Europe is taking a constructive approach to the influx of Chinese electric vehicles

Angst in the United States about imports of inexpensive electric vehicles (EVs) recently prompted President Joseph R. Biden, Jr. to impose a 100 percent tariff on EVs from China. Former president Donald Trump calls for a tariff of 200 percent. But it is Europe, not the United States, that sees a potential influx of Chinese EVs as a more immediate threat. And Europe is on the verge of acting, though perhaps taking a more constructive approach.

Such an approach could frustrate the United States. German chancellor Olaf Scholz and Swedish prime minister Ulf Kristersson commented on the day of the US imposition of the 100 percent tariff that dismantling global trade is a “stupid idea.”

Still, the European Commission may impose tariffs on Chinese EVs if an anti-subsidy investigation finds that Chinese subsidies of its EV industry provide legal justification to do so. The Commission may decide as early as June. Some independent observers say that a 20 percent tariff, historically the norm [1]—will not reduce profits enough for Chinese EV exporters to stop selling vehicles in Europe. The volume of Chinese EV exports—including EVs produced in China by US (Tesla) and European (Dacia, BMW, VW etc.) companies—will depend on future EU tariff levels.

European imports of Chinese electric vehicles have more than doubled since 2020

Consider recent trends as illustrated in figures 1 and 2 on the latest available data from February 2024.

Figure 1a shows European imports of EVs made in China compared to European exports of EVs to China. European imports of Chinese EVs rose fast in 2020, paused briefly in 2022 (likely because of COVID-related lockdowns), and then rose again to the current level of €10 billion annually in mid-2023. European-made EV exports to China have been lower, exceeding €500 million in 2020, nearly all it from German manufacturers, which have accumulated a total of €1 billion since late 2022.

Figure 1b illustrates the same trade development in terms of number of EV vehicles traded. European imports of Chinese EVs started to rise in 2020, reaching over 430,000 annually by July 2023, compared to only 12,000 to 17,000 since 2022 for European EV exports to China.

Figure 2b shows price differentials. Europe’s imports of EVs had a trade value of €22,000 to €23,000 per vehicle, whereas German EV exports to China were €74,000 to €77,000 per vehicle, illustrating that German exports are more high-end and found a market. Even so, premium German car producers are the only ones that export to China, suggesting that French (Renault), Italian (Stellantis), and other car makers may be more challenged by Chinese EV competition in the mass market high volume segments. As a result, Germany could feel pressure to go along with tariffs but would probably resist (along with EU members in the German supply chain) in order to maintain its market in China.

Europe is motivated to keep producing its EVs in China to continue benefiting from new EV innovations and economies of scale there

The Chinese car market is the largest in the world, with nearly 22 million cars sold in 2023, and it has been the only major car market dominated by foreign brands. But that could change with China’s shift to EVs and President Xi Jinping’s “Made in China 2025” focus. BYD, the leader in EV production, is China’s largest car producer, though Germany's Volkswagen remains number 2. Toyota, Nissan, BMW, and GM can be found in China’s top-10 sales to date in 2024 (figure 3 ).

The data points add up to show that European and other foreign car producers continue to sell a lot of cars in China and want to maintain their market presence. They also want to keep production of their EVs in China, motivated in part by a desire to preserve access to new Chinese EV-related innovation and economies of scale. Western companies—including Tesla, Renault-owned Dacia, and BMW—have by far the largest share of EVs made in China and exported to the European Union. Chinese EV brands accounted in 2023 for only around 45 percent of Europe's total EV imports from China, a number that can probably withstand or even grow despite future EU tariffs.

For all these reasons, Europe will be more cautious than the Biden administration on imposing tariffs on China, reflecting the political interest of European Commission president Ursula von der Leyen. She is running for a second term and wants to show the European Union’s willingness to pursue a more assertive trade policy with China without triggering retaliation that would lead to a major EU-China trade war. China, which is increasingly reliant on external demand to revive its economic growth, has its own reasons to prevent a trade war that would disrupt its relatively unfettered access to the EU market[2].

Factors motivating EU-Chinese cooperation in the EV sector

Foreign investment

For its part, the European Union seeks to remain open to Chinese investments in the EV sector, unlike Biden and Trump, who favor blocking Chinese EV and EV battery producers from investing in the United States.[3]

Indeed, during Xi’s recent visit to France, the French finance minister, Bruno Le Maire, declared: “France welcomes all industrial projects. BYD and the Chinese auto industry are very welcome in France.” The statement may seem to contradict the French desire to protect domestic car producers from Chinese competition. But French producers may benefit if Chinese EV producers locate facilities in France, employing French workers and depending on French domestic supply chains. Figure 4 shows how Chinese EV-related investments have accelerated in Europe.

