Tensions between China and the European Union (EU)escalated on Thursday as China vehemently criticized the EU’s investigation into Beijing’s electric vehicle subsidies, labeling it a “naked act of protectionism.” This dispute over access to the burgeoning clean-car market within the EU threatens to trigger a potential trade war between these economic giants.
China’s Commerce Ministry warned that the probe into Beijing’s state subsidies would have a detrimental impact on the EU-China relationship. The European Union asserts that it aims to safeguard domestic jobs and supply chains, contending that China is unfairly saturating the market with inexpensive vehicles.
In a statement, the ministry declared, “It is a naked act of protectionism that will seriously disrupt and distort the global automotive industry chain.” China’s electric vehicle (EV) sector, it emphasized, has prospered through innovation and a comprehensive industrial supply chain.
Leading Chinese EV manufacturers experienced slight declines in shares on Thursday. BYD concluded 1.2% lower in Hong Kong, while SAIC Motor Corp., owner of MG, registered a 0.3% onshore decline after recovering from initial losses.
The immediate economic impact of potential European tariffs on China appears limited, with over 80% of passenger cars produced in China being sold domestically in the first eight months of this year. China’s EV market remains a bright spot in its post-pandemic recovery, sustaining growth and boosting exports.
The decision of EU to counter the advancing electric vehicle capabilities of China deals a blow to President Xi Jinping’s strategy of seeking the EU as a buffer against US challenges to the world’s second-largest economy. It also underscores the EU’s struggle to forge trade ties with China while safeguarding against perceived supply chain and national security risks.
Henry Wang Huiyao, founder of the Center for China and Globalization research group in Beijing, expressed surprise at the EU’s move, deeming it “counterproductive” to the overall relationship. He remarked, “It’s certainly not helping the trend in the relations that were gradually heading toward recovery. The EU is a champion of multilateral rules. If they have an issue they should go to World Trade Organization.”
The EU’s threat of tariffs against China is expected to cast a long shadow over the bloc’s talks in Beijing later this month. Valdis Dombrovskis, the EU’s executive vice president and trade chief, is embarking on a trip to the capital, aiming to pave the way for a highly anticipated leaders’ summit later this year. This visit provides China an opportunity to present its case regarding the investigation.
The Commerce Department in Beijing emphasized on Thursday that the growth of its EV sector was a result of persistent efforts in technological innovation and a comprehensive industrial supply chain. Chinese customs data revealed that China’s EV car exports to the 27 EU nations accounted for 47% of the total sector exports’ value last year, which fell to 44% in the first seven months of 2023.
European Commission President Ursula von der Leyen countered this, stating on Wednesday that the global market was inundated with cheap Chinese cars sold at “artificially low” prices due to Beijing’s support. While the unity of the bloc on the probe remains unclear, Berlin affirmed that the EU’s executive arm had given advance notice.
The probe, anticipated to span roughly nine months, is likely to result in new EU tariffs on Chinese EV imports, potentially affecting non-European automakers such as Tesla Inc., which export cars from China. An insider suggested that China might face tariffs nearing the 27.5% level already imposed by the US on Chinese EVs.
Jens Eskelund, president of the European Union Chamber of Commerce in Beijing, expressed support for a level-playing field based on rules-based trade practices. He added, “The European Chamber expects to see a fact-based probe with a view to ensure such principles for all market participants.”
Although the immediate impact of the EU probe is expected to be limited, it will weigh on the growth outlook of companies with ambitious expansion plans in the EU, like BYD, according to Morgan Stanley analysts, including Tim Hsiao, in a note to clients.
Chinese brands most likely to be significantly affected include Zhejiang Geely Holding Group Co., which boasts the strongest Chinese presence, along with BYD Co. and Nio Inc., both aggressively expanding into the continent and challenging market leaders Volkswagen AG, Tesla Inc., and Stellantis NV.
Europe’s investigation, coupled with Washington’s assertive measures against China, reflects a broader shift in developed economies towards safeguarding production closer to home. US President Joe Biden has not only upheld a series of tariffs imposed on China during the previous administration but also introduced new restrictions on cutting-edge chips, citing national security concerns.
Deborah Elms, executive director at the Asian Trade Centre in Singapore, suggested that Europe’s decision is likely influenced by past experiences of China dominating steel and solar markets through large-scale exports at low prices. She explained, “Once the domestic industry in other markets gets swept away, the space is clear for foreign firms to dictate prices and standards.”
The escalating trade tensions between the EU and China over electric vehicle subsidies underscore the deep-seated concerns on both sides regarding market fairness and competition in the rapidly evolving EV industry.
Source: Bloomberg
