After a tight vote in favor of keeping in place countervailing duties on electric vehicles (EVs) imported from China on October 4, the European Commission is now in negotiations with China to see if a compromise can be reached over the amount of its EVs which may enter the European single market, and under what conditions. The negotiations are not going well, and China has been baring its teeth with retaliatory tariffs on European liquor imports, and potentially further tariffs on high cylinder combustion engine vehicles. The latter move would be ironic as it would hit Germany hardest, even though its government decided to take the unusual step of voting against the Commission’s decision to impose duties on Chinese EVs. More retaliation could come in the form of anti-subsidy/anti-dumping investigations into EU pork and dairy imports and, possibly, the curtailing of China’s foreign direct investment in EV manufacturing in Europe.
One should reflect on why China’s response to the EU’s duties has been more aggressive than that towards the United States or Canada, even though both of them have imposed much higher import tariffs on Chinese EVs, namely at a 100 percent rate. No action seems to have been taken against the U.S., and while China has started an antidumping investigation into Canadian rapeseed, its relevance as a market is much smaller compared with the importance of internal combustion cars exported from Europe to China. Beijing’s hostility is all the more surprising if one considers that the EU is China’s largest export market, particularly for EVs (with 55 percent of Chinese exports).
The answer to this apparent puzzle is quite simple: China has more leverage over the EU because of the EU’s self-inflicted weaknesses. First, the EU is unable to speak with one voice, even on trade, its most centralized competency after monetary policy. Second, the EU depends on China much more than the U.S. or Canada do. The EU’s main dependence comes from imports, especially of critical components for the digital and energy transition. In addition, some large European companies have continued to expand in China’s market. This is particularly the case for German companies, many of which are auto makers.
…the Commission’s decision to keep its countervailing duties on EVs produced in China are a signal, more than anything else, that the time in which China-EU relations were governed by engagement is over.
The EU individual member states’ increasing dependence on China contrasts with the EU Commission’s push for a de-risking strategy towards the world’s second largest economy. In fact, the speed and depth of the EU’s de-risking has to date been slow and shallow when compared with that of the U.S.. Even the rhetoric of both sides, which sounded quite similar at first — with the EU introducing the de-risking concept even before the U.S. did — has been increasingly divergent. This is particularly so in the case of the German government, whose economy is most exposed to China’s market, a fact which probably explains its vote against imposing import duties on Chinese EVs. That the largest EU country is ready to make such a move should sound the alarm about how much some major European companies operating in China are influencing EU trade strategy. It could also be read as a warning signal of how urgent it is for the EU to de-risk from China if it wants to preserve its independence when conducting economic policy.
De-risking and prioritizing economic security will, no doubt, come at a cost: but so would inaction towards China. To reduce the costs, the EU must jump from relying on defensive measures, such as its duties on EVs, to aggressive action to increase the bloc’s own competitiveness. The cost of producing an EV in China is still lower than elsewhere, even when subsidies are not factored in, because of China’s impressive technological upgrade and because of its massive economies of scale. Most analysts focus on the former as the main barrier for the EU in competing with China on green tech, but this might not be the case.
In fact, parts of the technology embedded in Chinese green tech originated in the EU or the U.S., but the companies that produced it received no government support while they were still unprofitable. The U.S. is clearly trying to change this situation with a massive industrial policy push, including through the CHIPS and Science Act and the Inflation Reduction Act. Whether this will be a success is still unclear. The EU, by contrast, is still scrambling to build a credible industrial policy plan that will make its innovation commercially viable. This is particularly important for the EU because compared to the U.S. it lacks the capital markets needed to fund and scale-up innovation.
China’s huge economies of scale will meanwhile be much harder to emulate in Europe unless a true single market is developed. Beyond strengthening the single market, the EU also needs to be much faster at building — and rebuilding — partnerships with other major economies, notably in the Global South. Such ties would also help reduce the cost of potential retaliation from China against actions such as the current duties on EVs. The main tool for this should lie coordination of economic security measures, mainly with the G7 and other like-minded economies.
All in all, the Commission’s decision to keep its countervailing duties on EVs produced in China are a signal, more than anything else, that the time in which China-EU relations were governed by engagement is over. Firstly, the EU has become too dependent on China and, secondly, China and the EU now compete with the same types of products in third-country markets. In a world of great power competition, the EU has no choice but to jump fully into a game whose rules are no longer fair.
Alicia García-Herrero is an Adjunct Professor at the Hong Kong University of Science and Technology, and the Chief Economist for Asia Pacific at Natixis. She also serves as a Senior Research Fellow at European think-tank Bruegel.