The map illustrates Hungary’s reward for the loyalty that its prime minister, Viktor Orban, has extended to Beijing, and shows Chinese investments are also growing fast elsewhere, especially in Germany and France. It is important to note here that the European Union recently introduced a new inward investment screening framework principally because the European Commission needs a way to survey such investments in the European Union; the power to block individual transactions or greenfield investments continues to reside entirely with member states. As French finance minister Le Maire indicated, it is extremely unlikely that a member state government would deny any Chinese EV-related investments—greenfield or acquisition based—and the related jobs in their economy. In fact, most if not all EU members are actively inviting Chinese firms to come.

Evolving EV battery technology

EV batteries make up another factor motivating EU-Chinese economic cooperation. As the price of EV batteries continues to decline, reducing the overall price of an EV, “non-battery components” become a larger determinant of the total price of the EV. Accordingly, European producers of these components could well be competitive against their Chinese counterparts. In addition, as EV prices decline, the cost of transporting EVs from China will weigh more heavily as EV producers—Chinese and foreign—decide how to supply the EU EV market in the future. The European Union’s expansion of CO2 emissions trading to include maritime emissions starting in 2024[4] will further add to the cost of transportation of EVs into the EU market. France has added an additional restriction on its national EV purchase subsidy in order to account for CO2 emissions during EV production. This will, given the heavy nuclear use in France, favor locally produced vehicles and implicitly (and by clear political intent) penalize Chinese-made EVs.[5]

Future reductions in battery prices will hinge on innovation in the still contested technological race to produce the best, most cost-efficient EV battery. It remains to be seen what the dominant battery chemistry will be, what critical minerals will remain part of it, and whether the best EV batteries will be solid state design or not. Given this uncertainty, EV battery production facilities located in China may not retain the competitive position they currently hold.

The battery production scene is already changing, influencing the rapid growth of Chinese EV battery manufacturing investments in the European Union (figure 4). Similarly, as emphasized by Princeton University postdoctoral researcher Kyle Chan (2024), Chinese EV battery producers like CATL and even BYD (which produces both EVs and batteries) are keen to partner with non-Chinese EV producers, including Tesla, BMW, and Mercedes. Such partnerships will make Chinese expertise, prices, and quality inputs available to all interested parties, including through technology licensing agreements.

Supply chains and other partnerships

Also, Chinese producers may be increasingly willing to sell parts and share technology with interested buyers,[6] given the competitive challenges they face in their domestic market resulting from slower domestic demand and low plant utilization. Partnering with EU-based producers hence represents an alternative corporate strategy to shipping as many Chinese produced EVs to the European Union as possible. The access that European and other EV companies producing in Europe have to the Chinese EV parts supply chain and technology makes it unnecessary for the European Union to introduce explicit maximum ownership thresholds (below controlling shares) for Chinese EV investments.[7] European car companies are likely to know better than policymakers which partners to collaborate with. These companies will also be able to offer Chinese partners valuable consumer insights into the EU car market.

EU-China EV trade looks a lot like US car trade with Japan and South Korea in the 1980s

The EV sector trading relationship between the European Union and China looks likely to replicate the relationship between the United States and Japan and South Korea after the car wars of the 1980s.[8] Figure 4 shows how Chinese EV manufacturers and suppliers are setting up factories in the European Union and look likely to expand. In the 1980s, Japan bowed to US demands to set up “voluntary export restraints” (VERs) on cars and relocate production to the United States. By contrast, the EU-China EV case is driven more by commercial auto industry logic in both China and the European Union, as well as Europe's political desire to promote the green transition and retain access to China’s car market. The imposition of relatively low-level EU anti-subsidy tariffs on Chinese-made EVs will add an accelerating “tariff hopping element” to this process of Chinese investments in the European Union. Crucially, however, EU EV tariffs could be only a fraction of the 100 percent rate the United States recently imposed.

