Great October Tariffs

Negotiations between the EU and China over the implementation of strict tariffs on Chinese automobiles are set to conclude in the coming days. Either the parties will reach an agreement, or the European Commission will impose import tariffs of up to 45% on electric vehicles (EVs) manufactured in China from 31 October, lasting for five years. European officials cite the substantial subsidies provided by the Chinese government to their car manufacturers as the justification for such measures. In response, Chinese officials have threatened countermeasures, including restrictions on the import of European alcohol, meat, and dairy products. While these threats vary in significance, opposition to restrictions on Chinese EV imports exists within the EU. For instance, some German car corporations are against these measures, influencing Germany's position in the votes earlier this October. Time is running out to create a "Plan B," especially with the examples set by the US and Canada, which have imposed crippling tariffs on imported Chinese EVs.

This trade war entered a heated phase on 4 July 2024, when the EU introduced preliminary protective tariffs on Chinese EVs, ranging from 17% to 38.1%. It was already clear at that time that negotiations on final measures would need to be concluded by the end of October. This was against the backdrop of significantly higher tariffs imposed by the US on electric vehicles – quadrupled to 100% in May of this year. The US also introduced steep tariffs on solar panels.

Not All Countries Impose Tariffs, But Most Do

Canada introduced 100% tariffs on the import of Chinese-manufactured EVs and certain hybrids starting from 1 October. This taxation not only applies to passenger cars but also to buses, trucks, and delivery vehicles. These measures followed consultations during the summer. Canada has also imposed a 25% tariff on Chinese steel and aluminium imports.

Turkey has applied an additional 40% tariff, or at least $7,000 per vehicle, since 7 July.

What about the UK? The country is still contemplating its stance. The UK remains committed to dramatically reducing its carbon footprint, which requires a sharp increase in the adoption of EVs. In particular, the Labour government under Keir Starmer maintains its intention to phase out sales of new internal combustion engine vehicles by 2030. Moreover, on 14 October, British Trade Minister Jonathan Reynolds announced during the International Investment Summit in London that the UK does not yet plan to follow the European Union's lead in imposing tariffs on Chinese EV imports. He referenced the fact that British companies had not lodged any complaints about the increasing imports of Chinese-made vehicles.

Indeed, British companies have not filed any complaints with the Trade Remedies Authority (TRA), although Reynolds also acknowledged that, as Secretary of State, he has the authority to initiate such a request himself. Such a request could lead to an investigation similar to those concluding in the EU.

Reynolds explained that the Labour government would prioritise the prosperity and openness of export markets for British manufacturers. This approach aligns with the policies he indicated back in July when the Labour government first took office.

What Is Driving This Back And Forth?

Most developed countries’ governments are pursuing a strict policy of high protective tariffs on Chinese-made vehicles, which are exported with the support of hefty government subsidies from China. Governments affected by these subsidised Chinese imports aim to protect their domestic automobile industries.

Of course, high tariffs increase car prices, leading to higher costs for voters in developed countries, which is unlikely to be popular. However, these governments attempt to justify their actions by citing the development of domestic industries and the creation of well-paid jobs.

How is China responding? With threats of retaliatory tariffs. These include tariffs on European-made brands of cognac and brandy (already introduced on 9 October), dairy products, and certain types of meat. However, the volume of imports of these goods from the EU to China represents a relatively small percentage compared to the significant volume of goods, particularly EVs, imported by the EU from China.

Chinese and some international media are keen to promote the view that the price advantage of Chinese EVs results from economies of scale in production, rather than massive state subsidies.

Opposition to protective measures – it's not where you might expect. But, there is it right now.

Interestingly, opposition to strong protective measures also comes from European car corporations. This affected the divided vote on 4 October regarding tariffs to be introduced after 31 October: 10 EU countries voted in favour, 5 against, and 12 abstained. Despite the divided vote, it was enough to pass the measure. Even within Germany, which voted against, the situation is not uniform across car manufacturers. Volkswagen, for example, has announced job cuts and even the potential closure of factories. In contrast, Mercedes-Benz Group AG and BMW AG lobbied the German government to vote against tariffs, as they sought to avoid retaliation from China regarding the import of their luxury models. Consequently, the German government voted against the tariffs on 4 October.

Italy and France voted in favour of high tariffs to protect the European market, despite the retaliatory tariffs from China potentially hitting them hard.

There is, of course, a temptation not to impose protective tariffs on subsidised Chinese imports, as it would appease voters for a while. But this reprieve wouldn’t last long. Even in the UK, where the government is not implementing protective tariffs, there are growing concerns about the rapid expansion of Chinese influence. This influence extends beyond vehicle imports, which involve driver assistance systems that scan the surrounding environment, to concerns about aggressive Chinese investments in certain industries, which enable Chinese corporations to gain significant access to British technologies. Worries have been raised about access to technologies considered sensitive or dual-use.

Security concerns have intensified over the past three years, particularly following Russia’s full-scale invasion of Ukraine, as China evidently plays the role of a hub for supplying dual-use and military-grade goods to Russia. The formation of the Beijing-Tehran-Moscow-Pyongyang axis is causing increasing concern in Brussels, London, Tokyo, and Washington. The growing military threat is shifting the balance of interests, forcing governments to consider not only trade and economic arguments but also security concerns.

And ahead lies the prospect of Donald Trump being re-elected as US president, with the EU reasonably viewing him as a hawk on foreign trade policy. This will undoubtedly heighten tensions in the EU’s trade disputes with China too, not only with US.