The Fight Over China’s Electric Cars Is Upside-Down

Reason would dictate that Germany’s tenacious automakers—the leaders in the European market—would vehemently demand an import charge on China’s subsidized and cut-price electric vehicles (EVs). Observers fear sleek and thrifty Chinese clean tech could overtake the European market, which is already on the back foot. Last year, almost a fifth of EVs sold in Europe were made in China, and this year, that share of European sales could climb to a quarter. That should be no surprise, as the Chinese automaker BYD sells its chic little Seagull for about $12,000, while Europe’s lowest-cost EV is the Dacia Spring, with a price tag of $18,500.

In the same way, environmentalists should be expected to oppose any surcharge that makes clean tech, such as EVs, more costly. The European Union’s ambition is to almost triple the number (currently 12 million) of zero-emission cars on European roads by 2030—and the chief obstacle to EV expansion for years has been their prohibitive cost.

But the reality has been the other way around: German carmakers have been the ones demanding that newly announced EU tariffs on Chinese cars be shelved, while environmentalists have warned against doing so. The former are concerned about Chinese retaliation; the latter are worried about undermining key promises of the European Green Deal: namely, economic momentum and high-wage jobs within the EU.

Chinese and EU representatives are now busy trying to broker a compromise solution. But it’s hard to imagine a deal in which everybody wins. And the worst outcome—in which climate protection, clean tech industries, and EV buyers all end up worse off—is a real possibility.

Beginning on July 4, the European Commission, the EU’s executive arm, plans to slap duties between 17.1 percent and 38.1 percent on Chinese EVs (as well as Chinese-built Teslas, BMWs, and Dacias.) This comes on top of its standard 10 percent tariff for car imports that Chinese vehicles already pay.

The measure follows a nine-month EU investigation that found that Chinese EV production benefits from “unfair subsidization, which is causing a threat of economic injury to EU BEV [battery electric vehicle] producers.” The probe revealed such perks as preferential lending, tax reductions, direct grants, and cheap land, as well as a cut-rate supply of lithium and batteries. The subsidies also favored Western-owned EV plants with factories in China—such as Tesla and BMW—in the same measure as Chinese firms, such as BYD, Geely, and SAIC.

The new EU tariff rates would vary depending on the study’s estimate of state support per individual automaker. This would, for example, hike the price of a BYD Seagull to $14,088.

“In this particular case, we had no option but to act in the face of soaring imports of heavily subsidised BEVs produced in China and their rising share of this market in the EU,” said Valdis Dombrovskis, the European Commission’s vice president.

China is flailing wildly to stave off the measures, despite the fact that Beijing’s EVs would still be cheaper than European models; and other products, such as electric city buses will suffer no levy at all. Nevertheless, China is thundering retaliation in what sounds like a trade war, and at the same time furiously hatching deals in last-minute negotiations.

First off, the Chinese say, Europe subsidizes its own carmakers aplenty, pointing to generous subsidies, research and development support, and tax incentives. (Although this is true, experts agree that the EU probe shows Chinese automakers benefiting much more than their European counterparts.) China is offering carrots in terms of lowering existing tariffs on Europe’s large-engine cars in return for dropping the new charges, as well as waving the stick: jacked up tariffs on those very same imported, gasoline-powered cars.

German carmakers are petrified that their own business in China—in particular, the large combustion-engine vehicles that they sell there—will suffer, and thus they ironically find themselves in the same side of the EU tariff dispute as their Chinese competitors—and on the opposite side of French and Italian carmakers. Indeed, the German automobile branch has long earned very well on the Chinese market: In 2021, Germany’s automotive goods industries boasted a trade surplus with China of roughly $30 billion.

In Germany, the heavy hitters protesting the EU tariffs—in the name of fair global competition, of course—include the government, the largest industrial lobbies, and the entire automobile  branch. BMW CEO Oliver Zipse charged that the European Commission was “harming European companies and European interests.” Two of Germany’s largest industrial lobbies, BDI and VDA, argued that “[o]nly with open, global sales markets can economies of scale be utilised and, as a result, more e-cars put on the road.” They added that “[g]lobal challenges require global partnerships. Challenges should be mastered through dialogue, and solutions should primarily be sought in partnership. Additional tariffs on EVs from China are the wrong instrument.”

Climate advocates, however, take another tack entirely. It is in the name of the Green Deal—the EU’s cutting-edge climate package—that environmentalists are defending the EU’s leveling measures. In Europe today, in the aftermath of European Parliament elections that saw the far right surge and green parties suffer, the bloc’s ahead-of-the-curve climate policies are expected to be stalled for now. Environmentalists are now acutely aware that evidence of global warming alone is not enough to justify green policies in the eyes of the larger public. Thus,  they are underscoring that the clean energy transition is also an investment in energy security, pollution-free air, and economic modernization. The latter can be summed up as green jobs and green growth.

“The premise of the Green Deal,” Julia Poliscanova of Transport and Environment, a Brussels-based nongovernmental organization that advocates for clean transport and energy, told Foreign Policy, “is that the European economy will lead the transition to carbon neutrality. If it’s completely imported, it will lose support and we’ll see a further swing to the far right, which can mean dismantling the progress we’ve already managed. We’re not against Chinese competition—on the contrary, it’s necessary, but all of the green jobs can’t land in China.”

“We have to invest in and keep [green business] in Europe — ‘whatever it takes,’” Sascha Müller-Kraenner of Deutsche Umwelthilfe, a Berlin-based NGO, wrote to Foreign Policy in an email. “We will need a combination of both tariffs on imported EVs and solar panels, and domestic and EU support of European EV makers and solar panel companies.”

“The way the US shored up its solar industry should be Europe’s blueprint,” Müller-Kraenner added. The United States imposed a series of tariffs on Chinese solar panels, EVs, and lithium-ion batteries, including a 100 percent tariff on Chinese EVs that was announced in May. Moreover, the Biden administration has invested heavily in solar research and development as well as implemented demand-side incentives for local solar manufacturing, dedicated tax incentives, and public financing initiatives.

In contrast to the blatantly protectionist U.S. levy—which China argues are in violation of World Trade Organization rules—Europeans such as German Economy and Climate Minister Robert Habeck feel that the EU tariffs are fair. Trade experts doubt that the EV tiff will trigger an all-out trade war simply because China has too much to lose. While visiting China in late June, Habeck opened the door to further negotiations on the issue, which are happening now.

But the fiasco begs the possibility of a win-win-win compromise. Subsidies can be beneficial for advancing an effective decarbonization strategy, argued Shang-Jin Wei of Columbia Business School. The world, however, “would have been much better off,” he wrote, “if major powers had found a way to negotiate a common pro-climate subsidy scheme for EVs, and a common tax on carbon emissions.”

Instead, he worries, “we may get a self-destructive race to the bottom”—one that has only losers.