EU Tariffs Must Be Part of a Multipronged Strategy

Commentary by Francesca Ghiretti

Published October 31, 2024

On October 4, a divided European Union voted to impose new tariffs on imports of Chinese electric vehicles (EVs) entering the single market. The publication of the tariffs on October 30 deals a blow against one of the most divisive actors within the bloc: China.

The new tariffs signal the ability of the European Union to act against China even in instances where internal opposition is high, beginning to unilaterally level the playing field between the two trade partners. However, tariffs risk becoming less effective if they are not accompanied by measures that create the conditions for European automakers to be more competitive with their Chinese counterparts.

Unlike U.S. tariffs on imports of Chinese EVs, the tariffs imposed by the European Union are about the search for a level playing field between China and the bloc. Since Chinese automakers have been receiving subsidies that have given their producers an unfair advantage over European producers and bilateral attempts to rebalance the conditions have failed, the situation needs to be unilaterally adjusted by imposing measured tariffs. Consequently, not all producers have been assigned the same percentage of tariffs. Duties assigned to Chinese automakers include 17.4 percent to Build Your Dreams (BYD), 35.3 percent to SAIC Motor Corp., as well as 7.8 percent to Tesla. Data show that the new tariffs will only marginally slow down the import of Chinese EVs into the European Union. Despite the tariffs, European EVs remain more expensive than Chinese EVs. But there are ways the European Union can ensure that tariffs lead to a more competitive European EV sector.

The case of EU tariffs on Chinese EVs reveals a longstanding and deep issue for the bloc: the inability to adopt a multipronged strategic approach. Some may advance the argument that competitiveness was not the goal, nor was the goal to have a strategic approach. The goal was to repair unfair competition, and in that the tariffs succeeded.

But counterbalancing unfair competition alone will not help the European Union's competitiveness.

The European Union needs a multipronged approach that addresses the technological gap that exists between the bloc and China. A first step could be to include consideration of how inbound investments can be used to boost EU competitiveness in the European Union's review of the bloc's inbound investment screening. When the regulation was first adopted in 2019, the debate was about screening acquisitions directed at EU strategic assets. Five years later, the debate about inbound investments needs to include solutions on how to manage greenfield investments in strategic industries when we need them. European countries are already welcoming Chinese greenfield investments in technologies related to electric vehicles. For example, European countries are seeking to attract BYD investments to build EV manufacturing plants, but also, battery manufacturing. Most notably, both CATL and BYD are investing in plants in Hungary, and Contemporary Amperex Technology Co. in Germany.

Tech transfer is a strategy that China used for a long time as part of the effort to catch up-and surpass-Western innovations. The country still uses it, although a slow but growing awareness among Western actors has made it more difficult. Nonetheless, China knows very well how big an asset tech transfer can become; hence, it will not be easy-to say the least-to get Chinese companies to accept clauses related to tech transfer from them to European counterparts.

As discussed in another article by the author, the first step is to make sure the European Union has a unified approach to greenfield investments in, at least, green technologies. If Chinese companies know they can invest in Hungary without running into any restrictions, why would they invest in a member state that imposes them?

To ensure that greenfield investments bring local added value and are not just a way to work around tariffs by creating assembly plants with little to no positive spillovers for the bloc, EU member states should include local content requirements in the agreements regarding inbound investments. Local content requirements are not a practice among advanced economies but have long been used by developing economies.

Trade tensions between the European Union and China increase the obstacles to a successful introduction of local content requirements. China's Ministry of Commerce has been reported to have asked Chinese automotive companies to pause investments in EU countries that voted in favor of the tariffs. However, this too can be turned into an opportunity. First, an opportunity to seek alternative investors, and finally use platform such as the G7 to coordinate such action. And second, a set of investments that respect the clauses mentioned above could be one of the points on the negotiating table to decrease and then, potentially lift tariffs, while developing a European ecosystem for EVs and empowering the European Union to become more competitive.

When it comes to EVs, beyond external competition, the European Union faces two internal problems, one of supply and one of demand.

On the supply side, there are very few European companies that currently could supply components needed to produce EVs. Looking at batteries, for example, according to a report by the European Federation for Transport and Environment, less than half of the battery plants planned for 2030 are secured. Automotive Cells Company started production in Pas-de-Calais and regional and national subsidies have ensured that plants by Verkor in France and Northvolt in Germany will go ahead. But reports have also highlighted the difficulties companies like Northvolt are currently facing despite governmental support. Earlier this year, Germany provided EUR 902 million in support of Northvolt's construction of a battery plant in the country. An even more complicated picture emerges for components like cathodes, lithium, and battery minerals, where the potential is there, but the reality is struggling to catch up.

Similarly, European producers and potential investors lament the slow demand across the board from chips to batteries and EVs. Intel pushed back the construction of the announced plants in Germany and Poland and SVOLT has announced that will shut down its European operation next year in Germany because of slowing EV demand and other factors.

The struggles facing European tech sectors demonstrate the difficulty of implementing industrial policy and supporting emerging companies while ensuring the creation of an ecosystem that can absorb production. However, measures to boost competitiveness do not work overnight. Since there is little to no tech ecosystem in the European Union, increased competitiveness can only be achieved via a combination of restrictions like tariffs and local content requirements, production incentives, and, importantly, demand incentives at both the business and consumer levels. One example of such a program might be an EU-wide system of incentives to encourage consumers to purchase EVs.

Emerging companies and sectors will not succeed through a one-off injection of money. Far greater investments of both time and money will be required to sustain the creation of the ecosystem needed for success. There is widespread admiration for China's successful industrial policies, which led to the current innovations, but China disproportionately invested in its strategic sectors, as well represented by the USD 230.9 billion spent in government support between 2009 and 2023, and those investments did not always lead to success.

Industrial policies should be built around long-term commitments. One-off injections of money do not inspire long-term trust among investors, who need assurances that Europe is committed to enduring success. Industrial policy is not going to guarantee that the European Union does not come last in the ongoing technological competition. However, if the bloc can work with its business community and monitor the situation to decide where to keep investing and where to let go, then it stands a better chance not to be left last. Finally, the European Union needs to seriously think about sustained demand incentives to make sure that planned projects are not lost and that production incentives do not simply turn into overcapacity and a loss for the businesses investing in that production.

Tariffs alone will not make competition with China fairer; that boat sailed long ago. Restrictions alone will not make the European Union more competitive in the automotive sector, green technologies, or anywhere else.

A combination of what the EU Economic Security Strategy labeled protection and promotion is needed to guarantee the success of the European Union as a global actor.

Francesca Ghiretti is an adjunct fellow (non-resident) with the Wadhwani AI Center at the Center for Strategic and International Studies in Washington, D.C., and a research leader at RAND Europe.

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