by Alicia Garcia Herrero and Leon de Graaf
If the EU thinks its import tariffs on Chinese EVs will please its US allies, it might be in for a rude awakening.
The EU on 29 October finally adopted additional import tariffs on Chinese electric vehicles of up to 35% on top of its existing 10% regime. As a response, it would make sense that Chinese EV makers circumvent those tariffs by investing directly in Europe. Furthermore, the Chinese government can use such investments to exert influence on EU member - a so-called Belt-and-Road Initiative 2.0.
However, something counter-intuitive seems to be happening: The Chinese government is allegedly instructing its EV and battery makers to scale down or even halt investments in Europe, with Dongfeng Motor Group’s announcement to halt investments for car production in Italy and Cherry Automobile’s postponed plans in Spain as first signals of the direction.
Why would Beijing do this? The official reasons for Dongfeng’s decision seem to be Italy’s previous support for Europe’s import tariffs and Beijing’s concern that more production capacity risks creating overcapacity in the EU’s slow-growing EV market.
However, the Chinese government could also be anticipating something that European leaders themselves are not yet realising, namely that the EU might be strong-armed by the new US administration to be even tougher on Chinese EVs than is currently the case.
In particular, the US had already imposed a 100% import tariff on Chinese EVs, so more than double those of the EU. Beyond the prohibitive tariffs, the US is planning to ban Chinese software and hardware on all cars driving on US roads.
Why is the US administration doing this? Because it assesses Chinese “connected vehicles” to soon become a threat to its national security.
Furthermore, the US has no intention to accept greenfield investment from China to produce EVs, let alone offer subsidies from its industrial policy arm, the Inflation Reduction Act (IRA) as some European countries are doing to entice Chinese investment.
In other words, there is really a long way to go for EU measures to compare with those of the US.
This begs the question of how much the US administration may push the EU to do more. There is an obvious case where the Biden administration has pushed the EU to align, namely on export controls of semiconductor-related products (lithography equipment for advanced chips in the case of the Netherlands).
In addition to semiconductors, the US has pushed the EU to impose restrictions elsewhere, such as 5G and telecom infrastructure, so a similar move on EVs cannot be discarded.
Are EVs a strategic sector? While EVs might just be seen as cars by many, their role in advances on artificial intelligence via autonomous driving, power system flexibility by being a mobile home battery, and other strategic parts of our future economy, will soon become apparent to everyone.
So while everyone anxiously awaits next week’s US presidential elections, either future US president, whether a Democrat or Republican, will be tough on China. And for the reasons given above, it might only be a matter of time before the future President of the US may force its main allies to help contain China.
Beijing’s instruction to scale down EV investments in Europe might so far be perceived as a counterintuitive retaliation, but it might end up making sense in such a scenario.
This is all part of a bigger geopolitical development where the US is forcing its main allies to derisk from China. In most cases - certainly the EU, Japan and South Korea - the direction is the same as the US, though the speed might be different.
The EU might have to end up acceleration its derisking after the US elections, which means that Chinese EV producers now delaying their investments in Europe might no longer have a chance to rethink their decision.
*Sustainability Advocate at #SustainablePublicAffairs, and Alicia Garcia-Herrero a senior fellow at EU policy think-tank Bruegel
**first published in: Euractiv.com
By: N. Peter Kramer
