Every side stands to lose in EV trade war
THE European Union’s decision to impose steep tariffs on Chinese electric vehicles (EVs) has drawn a predictable response – retaliation against European exports to China. An anti-dumping tariff on French brandy was imposed immediately. Other anti-dumping and anti-subsidy probes into imports of pork and dairy products from the EU are ongoing.
The EU’s decision earlier this month was based on the notion that Europe’s own EV industry would collapse under an onslaught of Chinese imports and had to be protected. Brussels wanted a deal that would set a minimum price and a maximum volume for EVs from China. Such a deal would hark back to the Reagan era when America imposed so-called “voluntary export restraints” on Japanese cars to the United States in the 1980s. Subsequent reviews have since concluded that the deal was useless in changing the bilateral trade balance – the reason that restraints were imposed. The EU’s EV restrictions are likely to suffer the same fate.
The Europeans should realise that the reason for surging Chinese imports is their own plan to phase out sales of vehicles with internal combustion engines (ICEs) by 2035. Brussels decided that by 2050, Europe’s transport sector should become carbon-neutral. Further, the EU opted for battery-EVs, because the total cost of ownership would be lower than alternatives, such as hydrogen-powered vehicles. All this was done in pursuit of noble climate-change goals.
So why are European EVs not ready to compete on price and quality? A bit of history might be useful. As the Chinese set out to build up their automotive sector, they realised they would never be able to match, let alone surpass, the quality of Japanese, German or even American ICE vehicles, which require about 2,000 moving parts. Beijing decided that China would focus on simpler EVs that won’t need as many moving parts, with incentives and subsidies dished out to kick-start the industry. Indeed, their efforts may have been too successful. There are no less than 15 major companies producing EVs, and the sector suffers from cut-throat competition. Some estimates put the number of Chinese EV makers at more than 200.
Anyway, China’s domestic car market is the push factor for the rapid penetration of Europe’s EV market. Chinese cars fetch a higher price in Europe (and everywhere else) than they do at home. From a tiny share just a few years earlier, Chinese companies last year had captured a market share of about 7 per cent in the EU, the world’s second-largest EV market.
Things would have been different if the EU had the foresight to give incentives and subsidies for its own EV industry before it announced the deadline for ICE cars. That aside, if Brussels does not change course, it will face both internal opposition as well as further retailatory measures from Beijing. Of the 27 EU member states, five voted against the tariffs and 12 abstained. Germany is against, knowing full well its luxury car industry is vulnerable.
And if a full-fledged trade war gets under way, the crown jewels of European industry, its aviation exports, are likely to become a target as well. The EU could also find its access to key industrial raw materials such as rare earths being blocked. Of course the EU will hit back however it can. In the end, every side stands to lose.
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