IF A surge in government support for strategic industries risks fuelling a global subsidy war, then the European Union may have just sparked one of its biggest battles.

With European officials fearing millions of auto jobs are at risk from China’s surging electric vehicle (EV) exports, the bloc’s executive arm on Wednesday (Sep 13) launched an investigation into Beijing’s financial support for the EV industry.

The probe, which could take up to nine months, will probably lead to new EU tariffs on Chinese EV imports and embroil major non-European automakers such as Tesla, which produce cars in China for export to the bloc.

The move may lead to tariffs close to the 27.5 per cent level already imposed by the US on Chinese EVs, according to a person familiar with the matter. The EU duties could vary depending on the producer, the source added, asking not to be identified as the discussions are private and no decision has been finalised.

The bloc’s investigation, as well as aggressive moves by Washington to counter China, are part of a broader rethink by governments in developed economies to bring production closer to home, especially for key sectors such as semiconductors, pharmaceuticals and heavy industries, which were disrupted during the Covid-19 pandemic.

That drive to secure supply chains, combined with the tensions after Russia’s invasion of Ukraine, has resulted in a simultaneous rush to throw up trade barriers, triggering fears of a global economic fragmentation.

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Major market

If the EU does impose duties, that would curtail one of the last major markets for Chinese EV exports, and raises the prospect of a cascade of defensive moves in places such as the UK to protect their markets from being flooded by vehicles redirected from the EU.

Shares of Chinese electric vehicle makers staged a mixed performance on Thursday with BYD and SAIC Motor falling more than 3 per cent onshore. Li Auto and XPeng opened lower in Hong Kong, but quickly erased losses to gain more than 1 per cent.

There’s also the question of Beijing’s response. While officials in Brussels say they want to “de-risk” from Beijing without a full-blown economic decoupling, China is a major supplier of raw materials and components for EU industries and a crucial market for German cars. European companies could also be vulnerable to sudden changes in regulations that curb their access to China’s massive consumer market.

“It is really quite risky,” said trade expert Sam Lowe, a partner at consultancy Flint Global in London. “You must also assume some Chinese retaliation.”

Tackling China’s subsidies – even if proven – will also not change the view that Chinese vehicles are technologically advanced and Europe’s carmakers have been slow to adapt and innovate.

The EU has been playing catch-up with the US, which imposed tariffs on Chinese vehicle imports during the Trump administration and later injected massive support into its EV industry through President Joe Biden’s Inflation Reduction Act.

The EU and other major economies have been fighting on two EV fronts – scrambling to match US government support for domestic automakers and battery suppliers while trying to catch up with Chinese manufacturers.

But because Washington and Brussels are now seeking some collaboration on their approaches to China, an EU probe and any resulting trade protections are likely to further draw in the US.

“This could get interesting because Europe, of course, is under fierce pressure,” Marcus Berret, member of the board at consultancy Roland Berger, said in an interview at the North American International Auto Show in Detroit. “It’s under pressure from the US to adopt the same logic, and make hurdles for Chinese cars bigger.”

The Office of the US Trade Representative Katherine Tai declined to comment on the EU move, but pointed to her comments in June that she saw the issue for the EU as a “real concern”. The Commerce Department declined to comment.

China’s Ministry of Commerce didn’t immediately reply to a request for comment. The China Chamber of Commerce to the EU expressed concern about the decision.

Chinese manufacturers “deliver high-end or cost-effective EVs that cater to diverse consumer preferences, receiving acclaim worldwide, including in Europe. It’s crucial to emphasise that this advantage is not a product of what the commission side called ‘huge state subsidies’”, the organisation said on its website.

Trade protectionism by Europe “will become a poison for the European economy”, according to an article in the ruling Communist Party’s Global Times newspaper. “European policymakers should not forget that China is an important automotive market,” the article said, threatening unspecified “countermeasures” to protect Chinese companies.

The battle lines over EVs run parallel to several industries globally as trade splinters between the US and China. Around the world, governments have been encouraging billions in investment in semiconductor plants, new mines and the production of components that the pandemic supply chain disruptions exposed as too reliant on China.

EU officials have been looking at other sectors in China but don’t have any investigations immediately in the pipeline, one person familiar with deliberations in Brussels said.

The announcement of an investigation, coming just days after Chinese carmakers made a big splash at an auto show in Munich, is partly Brussels playing catchup on protections for an industry that accounts, directly or indirectly, for nearly 14 million jobs – or 6.1 per cent of the EU workforce.

Flood of imports

The investigation is being driven by estimates that China’s 8 per cent share of the 27-nation bloc’s car market could double by 2025 given an expected rise in Chinese production, the relative openness of the EU economy and competitiveness gaps between European and Chinese EVs.

The EU probe will gather information and evidence to determine whether China has breached the bloc’s anti-subsidies rules by supporting Chinese battery-powered EVs.

While allowed under World Trade Organization rules, such tariffs could potentially be challenged at the Geneva-based institution – often a bureaucratic grind that leaves the parties lobbing tit-for-tat tariffs or other barriers while awaiting a ruling.

One person involved in the EU’s approach warned that any protections offered to domestic companies may not solve an innovation gap with China, a major underlying problem that threatens to worsen without more focus and investment on innovation rather than protecting companies playing catch up. Underscoring that point, this source said, were recently reviewed specifications for a high-end Chinese EV launching next year that beat many European producers on quality and price.

During a speech on Thursday presenting the probe, European Commission President Ursula von der Leyen also announced the EU will hold a summit with China later this year. The bloc’s executive vice-president and trade chief, Valdis Dombrovskis, will travel to China later this month for high-level discussions on the economy and trade to prepare for the meeting.

Meanwhile in the US, Republican lawmakers in Congress have been sounding the alarm about increasing Chinese influence in the American auto market, warning that a new partnership between Ford Motor and Chinese battery maker Contemporary Amperex Technology, the world’s largest producer of EV batteries, could risk US national security and exacerbate reliance on China.

The battle over cars also spotlights the resurgence of industrial policy to drive strategic sectors, as well as the lack of effective global rules governing the use of subsidies.

The Council on Foreign Relations in a report last week called on the US to lead a rethink at the World Trade Organization on how to regulate government support and cap subsidies to stave off deeper global economic conflict.

European officials have been trying for years to engage the US on industrial subsidies. Talks with the US and Japan during the Trump administration to hash out rules aimed largely at countering China ended without results. The EU is now pushing to have a common understanding on green subsidies at the WTO ahead of the next ministerial meeting in early 2024. BLOOMBERG