It could well be that China is already implementing its own version of VERs[9] on EVs shipped to the European Union, “voluntarily” limiting exports to a stable level until the European Commission decides whether to impose anti-subsidy tariffs in July.[10]

The European Union and China will likely avoid protectionism and agree on an EV import cap

The most probable future path for this crucial sector would be for the European Union to cap EV imports from China at a relatively high, mutually acceptable level, while hosting a rising share of Chinese brand EVs made and sold in the European Union, combined with a continued presence of EU brands in the Chinese market, and some high-end German-made EVs exported to China. Under this stable situation, Chinese and EU firms would enjoy reciprocal market access for EV sales, and parts and the European Union would accelerate its green transition.

Such arrangements would probably not shrink the aggregate EU-located auto industry output. But Chinese EV producers will become an increasingly large part of the local sector. Meanwhile, the technological shift to EVs will almost certainly result in less employment in the EU auto sector, resulting from shorter supply chains for EVs and accelerating automation. For EU consumers, this path ensures further access to the technologically best and cheapest EVs in the world, overwhelmingly produced within the European Union by all the world’s major EV producers. Some of these EU-produced EVs might even in turn find their way to the US market, though at the risk of triggering a politically driven US trade response.

Lastly, this type of EU EV strategy would dramatically differ from the emerging protectionist US policy response to the Chinese EV sector. As stated by Commission president von der Leyen, the European Union will not join the United States in imposing blanket tariffs on China. Biden administration policies look likely to isolate the US EV sector behind high tariff barriers—inside a small garden with high fences so to speak. Such a strategy will not, despite the stated intentions of President Biden, propel the US EV sector to global leadership. Rather the risk seems to be that the US EV sector chooses to service a relatively small US domestic market with profitable but also idiosyncratic EV models—e.g. electric pickup trucks[11]—with limited export appeal elsewhere in the world. That in turn would set back the goal to decarbonize the US transport sector.

Notes

1. Under EU anti-subsidy rules, the provisional or definitive duties imposed on a given import cannot exceed the amount of subsidies found, but they should per Regulation (EU) 2016/1037 articles 12 and 15 be “less than the total amount of countervailable subsidies if such lesser duty would be adequate to remove the injury to the Union industry.” In other words, EU anti-subsidy tariffs cannot exceed the level of injury suffered by affected EU industries. This is a very high burden of proof for the European Commission to carry, effectively limiting the legally plausibility that EU anti-subsidy tariffs will be imposed on Chinese EVs.

2. The recently reported Chinese trial balloon to potentially raise tariffs on large imported internal combustion engine cars to 25 percent is likely meant to remind the European Commission not to impose too high an anti-subsidy EV tariff, as well as to placate China’s domestic political forces. See Bloomberg, "China Hints at 25% Car Tariff as Deadline for EU Probe Looms," May 21, 2024.

3. An interesting upcoming case is Polestar, a nominally Swedish EV company ultimately owned, via Volvo, by Chinese Geely. Polestar has planned to commence production of its Polestar 3 model in Ridgeville, South Carolina, in mid-2024. It is unclear if the ultimate Chinese ownership of Polestar will be sufficient to trigger a US political issue.

4. Cargo ships large enough to transport EVs must purchase 50 percent of the emissions of any voyage that ends or begins at an EU port, and 100 percent of emissions that occur within EU ports. Forty percent of total 2024 emissions must be purchased by September 30, 2025 and 70 percent of 2025 emissions by September 30, 2026, after which 100 percent of emissions must be purchased. See the European Commission, "Reducing emissions from the shipping sector."

5. Chinese power production remains heavily coal-based, especially compared to France, meaning this penalty will remain in place until Chinese power production is decarbonized. See Reuters, "France's new EV cash incentive rules toughen market for Chinese-made cars."

6. The Financial Times cites research indicating that the plant utilization at Chinese EV manufacturers is likely to fall(!) from just 54 percent in 2024 to 48 percent in 2024.

7. See Institut Montaigne, "Europe Needs a Systemic Response to China's Car Offensive," April 10, 2024.

8. For an overview of the US-Japan trade frictions in auto parts, see testimony by Gary Clyde Hufbauer before the Joint Economic Committee in Congress, June 24, 1985.

9. Under a voluntary export restraint, the exporting country agrees to limit the level of exports of a given good to the importing country at an agreed level. This supersedes the need for the importing country to impose more far reaching trade restrictions.

10. The European Commission launched its probe on October 4, 2023, a few months after EV imports reached the level of approximately €10 billion.

11. I am indebted to my PIIE colleague Cullen Hendrix for the example of the development of the Chevrolet Silverado EV pickup truck at the expense of the compact Chevy Bolt.