New Tariff Raises Controversy

June 12, the EU Commission announced it would impose import tariffs as high as 38% on Chinese electric vehicles, following an earlier investigation that found Chinese manufacturers benefited from "unfair subsidies" across the entire supply chain, from lithium refining to final product transport.

However, this decision may not achieve unanimous support among the 27 EU member states. Hungary released a statement expressing its disagreement with punitive tariffs, stating that protectionism is not a solution and describing the decision as "highly discriminatory".

Hungary will assume the rotating presidency of the EU Council from Belgium starting in July this year. Additionally, reports indicate Germany also opposes the punitive measures.

According to the EU Commission, electric vehicles under BYD will face a 17.4% import tariff, Geely's cars will be subject to a 20% tariff, and electric vehicles from China's state-owned SAIC Group will face tariffs as high as 38.1%. Currently, Chinese electric vehicles entering the EU are subject to a 10% import tariff.

Furthermore, companies that cooperated in the EU investigation face a weighted average tariff of 21%, while non-cooperating companies will be charged a "residual tariff" of 38.1%.

China and EU Launch Talks

In terms of the proposed tariff rate, China's Ministry of Commerce responded that it is "excessive" and "lacks factual and legal basis". The spokesman stated, "This measure is a typical act of protectionism that exacerbates trade tensions. China will take all necessary measures to defend the legitimate rights and interests of the enterprises".

Currently, the proposed tariff rates are temporary in nature. The EU Commission has stated that it is in talks with Chinese authorities to resolve the issue in accordance with WTO rules. If negotiations with Chinese authorities do not reach an agreement, the new tariff rates will take effect from July 4.

The EU Chamber of Commerce in China noted that Europe remains a "strategic market" for Chinese electric vehicle companies, but it also criticized the EU investigation as "protectionism driven by political motives", warning that the new tariff rates could become "severe market barriers".

The EU Commission and its member states will vote in early November this year to decide whether to set the implementation period of the new tariff rates at five years.

U.S. 100% Tariff

Last month, the U.S. government announced a 100% tariff on electric vehicles imported from China, up from the previous 25%, aiming to prevent cheap products from flooding the American market and to create a "fair competitive environment" for U.S. car manufacturers.

In addition, tariffs on Chinese lithium-ion electric vehicle batteries and critical components are set at 25%, while tariffs on Chinese solar panels and semiconductors have doubled to 50%. Tariffs on specific steel and aluminum products have been raised to 25% (over triple the current levels).

Reportedly, tariffs on electric vehicles, steel, aluminum, and solar panels will increase starting this year, with new tariffs on chips taking effect from 2025. The government also plans to "closely monitor" companies attempting to circumvent these tariffs.

In response, China's Ministry of Commerce promptly expressed strong opposition, stating that such actions politicize and weaponize economic and trade issues between the two countries, severely impacting bilateral relations. China vows to take measures to staunchly defend its own interests.

As of today, except for Lynk & Co, major Chinese manufacturers such as BYD, NIO, and XPeng have yet to enter the U.S. market.

Lael Brainard, Chair of the U.S. National Economic Council, emphasized that the new tariff rates are intended to ensure that the manufacturing jobs created by President Joe Biden's legislative measures (such as IRA, CHIPS, and BIL) are not affected by a "export wave" from China.

Research Institutions Analysis

According to statistical data, in 2023, the EU's imports of electric vehicles from China skyrocketed from $1.6 billion in 2020 to $11.5 billion, constituting around 20% of the total car sales in the EU market.

Jacob Gunter, Chief Analyst of the Economic Research Team at the Mercator Institute for China Studies, remarked, "I am eagerly anticipating Chinese manufacturers making tangible changes to address the factors that led to this development. However, given the automotive industry's significance to Europe, I cannot imagine they would be willing to bear the consequences of this decision".

Alicia Garcia-Herrero, Senior Research Fellow at Bruegel, echoed this sentiment, stating, "China should have negotiated before this, but now it's too late. Of course, the issue lies in the impact of the new tariffs on European electric vehicle manufacturers, putting them under considerable pressure".

It is understood that certain Chinese companies hold stakes in several well-known European automotive brands—Geely Holding controls a significant portion of Volvo, SAIC acquired the British MG brand, and Volkswagen Group established a joint venture in China with Porsche to produce electric vehicles.

Consequently, the Rhodium Group pointed out that brands like MG, BMW, Renault, and Mercedes-Benz will all face adverse effects because the new tariffs exceed their profit margins in the European market.

Furthermore, James Moran, Senior Research Fellow at CEPS in Brussels, suggested that punitive tariffs in Europe might not necessarily reduce import volumes but could squeeze the profit margins of relevant manufacturers. The European Economic Institute had predicted that a 20% tariff could lead to a 25% decline in imports (approximately 125,000 fewer autos), amounting to a loss of about $3.8 billion.

In addition to its impact on profitability, excessively high tariffs could also accelerate Chinese manufacturers' deployment of localized production.

Gregor Sebastian, Senior Analyst at the Rhodium Group, pointed out that BYD might benefit under the new tariff regime, as its tariff rate (17.4%) is relatively lower, giving it a competitive advantage compared to other companies.

Macquarie Capital's Head of China Automotive Business at Macquarie Capital stated, "Given BYD's cost advantage, the company can still profit from its export business even with a 35% tariff rate. Moreover, as a privately-owned enterprise, BYD has the backing of Berkshire Hathaway. The company has also indicated its clear intention to gradually establish its brand in the EU and has shown willingness to cooperate with local regulatory authorities".