A changing landscape in one of Europe’s largest industries.

On October 4th, 2024, European Union (EU) member states made a highly debated decision regarding the European automotive industry, specifically on Chinese electric vehicles (EVs). The European automotive industry, accounting for over 7 per cent of the continent’s GDP, has traditionally been dominated by powerhouses from Germany (Volkswagen, BMW, Mercedes), France (Renault, Citroën, Peugeot), and Italy (Fiat, Alfa Romeo). However, this European industry has recently experienced significant changes, for example when the Model Y from Tesla, an American EV company, became the best-selling car in Europe in 2023.

Next to Tesla’s rise, another interesting development is taking place. Chinese EV manufacturers have steadily increased their share in the European EV market. Chinese brands such as Build Your Dreams (BYD) and NIO have become increasingly competitive. This has prompted concerns among European manufacturers and lawmakers, leading to the decision at the beginning of October: the EU member states voted to impose tariffs of up to 45 per cent on Chinese EV companies.

Why has the EU introduced these restrictive measures on Chinese EVs? And, how united does the EU stand regarding these measures against China?

Intense competition and the rise of China

In recent years, EVs have become more common on European roads. According to the European Automobile Manufacturers’ Association, 14.6 per cent of all new registered cars in 2023 were battery-only electric cars, marking a fast increase in the sales of EVs. This growth should not come as a surprise as member states have stimulated the adoption of these vehicles through subsidies for consumers, such as in Germany and the Netherlands. Furthermore, on a European level, the European Green Deal, which aims to make the bloc climate-neutral by 2050, pays special attention to the reduction of emissions from vehicles. For example, it sets goals to increase EV charging points. In addition, as part of the Green Deal, the European Commission passed a law that ends the sale of new petrol and diesel cars from 2035.

These initiatives reflect the European belief that EVs are the future, meaning that European automotive brands, such as Volkswagen and Peugeot, have to transition from producing fuel vehicles to EVs. However, this has been a bumpy road full of obstacles. For example, car manufacturers now face mainstream consumers, who are concerned about the range and price of EVs. The latter especially hurts Western EV companies, which have initially focused on the more expensive and luxury segments of this part of the automotive market. Furthermore, EV brands from the United States of America (USA) and China have increased their share in the European market, posing further challenges to the European powerhouses.

Amid the rising prices and intense competition in the car industry, it is hardly surprising that European carmakers are suffering from declining sales. For example, Volkswagen, Europe’s largest carmaker, has recently announced it is considering closing factories for the first time in its 87-year history, potentially leaving tens of thousands of employees without jobs. These plans signal a major shift within the European automotive sector.

The surge in competition is closely tied to the booming Chinese EV market. Since the rapid growth of the Chinese economy, the Chinese government has put significant effort and money into its EV industry, which has resulted in a large supply chain with relatively low production costs. This is exactly where the problem for many European manufacturers lies. China can produce EVs much cheaper than their European counterparts. According to The Guardian, Chinese car sales rose to 11 per cent of the European EV market in June this year, in anticipation of the tariffs. Moreover, carmaker BYD has recently surpassed Tesla in global sales revenue, highlighting the fast growth of Chinese EV brands.

With Chinese carmakers looking to other markets to export their EVs, the EU and the USA have decided to impose trade restrictions. Initially, the EU has maintained a standard of 10 per cent import duty on cars. However, the decision made this October permits tariffs of up to 35.3 per cent on Chinese EV brands, in addition to the existing 10 per cent, for at least five years.

Division on the tariffs

Although these tariffs appear to be a significant step to safeguard the European car industry, they fall short compared to the tariffs imposed by the USA, where the Biden administration introduced tariffs of 100 per cent on Chinese EVs. Regardless, the step by the EU member states sends a clear signal to Beijing and does not come lightly. Following an anti-subsidy investigation, the EU has accused the Chinese government of subsidising Chinese carmakers, creating unfair advantages and violating the level playing field principle for competitors. This principle argues for common rules and standards that prevent businesses from gaining a competitive advantage in one country, over those operating in others.

