many of the German cars are produced in China but some, usually the most expensive models, are exported there. Those export sales could be destroyed by high Chinese import tariffs. The French and Italian car makers (Renault and Stellantis), rely far less on China for their sales. Not surprisingly, the French government has lobbied harder than the German government for protection from Chinese EV imports.

Retaliatory tariffs are one weapon the Chinese could use; messing up the EV supply chain is another. China is an increasingly big player in the metals used to make EVs, such as cobalt and copper, and, crucially, utterly dominates the global market for rare earths, the group of metals that include neodymium, essential for the production of EVs and wind turbines. According to the Financial Times, China mines 70 per cent of rare earth concentrates and refines more than 90 per cent of them. Europe’s rare earths industry is virtually non-existent. China could inflict enormous pain on European EV makers by restricting their rare earths supply.

You can already see where this is going. China and Europe need each other. China wants greater EV sales in Europe; Europe wants to protect its car sales in China and the supply chains that keep EV factories humming. This scenario suggests that Europe is unlikely to slap U.S.-style tariffs on Chinese imports. Instead, Brussels may ask for voluntary sales restrictions – that is, an annual cap on the number of EVs China can sell in the EU – while European car makers roll out cheaper EV models. China seems to have the upper hand in this emerging battle. It is just too powerful in the EV and rare-earths market to be a pushover.