The European Commission ’s plan to impose countervailing duties on electric vehicles ( EVs ) from China barely survived a Council of the European Union vote on October 4.
Five EU states voted against the tasks, including Germany, which had abstained in a past voting. Spain was even expected to vote against the taxes after Prime Minister Pedro Sanchez called for revision during a visit to Shanghai in September. But Spain eventually abstained, perhaps because Sanchez realized there was insufficient support to prevent the taxes.
China had pressurized important places to ballot against the taxes while initiating anti-subsidy and anti-dumping investigations into rum, meat and dairy. China has also threatened to curtail its foreign direct investment ( FDI) in EV manufacturing in the EU.
China ’s reaction to the EU tasks is more violent than its reaction to the United States and Canada’s 100 % taxes on Chinese Vehicles– though China has started an anti-dumping research into American rape.
China ’s reaction to the EU determine deserves attention. It’s clear that China has more leverage over the EU than other parts of the world, which contrasts with the EU’s large market size for Chinese EVs ( 55 % of Chinese EV exports go to the EU).
China ’s utilize arises from two major European shortcomings. Second, the EU is unable to communicate with one voice, yet on trade, its most consolidated competence after economic policy. Next, the EU depends on China much more than the US or Canada.
The EU’s main dependency comes from imports, especially important components for online and power transitions. In contrast, some big Western businesses depend on China ’s business.
The situation has not improved despite the EU plan to “de-risk ” from China – meaning to manage the risks related to economic and technological dependence. On the contrary, International dependence on China continues to rise, while the opposite is true for the US.
EU dependence on China also arises from years of European investment ( mostly German ) in China ’s auto industry. European manufacturers then export Vehicles from China into Europe, exposing them to the EU’s competing jobs.
While it seems reasonable that any company– including those from Europe– that receive international subsidies to provide the International market may be penalized to avoid harsh competition, the German government voted on October 4 to protect these automakers over the second market.
The fact that the largest EU land is ready to create such a move may sound the alarm about how much some major European companies operating in China are influencing EU business plan.
This also makes EU de-risking from China all the more urgent if the EU wants to preserve its independence over economic policy-making.
De-risking and economic security will, no doubt, come at a cost, but so will inaction. To reduce the cost, the EU must move from relying on defensive measures, such as the countervailing duties on EVs, to aggressive action to increase competitiveness.
The cost of producing an EV in China is still lower than elsewhere, even if subsidies are not factored in because of China ’s impressive technological upgrade and massive economies of scale.
Most analysts focus on the former as the main barrier for the EU in competing with China on green tech, but this might not be the case. In fact, part of the technology embedded in much of Chinese green tech originated in the EU or the US but received no government support while still unprofitable.
The US is clearly trying to change this situation with a massive industrial policy push, including through the CHIPS and Science Act and the Inflation Reduction Act. Whether these policies will succeed is still unclear.
The EU, by contrast, is still scrambling to build a credible industrial policy plan that will make its innovation commercially viable. This is particularly important for the EU because, compared to the US, it lacks the capital markets needed to scale up innovation.
China ’s huge economies of scale will be much harder to emulate in Europe unless a true single market is developed. Beyond strengthening the single market, the EU also needs to be much faster at building – and rebuilding – partnerships with other major economies, notably in the Global South.
Partnerships are needed beyond markets and sourcing. They will also help reduce the cost of potential retaliation from China against defensive actions such as the new duties on EVs. The main tool for this is coordination of economic security measures, mainly with the G7 and other like-minded economies.
Overall, the European Commission ’s duties on Chinese EVs signal that the era when China-EU relations were mainly governed by engagement is over. China and the EU now compete on the same types of products in third markets and it is more important than ever that the rules of the game are fair.
Alicia Garcia-Herrero is chief economist for Asia Pacific at Natixis and senior research fellow at Bruegel.