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Genuine Trade War

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Photo: Car exports in May 2024 totalled $20.31 billion, reflecting a 1.3% increase month-on-month and a 9.8% year-on-year growth. The rapidly growing Chinese car exports are forcing importing countries to take protective measures. Source: X (formerly Twitter) CCCEU.
Photo: Car exports in May 2024 totalled $20.31 billion, reflecting a 1.3% increase month-on-month and a 9.8% year-on-year growth. The rapidly growing Chinese car exports are forcing importing countries to take protective measures. Source: X (formerly Twitter) CCCEU.

On 4 July, the EU will impose preliminary safeguard duties on Chinese electric vehicles, ranging from 17% to 38.1%. If the investigation finalises these measures, they will be implemented long-term from November 2024. In May, the US increased tariffs on electric vehicles from 25% to 100%, and on solar panels from 25% to 50%. Turkey is also defending its market aggressively: on 7 July, an additional duty of 40%, but no less than $7,000 per car, will come into effect there.


This story about heavy tariffs on Chinese cars suggests that many governments are torn between two options:


Leave things as they are, keeping Chinese car prices relatively low but risking their own automotive industries.

Impose protective tariffs on Chinese car imports, thus saving their own automotive industries but harming their voters' wallets here and now.

It may seem straightforward, but it’s much more complicated. That’s why powerful negotiators are involved in the disputes over Chinese exports. At the end of June, EU Trade Commissioner Valdis Dombrovskis travelled to Beijing to meet Chinese Minister of Commerce Wang Wentao for preliminary talks on mutual consultations regarding the EU's anti-subsidy investigation into Chinese electric vehicles. This investigation concerns the illegal subsidisation of electric vehicle production and their export to the EU. An interesting detail – on its X (formerly Twitter) account, the Chinese Ministry of Commerce noted that these negotiations were initiated by Dombrovskis, indicating that Beijing started the negotiation tour from a strong position.

Photo: European Commissioner for Trade Valdis Dombrovskis and Chinese Minister of Commerce Wang Wentao smile, but their disputes are intense. Source: European Union


The Root of the Conflict

This trade conflict poses an existential challenge for the EU because China is a totalitarian state where the economy only outwardly resembles those in the EU, US, Canada, Japan, Turkey, Mexico, Brazil, Indonesia, Australia, and many other countries. The authoritarian regime in China can easily inject money into specific industries, providing them with competitive advantages.


Want to boost the real estate sector? Sure! And soon Chinese megacities are filled with enormous apartment buildings where no one buys flats. Consequently, the country's financial system is rocked by a mortgage crisis. However, mismanagement is papered over with money, making everything appear normal. In less visible sectors, problems are not as pronounced, but not in the case of electric vehicles. A similar situation occurred previously with solar panels, where the government directed cheap investments and other forms of state support. This too was met with strong protective measures by governments in developed countries.


So why don't governments in the EU, US, and other countries welcome the influx of cheap Chinese cars, solar panels, or other products? Because it results in two very unpleasant consequences for these countries. Firstly, it leads to job cuts in the EU, US, and other countries importing Chinese electric cars, while China’s surplus industrial capacity grows rapidly. Secondly, it creates excessive dependence on China for these importing countries. The risks and disadvantages of this became especially clear after the collapse of Chinese manufacturers due to the COVID-19 pandemic.


In this scenario, Europe is striving for more sustainable supply chains and the preservation of jobs.


A Powerful Barrier

In May, the US took a clear and demonstrative step by increasing tariffs on the import of Chinese electric vehicles from 25% to 100%. The EU, however, has opted for a more formal approach, initiating an anti-subsidy investigation against battery electric vehicles (BEVs) from China.


The findings were extremely harsh. The European Commission accused the Chinese government of aggressive and illegal subsidisation: “The Commission has preliminarily concluded that the value chain of battery electric vehicles (BEVs) in China benefits from unfair subsidisation, which poses a threat of economic harm to BEV manufacturers in the EU.”


The EU government then approached Beijing to discuss these findings and potential resolutions under World Trade Organization (WTO) procedures. What might these solutions entail? For instance, voluntary restrictions by China on the supply of electric vehicles to the EU or other measures. If no agreements are reached, the countervailing duties preliminarily announced by the European Commission will be permanently enforced.


