Tue. Dec 10th, 2024

Brussels, 8 October 2024

An EU duty on electric cars from China overstates the problem and will do more harm than good

Author: Uri Dadush

The European Commission is set to impose countervailing duties (CVDs) of up to 35.3% on electric vehicles (EVs) from China, additional to the European Union’s 10% tariff on imported cars, after EU countries did not oppose the move in a 4 October qualified majority vote. Even though Germany and four other members voted against the duties, and twelve other members abstained, the Commission can now proceed with the CVDs before a 30 October deadline. Negotiations with the Chinese may continue even after that.

The duties are a mistake. They will harm EU citizens more than help them, and they will eventually backfire on the European automotive industry.

According to industry sources, Chinese-made EVs, many in joint ventures with EU and US carmakers, now match world quality standards and are much lower priced – indeed, this is the fear that triggered the policy debate on duties. Moreover, it is understood in the automotive industry that subsidies in China and elsewhere now play a minor role in market outcomes. The price/quality advantage of Chinese EVs appears to reflect China’s vast economies of scale (it produces 60% of all EVs), low labour costs, a technology and materials edge in batteries, intense competition among over one hundred China-based producers and their early-mover advantages.

In an animated debate over the CVDs, their biggest cost is the least discussed: persistently high EV prices hurt all consumers and especially those with low incomes. For many less well-off EU citizens, especially in rural areas, a car is the only viable transportation option. Yet, with CVDs, many EU citizens potentially willing to green their vehicles will be unable to do so. Their peers in Japan, Norway and the UK, which have eschewed CVDs so far, will be better placed, as will the middle classes in poorer nations such as China, Mexico or Thailand.

The CVDs will also have three negative longer-term repercussions.

First, China will retaliate. It has already challenged the CVDs at the World Trade Organisation, and the EU may lose under compulsory arbitration. I believe that the Commission’s case for such high duties is weak. The methods used by the Commission to compute the CVDs systematically and considerably overestimate China’s subsidies (grants, land-use rights, preferential financing, battery inputs). This conclusion is consistent with industry views. No one doubts that the Chinese subsidise (and they are not alone), but the impact should not be overstated.

Second, the CVDs will insulate the EU’s EV producers from global competitive pressures, reducing the incentive to cut costs and innovate. Once imposed, duties – which legally extend for five years – will be extraordinarily difficult to remove because the industry, including carmakers, their suppliers and their workers, will adjust and become entitled to them.

The duties will discourage European manufacturers from developing integrated value chains with Chinese partners and their highly competitive suppliers. The hold EU carmakers have on the Chinese market will weaken, and more so if China retaliates directly against them, which is a real possibility. Though sheltered at home, EU producers will still have to compete in China, the fast-growing markets of the developing world, and in many others. The prospect that they fall behind the curve is real.

Third, the CVDs represent another step in the fragmenting of world trade and the possible decoupling of the West from China. The economic costs and uncertainties of trade fragmentation are well documented and will not spare the EU. For example, the US market is already closed to Chinese EVs. If Trump is re-elected, he has promised an additional 10% tariff on all imports, including those from the EU.

Furthermore, it is naïve to believe that trade conflicts among great powers will be confined to the economic sphere. A trade war with China will strain alliances within the EU, embolden revanchists at its border, further accelerate the regional arms race, and make it harder to contain nuclear proliferation nearby and across the world – trends that are already painfully evident today.

Is there a better course? The answer is yes. The Commission’s attempt to negotiate a price cap with the Chinese – a promise that the price of their EV exports will not fall much below that of those produced domestically – is not the answer. It works against consumers and would deny the EU the duty revenue.

Instead, the aim should be to make Chinese automotive subsidies transparent and less distortive of trade. There should also be an understanding that if imports of Chinese EVs threaten grievous harm to the EU’s industry – which is not the case today – then a safeguard measure will be imposed. To be WTO-consistent such a duty would be temporary and apply to EV imports from all sources, not only from China. Until 30 October, the CVDs remain provisional. It’s not too late for the EU to change its mind.

About the authors

Uri Dadush is a Non-resident fellow at Bruegel, based in Washington DC, and a Research Professor at the School of Public Policy at the University of Maryland where he teaches courses on trade policy and on macroeconomic analysis and policy. He is also a Non-Resident Fellow at the Policy Center for the New South in Rabat, Morocco and Principal of Economic Policy International LLC, providing consulting services to international organizations. He was a co-chair of the Trade, Investment and Globalization Task-Force of the T20 and Vice-Chair of the Global Agenda Council on Trade and Investment at the World Economic Forum.

He was previously Director of the International Economics Program at the Carnegie Endowment for International Peace. Prior to that he was Director of International Trade, Director of Economic Policy, and Director of the Development Prospects Group at the World Bank. Based previously in London, Brussels and Milan, he spent 15 years in the private sector, where he was President of the Economist Intelligence Unit, Group Vice President of Data Resources Inc., and a consultant with McKinsey and Co.

His books include: Trade Preferences, Foreign Aid and Self-Interest; Trade Policy in Morocco: Taking Stock and Looking Forward (with Pierre Sauve’ , co-editor); WTO Accessions and Trade Multilateralism (with Chiedu Osakwe, co-editor); Juggernaut: How Emerging Markets Are Transforming Globalization (with William Shaw); Inequality in America (with Kemal Dervis and others); Currency Wars (with Vera Eidelman, co-editor); and Paradigm Lost: The Euro in Crisis. His new book, ‘Geopolitics, Trade Blocks and the Fragmentation of World Commerce’ will be published by Lexington Books in September 2024.

His columns have appeared in the Financial Times, the Wall Street Journal, Foreign Affairs, Foreign Policy, Il Sole 24 Ore, Le Monde, Liberation, L’Espresso and El Pais.

He has a BA and MA in Economics from Hebrew University of Jerusalem and a PhD in Business Economics from Harvard University.

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