EU China Tariff Action May Undermine Its Own EV Mass Market Drive

The European Union’s decision to raise tariffs on Chinese electric vehicle imports by up to nearly 40% sounded harsh but analysts reckoned it wouldn’t provide much of a barrier to China sales because of their huge efficiency advantage.

But the move was seen as a serious barrier to sales of cheaper EVs, which are required if the EU is to make a success of its phaseout of the sale of new internal combustion engine powered vehicles by 2035.

German manufacturers like BMW, Mercedes, Porsche, Volkswagen and Audi were bracing for retaliation from China which could trash hugely profitable sales there. German auto shares dived in initial European trading but recovered towards the close. France’s Renault and multi-brand giant Stellantis shares fared better because they rely less on Chinese business than their German counterparts.

“The tariffs have turned out to be lower than many feared and are initially a plan that can still be revised. The measures are a disaster for European car buyers and for German car manufacturers,” Frank Schwope, automotive industry lecturer at the University of Applied Sciences FHM Hannover said in a LinkedIn message.

The U.S. has quadrupled duties on Chinese EV imports to more than 100%.

The EU’s provisional new tariffs were applied on a sliding scale from 17% for BYD up to 38% for SAIC’s MG depending on the level of cooperation by the accused companies. Geely has a 20% levy. The duties, on top of the current 10%, will take effect in July. The anti-subsidy probe will continue until November.

Reuters Breaking Views, in a column headlined “Chinese EV makers will drive around EU tariffs” didn’t see the decision restraining the Chinese much.

“Those relatively low rates will slow, not stop, their march into the European Union,” Breaking Views columnist Katrina Hamlin said.

“The most likely upshot is fewer China EV exports on European roads – but not a lot less,” according to Hamlin.

Hamlin pointed out that Rhodium Group had said at tariff levels lower than 50% Chinese EVs would still be profitable because of their more efficient manufacturing. Investment bank UBS has said that gives the likes of BYD a 30% cost advantage.

Brussels-based green lobby group Transport & Environment welcomed the new tariffs but worried the EU’s plan to eliminate sales of new ICE vehicles by 2035 required a broader industrial policy to make sure European carmakers could provide affordable EVs.

EV researcher Rho Motion said sagging sales of EVs in Europe won’t be helped by higher prices for Chinese EVs.

“European drivers are crying out for affordable EVs and with the news today of sales plateauing in Europe, lower-priced cars will be critical to achieving the transition as planned,” said Will Roberts, head of Rho Motion automotive research.

Rho Motion research published Wednesday showed EV sales in Europe dived 9% in May compared with the same month last year.

EV sales in Europe have stalled at around 2 million a year after an initial seemingly unstoppable momentum petered out. Sales must quickly gain momentum if they are to reach the predicted around 9 million by 2030. Even this level would lag behind EU and U.K. targets that EV sales reach about 80% of overall vehicle sales in 2030 on the way to 100% by 2035.

“Having said that, Chinese manufacturers should be able to absorb some of these lower tariff levels into their padded profit margins,” Roberts said.

“The true test from today’s announcement will be whether Beijing will retaliate in kind or come to an amicable solution. Europe’s manufacturers still rely on the Chinese market, so declining profits from the East would only slow their ability to transition (to EVs) effectively,” he said.

In the buildup to the EU decision, German manufacturers like Volkswagen and Mercedes had put the case for free trade, knowing that the EU action might spark a Chinese reaction.

On Wednesday the German Association of the Automotive Industry (VDA) said the EU’s action taken to protect the European industry might do it more damage in the longer term.

“The fact is we need China to solve global problems. This is particularly true for successfully overcoming the climate crisis. China would play a crucial role in a successful transformation towards electromobility and digitalization – a trade conflict would also endanger this transformation,” the VDA said in a statement.

The VDA, like T&E, wanted an active industrial policy to develop EVs. The European Automotive Manufacturers Association had a similar thought.

“What the European automotive sector needs above all else to be globally competitive is a robust industrial strategy for electromobility,” the association said in a statement.

Phoebe O’Hara, lead analyst at Fastmarkets, a commodity price reporting agency, agreed that the EU’s action wouldn’t make much difference to the overall level of Chinese EV sales, but would inhibit the crucial path to a broadening acceptance by those currently priced out of the market.

O’Hara, in a LinkedIn message, said Chinese EV’s will remain broadly price competitive, and profit margins will remain high due their efficiency. Will the measure help to protect Europe’s market and manufacturers?

“My take – raising the price of the only affordable models in the market is bound to have repercussions. If our focus is enabling low to middle-income consumers to be able to afford an EV, then this policy is entirely undermining that ability,” O’Hara said.