The electric vehicle industry is facing a high-voltage trade dispute as China and the European Union engage in a tit-for-tat battle over market dominance. With the EU imposing new tariffs on Chinese-made EVs, Beijing has swiftly retaliated by launching its own investigation into European trade practices. This escalating conflict threatens to reshape the global EV landscape and test the resilience of international trade relations.

 

China is meeting force with force after the European Union decided to press ahead with new tariffs on certain China-made EVs following the collapse of more than three weeks of negotiations.

China’s Ministry of Commerce has announced the launch of a trade-and-investment-barrier investigation to see how the EU’s Foreign Subsidy Regulation has affected Chinese companies. The investigation is set to last until Jan. 10 next year.

The probe came after the EU decided to levy an additional 17.4 percent import duties on Chinese EV champion BYD, 19.9 percent on Geely, and 37.6 percent on SAIC, on top of the current 10 percent levies. Other carmakers will face extra duties of 20.8 percent or 37.6 percent, depending on whether they have cooperated with the EU investigation.

The decision is provisional, meaning the duties will be paid by Chinese carmakers to the EU customs in the form of guarantees. If no definitive agreement is reached in four months, the guarantees will be collected.

The EU decision to impose tariffs on China-made EVs was a result of an anti-subsidy investigation launched in October last year. The European Commission was trying to decide whether the Chinese carmakers were benefiting from unfair subsidies and flooded the single market with subsidised vehicles with low export prices, posing unfair competition for European carmakers.

Over the past three years, 30 percent of Chinese-manufactured EVs were exported to the European market, with Chinese EVs occupying a 22 percent market share in Europe in 2023.

Hang Guoliang, a partner at Global Law Office, tells ALB that the EU's anti-subsidy investigations typically focus on loans, raw materials, land, income tax exemptions, and government grants. These investigations would compare loan interest rates, raw material procurement prices, and land prices with benchmark prices in targeted countries to calculate the subsidy margins.

"Generally, anti-subsidy investigations focus on raw material prices and loan interest rates, which usually account for over 70 percent of the subsidy margins. However, in the case of EVs, there are also various government grants to consider," says Hang.

In April this year, the European Commission released a report alleging state-led distortions in the Chinese economy, highlighting several Chinese government actions of concern, such as support for state-owned enterprises through low-interest loans provided by state-owned banks and financial support from local governments. The report also pointed out policies exempting the purchase tax for EVs, which amounted to $11.9 billion in 2022 alone.

As the Chinese probe into the EU’s additional duties is underway, Hang says the final duties will be determined based on the conclusion of the investigation including questionnaires and on-site verifications.

TURNING OVERSEAS

Since the beginning of the EU investigation, Chinese carmakers have been seeking ways to mitigate the potential impact of the imposition of additional tariffs. One of the most widely discussed and seemingly "once-and-for-all" options is to establish manufacturing plants overseas, particularly in Europe.

In January, BYD announced plans to build the first passenger EV production base for a Chinese car company in Europe, in Hungary. A few months later, Geely signed a joint venture agreement in Spain to start EV production through direct acquisition of a factory.

Additionally, carmakers SAIC MG, Changan Automobile, Great Wall Motor, NIO, and Neta Auto have also announced plans to set up factories in Europe, considering countries including Hungary, Poland, Spain, and Italy.

However, a partner from a leading Chinese law firm specialising in overseas investments in new energy cautions that investing in local manufacturing might not be a practical solution for all.

"The investment cycle for building a factory is long, requiring substantial fixed asset investments and extended construction periods. Additionally, companies must meet high environmental and other compliance standards, with no immediate returns during the construction phase," the partner says.

 

"According to EU anti-circumvention regulations, if 60 percent or more of the component value is imported from a country subject to tariffs, and the added value from assembly does not exceed 25 percent, it may be deemed as circumvention. Therefore, if carmakers simply ship parts to Europe for basic assembly with minimal added value, the EU may still consider the vehicles to be of Chinese origin and subject them to countervailing duties.”

- Hang Guoliang, Global Law Office

 

Even if succeeding in building factories, Chinese EV makers may still face potential anti-circumvention investigations.

"According to EU anti-circumvention regulations, if 60 percent or more of the component value is imported from a country subject to tariffs, and the added value from assembly does not exceed 25 percent, it may be deemed as circumvention. Therefore, if carmakers simply ship parts to Europe for basic assembly with minimal added value, the EU may still consider the vehicles to be of Chinese origin and subject them to countervailing duties,” explains Hang.

Even shifting production to other markets such as Southeast Asia and Latin America might not be sufficient to shield China-made EVs from anti-circumvention investigations.

"Chinese photovoltaic products faced a similar issue, with the EU and the U.S. launching anti-circumvention investigations against Southeast Asian photovoltaic products. If the added value from processing in third countries is insufficient, they may still be deemed as originating from China," says Hang.

Against this backdrop, assisting Chinese companies in dealing with anti-circumvention investigations has arisen as a bright spot for Chinese law firms as the regulatory environment hardened.

In a more direct response, Chinese EV makers can opt to raise the prices of their vehicles in a bid to increase the price competitiveness of European cars.

According to Reuters, Tesla has already announced price increases, while BYD and SAIC have not yet decided on them. Geely believes that its Spanish factory will mitigate some negative impacts, and Polestar – which it jointly owns with Volvo – is considering lowering supply chain costs to ease the pressure.

Hang points out that an alternative avenue could be negotiating a price commitment agreement. "Price commitment means that Chinese car manufacturers commit to selling EVs to the EU at no less than a certain price. If they do not comply, the EU will continue to impose anti-subsidy duties. China and the EU have previously reached such an agreement on photovoltaic products," he says.

A third strategy is to further diversify export markets. Recently, Neta Auto and Xpeng have been strengthening their presence in the African market. At the end of June, Neta opened its first flagship store in Kenya with plans to expand to 20 African countries over the next two years. Xpeng has begun sales in Egypt since mid-June.

In the Middle East, 20 Chinese EV brands were on the market in the UAE in 2022. In Latin America, Brazil has become the largest single export destination for Chinese EVs in recent months.

NEXT STEPS

Negotiations on the definitive tariffs will continue during the window before the final EU ruling in November this year, in hopes of reaching a mutually acceptable solution between the bloc and China, its largest trading partner.

At the moment, the divided views within the 27-nation bloc have rendered uncertainty to the final decision. Germany, Hungary, and Slovakia have clearly expressed opposition to slapping extra levies on Chinese EVs, while France is a staunch supporter of the tariffs.

An advisory vote by all member states will be held in two weeks, followed by a final vote in October to decide whether to impose tariffs on Chinese EVs for the next five years. The decision will only pass if at least 65 percent of the countries, or 15 countries, vote in favour of imposing tariffs.

If the final ruling is implemented, Hang says, the Chinese government could also file a complaint with the WTO's dispute settlement body. The Chinese Ministry of Commerce has also stated that it reserves the right to file a complaint with the WTO.