Tariffs

Tariff Tango: Economic and climate transition in times of rising EU and China tensions?

It is quite common to see car advertisements at airports. We are used to seeing a BMW, Audi or Mercedes in the middle of an airport. Travellers are already on their way, so advertising another means of transport might have a convincing effect on one or the other. When I arrived in Europe’s capital the last time, however, something in particular caught my eye.

It was not one of the big German or French brands in this football-field-sized poster in the middle of the airport. Now, a huge BYD car was looming in front of me. I was already familiar with the brand, but to see it so prominently displayed here and not one of the European giants felt unusual. Similarly, the current European Football World Cup is not embedded in logos of VW or Renault – surprisingly, BYD is the only car manufacturer sponsoring the event. This raises the question: Is China still in the fast lane, or has it already passed us by?

In recent years, the presence of Chinese cars on the European market has also been a concern for the EU and Germany. Last week, the former announced that it would be imposing countervailing duties on Chinese electric cars from the beginning of July. For Chinese manufacturers, between 17.4% and 38.1% will be added to the existing of 10% tariff. However, according to the industry, Western car manufacturers such as Tesla and BMW, producing in China for the European market, could also be affected. Germany has therefore called for a grace period to open talks with China, which has consequently been promoted by German Federal Minister for Economic Affairs Robert Habeck during his trip to the country last weekend.

China's Pork Power Play

In Germany, public debate is particularly divided on the subject. While around 80% of German car manufacturers are in favour of the additional tariffs according to a survey by the IW Cologne, many companies have relocated their production to the East Asian country in recent decades. As a result, industry not only fears national countermeasures, but a fully-blown trade war.

The bilateral trade volume between Germany and China amounted to 254 billion euros last year - a twelfth of Germany's total trade in goods. As an initial reaction to the tariffs, China has swiftly announced a review of pork and other pork products. A smart move after the whole of Europe was engulfed in peasant protests this spring. The Netherlands, Spain, France and Denmark in particular export pork products worth around 2.5 billion euros to China. In addition, a review of brandy exports has also been announced - a clear signal to France, one of the main proponents of the tariffs.

In this geoeconomic time, the EU tariffs show that the Union can bite and not just bark. However, based on the Chinese model, the tariffs are not necessarily intended to keep Chinese companies out of the European market, but rather to create joint ventures and production sites in Europe. However, this ignores economic motivators. European car manufacturers have not relocated to China because of the good food and picturesque inner cities, but because of the extraordinarily low labour costs, lax environmental regulations and simple approval procedures. All things where Europe is proud to differ.

However, this does not seem to stand in the way of cooperation, as Europe also offers high subsidies, for example for research and development. The transatlantic company Stellantis, which includes Jeep, Fiat and Maserati, recently entered into a partnership with Leapmotor. EBRO-EV, a Spanish electric car manufacturer, will also be developing new vehicles together with Chery, China's fifth-largest car manufacturer. Meanwhile, Hungary positions itself as a production hub. In addition to BYD's existing plans to establish plants in the Eastern European nation, the country accounts for over 40% of Chinese direct investment - almost 70% of which is in the electric vehicle sector. The upcoming Hungarian presidency of the Council of the European Union is also geared towards opening the continent up for more Chinese investment. 

Innovation bringt China auf die Überholspur

The increasing global market share of Chinese electric cars does not come as a surprise. Some BYD cars cost significantly less than half the price of comparable models from the West. This is not just because of massive state subsidies, China has been expanding its battery capacity immensely for years. Moreover, innovative technology can also be accessed much more widely thanks to IT and AI expertise.

In the last three months of 2023, BYD overtook Tesla as the best-selling electric car brand. This did not go unnoticed in the White House. This May, President Biden imposed a 100% punitive tariff on Chinese electric cars. In contrast to the European measures, these measures are not only offsetting the level of subsidies but also aim at protecting the domestic market. Currently, the USA hardly buys any cars from China but is scared that the European tariffs will divert trade toward them.

However, not only electric vehicles were affected by the US tariff increases, but imports of Chinese solar panels, microchips and batteries also became significantly more expensive. China now produces around 80% of the world's solar panels. Solar panels from China only cost around half as much per watt of output, so they were able to crowd out domestic producers. Nowadays in Europe, only 3% of the solar panels used are produced locally. A similar picture is on the horizon for wind turbines, which is why the EU Commission is already examining additional tariffs for Chinese producers in both sectors.

Climate transition made in China

Recalling that the EU and its member states have set themselves binding targets for climate neutrality by 2050, as well as a 55% reduction in greenhouse gases by 2030 it seems this needs to be balanced carefully. Renewable energy and electrification, particularly transportation, are major levers in achieving climate neutrality. The electric vehicle market in Europe is still functioning, with great potential for European innovation and competition. However, the situation in the renewable energy sector has drastically changed. It might be better to benefit from cheap production from China without losing the potential for innovation in Europe.

In contrast to the USA, whose Inflation Reduction Act provides billions in subsidies for green technologies, the EU lacks a coherent industrial policy and a plan on how to achieve the necessary investments. The Green Deal Industrial Plan will not necessarily change much in terms of market share and costs. Estimates speak of an investment gap of around 70 billion by 2030 just to achieve the EU targets for domestic European solar panel production and batteries. In this context, some also talk about a new energy trilemma: reducing emissions, decoupling from China, and preserving European jobs.

On the sidelines of the Minister's trip, it was evident that China's Russia policy is contributing to European skepticism. The EU and China have now resumed talks on finding joint solutions. Some might say this will just delay the inevitable. In any case, the EU must take its future into its own hands and become a self-confident global player. Tough decisions will decide if Europe’s industry continues to ride or die.