Why Biden’s Significant EV Tariffs Could Spark a Europe-China Trade War

Biden’s significant EV tariffs could trigger a trade war between Europe and China. These tariffs, aimed at protecting the US automotive industry, might escalate tensions, impacting global trade and international relations, particularly between European and Chinese markets involved in electric vehicle production and sales.

‍LondonCNN — US President Joe Biden has increased tariffs on electric vehicles from China to 100%, effectively closing off one of the world’s largest passenger car markets to the biggest global producer of EVs.

“I’m determined that the future of electric vehicles will be made in America by union workers,” Biden said Tuesday. However, the real battleground for EVs may extend beyond the US — in Europe.

The United States currently imports very few EVs from China. Europe, on the other hand, is the largest export market for Chinese EV manufacturers. Washington’s drastic measure puts pressure on the European Union to protect its automakers, who are likely to face even tougher competition from Chinese EV imports if they are effectively priced out of the US market.

Joseph Webster, a senior fellow at the Atlantic Council, noted that the recent US tariffs on EVs and other goods from China, including semiconductors and batteries, might “force Brussels’ hand” as higher US tariffs could redirect much of the trade to Europe.

“Brussels will have to act quickly, either by imposing its own tariffs or by accepting a flood of Chinese-made products,” he added in comments on the think tank’s website.

The EU is already investigating state support for Chinese EV makers. If it finds that their prices are artificially low, it will announce additional import duties by early July. Brussels suspects that Beijing’s subsidies may be creating unfair competition for European carmakers.

Agatha Kratz, a director at research provider Rhodium Group, stated that the increase in US tariffs on Chinese EVs makes it “easier” for the EU to raise its tariffs “all the way to 30%,” which is three times their current level.

However, she told CNN that it would be “very hard” for Brussels to match US tariffs. The EU “can’t justify going much higher (than 30%) as the duties need to be aligned with the findings of the investigation on the scale of subsidization in China.”

“This means that the EU will need to explore other tools and defensive measures to try and stem the flow of China-made EVs into Europe,” she added. These could include measures targeting data security and strict enforcement of environmental and labor standards.

EU tariffs could backfire

According to Citi, the EU accounted for 36% of Chinese EV exports last year, more than the next five largest markets combined. In contrast, the United States currently receives only 1.1% of China’s EV exports, amounting to less than $365 million, according to consultancy Capital Economics.

Chinese brands benefit from much lower production costs compared to their European rivals. Agatha Kratz and other researchers at Rhodium Group suggest that duties of 40% to 50% would likely be necessary “to make the European market unattractive for Chinese EV exporters.”

For BYD, China’s largest EV maker, the tariffs would likely need to be even higher to be effective, they add. However, Rhodium Group believes that duties at such levels are unlikely.

That's also because such tariffs could ultimately harm European automakers, many of which manufacture cars in China and then sell them in Europe.

During an earnings call with reporters last week, BMW CEO Oliver Zipse cautioned Europe to proceed carefully.

“We don’t think that our industry needs protection,” he later told analysts, emphasizing that operating on a global basis is an advantage. “You can easily endanger that advantage by introducing import tariffs.”

The EU will also want to avoid provoking retaliation from Beijing, which could complicate matters for European carmakers selling in China.

“The EU’s situation is very different from the US... since the German automakers rely so heavily on the China market for significant sales (and) profits,” said Tu Le, managing director at Sino Auto Insights, a consulting firm. “That makes the chances of (the EU) doing something heavy-handed very low.”

Trade war brewing?

Biden’s tariffs reflect a growing urgency among Western officials to protect domestic jobs and strategically important industries from being undermined by cheap Chinese imports.

As a trade partner, China is more significant to the EU than to the United States, representing a much larger market for EU goods exports. Nonetheless, Brussels is adopting a more protective stance on trade.

In addition to investigating Chinese EVs, the EU is also probing alleged dumping of industrial products by China and unfair state support for Chinese wind turbine manufacturers.

“The EU is using its whole toolbox at the moment to defend its economy and European jobs from what it perceives to be unfair trade practices from China,” said Kratz from Rhodium Group, suggesting the EU and China are already engaged in a low-level trade war.

“I’d say we are entering a very tense period in terms of trade interactions and trade defense,” she added.

The United States may also pressure the EU and other allies to reduce their reliance on trade with China, as it has successfully done with semiconductors.

In a statement announcing the tariffs Tuesday, the White House said it would continue to work with allies “to strengthen cooperation to address shared concerns about China’s unfair practices.”

Leaders from the Group of Seven (G7) developed economies will discuss how to protect their industries from Chinese competition at a summit in Italy next month.

“The next few weeks will be telling,” said Josh Lipsky, a senior director at the Atlantic Council. “If Europe and the G7 countries match or mirror US policies… it may cause Beijing to realize that this time is different,” he wrote in comments Tuesday.

“On the other hand, if Europe hedges its bets, coming out of its own anti-dumping review, it could affirm China’s view that their challenge is primarily with the United States, not the rest of the advanced economies.”

Juliana Liu in Hong Kong contributed reporting.

Source:CNN