Despite these accusations, not all member states have supported the new tariffs. While the vote was not publicly available, EU sources reported that ten member states voted in favour, five opposed the tariffs, and twelve abstained. In other words, the bloc is deeply divided on this issue and its trade relationship with China. The way member states voted and the underlying reasoning behind it shed light on this division.

For example, Germany opposed the tariffs. This decision could be grounded in the fact that German stakeholders fear retaliatory tariffs on German car exports. This could further impact German car sales in China, which have already dropped significantly on a year-to-year basis. While Germany initially wanted to abstain from voting, it was only after heavy lobbying by stakeholders that German Chancellor Olaf Scholz used his Richtlinienkompetenz (executive power) to force his coalition partners into voting against the tariffs. Another example of a country that voted against the tariffs is Hungary. Here, the decision to vote against the tariffs could be attributed to the large Chinese foreign direct investments (FDI) into the country, which captured almost half of the total Chinese FDI in the EU in 2023.

The fear of Chinese retaliation by member states is not ungrounded as China has threatened to do so ever since the launch of the anti-subsidy investigation. In fact, since the decision this October, China has already hit back by imposing tariffs on European products such as brandy, thereby specifically hitting the French industry. According to France, this move was made in retaliation for the tariffs placed on Chinese EVs, which the country voted in favour of. This retaliation shows how the conflict is not just limited to the car industry anymore but has already spread to other industries.

The bigger picture behind the tariffs

While the EU’s decision to impose tariffs on Chinese EVs could be regarded as a simple act to protect its automotive industry, and China’s retaliation as a tit-for-tat, there is also a bigger picture to consider. On the one hand, the European decision to raise the tariffs painfully demonstrates the struggle of EU member states to address the challenges posed by China, and ultimately leads to internal fragmentation of the bloc.

On the other hand, the decision is consistent with broader policies the EU has implemented against China. For example, at the start of 2023, Ursula von der Leyen, the president of the European Commission, introduced the EU’s “de-risking” strategy, which aims to achieve a better balance between leveraging opportunities and managing risks regarding China. Furthermore, the European Commission has launched investigations into Chinese solar panel manufacturers, which are also suspected of heavily benefitting from state subsidies. It would, therefore, come as no surprise if the EU potentially introduces other tariffs soon. 

Can the bloc maintain its course?

When it comes to the decision taken at the beginning of October, the reasons behind the tariffs are mostly about protecting European businesses and jobs but also safeguarding Europe’s competitiveness in the industry. By protecting Europe’s domestic production, reliance on Chinese imports can be reduced. Still, the future remains uncertain as the effects of the tariffs have not yet become clear. Furthermore, the division over the tariff decision highlights the different member states’ interests, which could potentially form an obstacle to further measures against China.

Although the tariffs may provide some temporary relief to European car manufacturers, they could also lead to higher car prices in Europe, thereby achieving the exact opposite of what the tariffs aim to achieve. In addition, retaliation by China could further evolve into a trade war, which is not beneficial for either party. Moreover, the tariffs could slow down the adoption of EVs, which would hinder the EU’s efforts to meet its climate targets. In other words, the tariffs could protect its industries, but the question remains at what cost.

To overcome the intense competition in the EV market, the EU’s main priority should be to gain a technological edge, encouraging carmakers to fully commit to producing highly technical and affordable EVs. This should also include investments in industries like battery production to ensure European brands can offer greater ranges for their EVs. However, even if European powerhouses manage to catch up in the EV industry, measures against China might still be necessary in the future. This means the EU must address its long-standing internal struggle about how to engage with China. The first step should be for Germany to decide where it stands regarding China. The decision by the EU’s largest economy to vote against the tariffs reflects how fear of China’s retaliation has become greater than its commitment to fellow member states in standing unified against the increasing influence of China. A solution could be to create a substantial fund to buffer against retaliation and help countries overcome this fear. While the EU has introduced funds to support industries before, they often fall short in size, especially compared to the USA or China. Only when issues like these have been addressed can the EU navigate a clear road to achieve its future commercial and climate objectives.

Vincent Lubach holds a master’s degree in European Policy and a bachelor’s in European Studies from the University of Amsterdam with a major in European Economics and a minor in International Relations.

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