The global automotive industry, particularly the electric vehicle (EV) sector, is witnessing a seismic shift as China asserts its dominance. While Europe seeks to transition towards greener transportation, Chinese automakers, driven by innovative technology and aggressive market strategies, are rapidly expanding their presence. However, this expansion has not come without friction. The European Union’s (EU) proposed tariffs on Chinese EVs have sparked a diplomatic and economic divide within Europe. Some nations push for punitive tariffs, while others, swayed by promises of Chinese investment advocate for compromise.
As reported by Reuters, China’s Commerce Minister Wang Wentao is set to visit Europe in the coming days to discuss the European Union’s ongoing anti-subsidy investigation into China-made EVs. This visit comes as the EU prepares to vote on the imposition of additional tariffs on Chinese EVs. Wang is scheduled to meet with the European Commission’s Executive Vice President and Trade Commissioner Valdis Dombrovskis on September 19, according to a spokesperson from the Chinese ministry during a regular news conference.
China’s EV strategy: A two-pronged approach
China’s strategy to dominate the EV market involves two key elements: leveraging its advanced domestic technology and expanding manufacturing capabilities abroad. According to reports, the Chinese Ministry of Commerce (MOFCOM) recently advised automakers to retain key technological knowledge within China, even as these companies establish foreign factories. This approach is designed to mitigate potential risks associated with regulatory and competitive pressures ensuring that China remains the hub of technological innovation in the EV space.
For instance, leading Chinese EV manufacturers like BYD and Chery are expanding their footprint by building factories in regions such as Spain, Turkey, and Hungary. This expansion aims to sidestep tariffs on Chinese-made EVs, particularly as Europe contemplates imposing significant duties on imported Chinese vehicles. BYD’s planned factory in Turkey, with an annual capacity of 150,000 cars, exemplifies this approach. Turkey’s customs-union agreement with the EU provides a strategic advantage for Chinese automakers to penetrate European markets, bypassing potential trade barriers.
Despite this international expansion, China has made efforts to ensure that critical components such as batteries and software remain domestically produced. A Bloomberg report highlighted China’s reliance on knock-down kits—semi-assembled vehicles that are completed abroad—as a means to maintain control over core technologies, reducing its dependence on potentially volatile foreign markets.
Europe’s divided stance on Chinese EVs
The EU’s response to the growing influx of Chinese EVs has been mixed, reflecting internal divisions. On one side, nations like France and Italy are advocating for hefty tariffs citing concerns over the competitive threat posed by cheaper Chinese vehicles. In July, a non-binding vote saw these countries support additional duties of up to 36.3 per cent on Chinese EV imports, as reported by DW. France and Italy voted in favour of the tariffs, while Germany, Finland, and Sweden abstained. Those in favour argue that without protective measures, European automakers, particularly those manufacturing internal combustion engine (ICE) vehicles, could face insurmountable challenges from low-cost Chinese alternatives.
On the other side, countries like Spain and Hungary are adopting a more concilliatory approach. Spain’s Prime Minister Pedro Sanchez recently called for a reconsideration of the proposed tariffs, warning against igniting a trade war with China. Spain’s reluctance to endorse the tariffs stems from its dependence on Chinese investment. During a visit to China, Sanchez emphasised the need for diplomacy and bridge-building between the EU and China, highlighting the potential economic fallout that could affect Spanish industries, particularly agriculture.
Similarly, Hungary is wary of the EU’s hardline stance. According to the Financial Times, Hungary has actively courted Chinese investment and is positioning itself as a European hub for EV manufacturing. BYD’s planned factory in Hungary is expected to create thousands of jobs, solidifying Hungary’s role in the global EV supply chain. This investment strategy aligns with Hungary’s broader trend of supporting Chinese firms including its alignment with China’s Belt and Road Initiative further deepening ties between the two nations.
A balancing act for European nations
China’s expanding presence in Europe presents a delicate balancing act for many European nations. Countries like France and Italy are grappling with the need to protect their domestic industries, which are struggling to compete with the cost-efficient production of Chinese EVs. French automakers, for instance, are already under pressure as traditional ICE vehicle sales decline amid the global shift towards electrification. The EV adoption rate in China, where electric vehicles accounted for over 50 per cent of total vehicle sales in August 2024, contrasts sharply with the slower transition seen in Europe. This disparity puts European manufacturers at a disadvantage, particularly as Chinese automakers like BYD and Li Auto scale up production and penetrate foreign markets.
However, countries like Hungary and Spain view Chinese investment as an opportunity to boost local economies. Spain, for example, relies heavily on pork exports to China, a sector that could face retaliatory tariffs if the EU proceeds with its trade measures. Hungary’s strategy of attracting Chinese EV manufacturers aligns with its broader goal of becoming a hub for lithium-ion battery production, a critical component in the global transition to electric mobility. As Europe grapples with this internal divide, the potential for a trade war with China looms large with possible repercussions for various industries beyond just automotive.
China’s leverage
China is not standing idly by as the EU debates its tariff policies. In response to the EU’s proposed tariffs, Beijing has launched its own anti-dumping investigations into European imports of pork and dairy. This move signals China’s readiness to retaliate economically, particularly against countries like Spain, which exported €1.5 billion worth of pork to China in 2023. The ongoing negotiations between China and European nations underscore the high stakes involved in the tariff debate. Chinese automakers, meanwhile, have called on their government to impose tariffs on European gasoline-powered cars adding another layer of complexity to the situation.
Furthermore, China’s strategic investments in Europe’s renewable energy and EV sectors provide significant leverage. For instance, during Sanchez’s visit to China, a $1 billion deal was signed for China’s Envision Group to build a green hydrogen plant in Spain. These investments underscore China’s ability to forge economic ties that extend beyond EVs, making it more difficult for European nations to support punitive measures without risking broader economic fallout.
Broader geopolitical context.
China’s expanding influence in Europe’s EV market must also be viewed within the broader context of China-EU relations. Chinese President Xi Jinping’s call for Spain to play a constructive role in easing tensions between Brussels and Beijing reflects China’s desire to prevent further escalation. With China accounting for 65 per cent of global EV sales in the first half of 2024, it remains a key player in Europe’s green transition. European countries, therefore, face a complex dilemma: how to foster their domestic EV industries while managing the risks of becoming overly dependent on Chinese technology and investment.
At the same time, Europe’s internal divisions weaken its collective bargaining power. The abstention of countries like Germany, Finland, and Sweden in the vote on EV tariffs highlights the fragmented nature of the EU’s approach. Without a unified stance, Europe may struggle to negotiate effectively with China, leaving individual countries to pursue their own bilateral agreements, as seen in Hungary and Spain. Chancellor Olaf Scholz’s support of Sanchez in rethinking the proposed tariffs further illustrates the complexities within the EU’s internal dynamics.
A future of trade tensions or compromise?
As China continues to expand its EV footprint in Europe, the internal divisions within the EU are becoming increasingly apparent. While countries like France and Italy push for tariffs to protect their domestic industries, others like Spain and Hungary remain focused on fostering Chinese investment to boost local economies. The proposed tariffs on Chinese EVs have thus become a flashpoint in the broader debate over Europe’s economic and industrial future.