At present, these duties are not being collected but are instead being held in special accounts as guarantees. Should these duties be formally approved, the amounts owed since 4 July will be collected. Thus, the cost of cars imported after 4 July will include these duties.


How much will be paid? This depends on the involvement of Chinese car manufacturers in the investigation. For example, BYD’s electric vehicles will face a duty of 17.4%; Geely, 20%; and SAIC, 38.1%. Other cooperating Chinese electric car manufacturers without individual duties will be subject to a weighted average duty of 21%. However, those who did not participate in the investigation will face the highest duty rate of 38.1%.


Not all is bleak for unnamed manufacturers. They can still request a review. Tesla, for example, could receive an individual duty rate but must submit a special request. Manufacturers can also provide arguments for a review of the duty rates, though success in such reviews is uncertain.


What's next? As mentioned, difficult negotiations and consultations lie ahead, but they are not indefinite. The process must conclude by November 2024, as the procedure began on 4 October 2023. Thus, final measures must be implemented by 4 November. These measures may not necessarily be the currently announced duties, which serve more as an invitation to Beijing for active negotiations to protect the European market from aggressive export expansion.


Photo: Viktor Orban held the warmest talks with Chinese President Xi Jinping in Budapest in May, a month and a half before Hungary assumed the six-month presidency of the Council of the EU. Source: FB Viktor Orban.


China Gains Strong Promoters

Beijing is set to pressure the EU to abandon the protective measures, and China has considerable leverage. About ten years ago, when the EU tried to shield itself from aggressive exports of Chinese solar panels, Beijing responded by imposing protective measures against European wines, forcing Brussels to retreat.


However, whether Beijing will succeed this time is far from certain. As mentioned earlier, China lost its status as a reliable supplier after the COVID-19 pandemic. Since then, the EU has been diligently creating alternative supply chains, and the stance that "China should not hold European consumers to ransom" has become a matter of principle.


Additionally, there is a geopolitical factor at play. China is actively supporting Russia in its aggression against Ukraine, effectively fuelling a full-scale war on the EU's eastern doorstep. This is another powerful reason not to engage in "business as usual" with Beijing.


Nevertheless, Beijing has enough promoters in Europe. From 1 July, Hungary holds the presidency of the Council of the EU, and its leader, Viktor Orban, has more than warm relations with Chinese leadership. Orban has received assurances from Chinese President Xi Jinping regarding plans to develop car assembly and battery production in Hungary. While battery factories are already operating in Hungary, Chinese corporation BYD, one of the largest electric vehicle manufacturers, is preparing to launch its first electric vehicle factory in the EU in southern Hungary. This factory is likely to serve as a major export hub and gateway to the European electric vehicle market.


It is not only some European politicians who will fight for Chinese manufacturers' interests. For example, BYD is a private company predominantly owned by Chinese investors, with small stakes held by Berkshire Hathaway and BlackRock in the holding company that includes this car manufacturer. These funds are purely portfolio investors, but there are Chinese car manufacturers in which European car corporations are co-owners. As the saying goes, "It's just business, nothing personal," even if this business is conducted in an authoritarian country that also supports Russia's war in Ukraine.


Volkswagen may defend the Chinese state-owned car manufacturer SAIC, with which it has a long history of joint business. SAIC also has a history of cooperation with General Motors. A year ago, Audi and SAIC Group announced a partnership to integrate the EV platform from IM Motors (a subsidiary of SAIC) into the German company's electric models.


Renault is likely to support the private Chinese auto corporation Geely, with which it has not only expanded cooperation in recent years but also created several joint ventures. This includes car production in South Korea and the launch of Horse Powertrain Limited in May 2024, headquartered in London, UK. Horse Powertrain will be a joint project of the two megacorporations, focusing on the development and production of powertrains.


Of course, only a fraction of the joint projects between European car corporations and their Chinese counterparts is mentioned here. These companies would prefer to continue their joint business "as usual," but Brussels sees the risks and is unlikely to be overly accommodating. Although the previously announced tariff rates on Chinese cars have been disclosed, the trade war is just beginning. However, it will conclude in a matter of weeks.

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