“Each element in the foreign policy of capitalist democracies,” said the late British economist and Labour Party politician Harold Laski, “touches on the vital nerve centre of some vested interest.” Changes to a tariff schedule may be a “life and death” matter for any one vested interest, for example.
Last week European Commission president Ursula von der Leyen lamented “huge state subsidies” that give Chinese electric vehicle (EV) makers a price advantage over their European counterparts. “Europe is open for competition, not a race to the bottom,” she said in response to China’s commerce ministry complaining of “naked protectionism”.
As a bilateral summit between the EU and China is scheduled for later this year, one can surmise that this will top whatever agenda is discussed. But is it in the vested interest of European consumers and industry, as Laski would have suggested? If it gives rise to higher tariffs on Chinese-made EVs, as seen in the US, will it have a positive effect on the interests of European consumers and firms? The answers to these questions are complicated by a range of factors.
No iron walls separate the interests of German carmakers and their Chinese supply chains. All top European EV producers have some Chinese interface upstream. BMW imports its electric iX3 vehicle from China, Tesla’s Shanghai plant produced more than 700,000 cars last year, and VW recently bought a 5% stake in Chinese carmaker Xpeng.
If tariffs rise due to any probe it will only sting if European carmakers fundamentally change their corporate strategies towards European sourcing and assembly in response.
EV imports into Europe from Chinese brands are getting a rising share of consumer spending. According to data from JATO Dynamics, battery and plug-in hybrids from China (excluding imports by European brands) grew market share from 1.1% in 2020 to 5.6% in 2022, and this is expected to reach 15% by 2025. As consumer subsidies taper off in markets such as Germany, the cost advantage of production in China for export into Europe will become even more compelling for cost-sensitive carmakers and European consumers.
Refines two-thirds
VW has already started to lay off temporary workers in one of its plants near the Czech border as fleet orders decline due to lower purchase subsidies. If tariffs arising from the probe fail to equalise input and final prices between EU-produced EVs and those from China, European consumers faced with reduced purchase subsidies in places such as Germany may be left with little but more expensive choice.
The vertical integration along the entire EV value chain of Chinese interests, including in high-value elements such as battery cell production, implies that the cost and price advantages are not solely attributable to generous subsidies. If the battery is the largest cost component in an EV, it is not inconsequential that China refines two-thirds of the battery-grade lithium mined in worldwide, and more than two-thirds of all of the cobalt and graphite.
China’s dominance not just in the design and assembly of the parts that make a vehicle, but in the backward integration of the components and technology that make up EV batteries, means Von der Leyen’s probe may be pressured to balance many vested interests beyond notions of Euro-sovereignty.
Sovereignty is the instrument through which the vested interests of any society wage “the war of steel and gold”, said Laski. The economic and social difficulties confronting the European economy and the lead firms at the helm of global production networks that call it home, will require more than just higher tariffs. In this sense such moves may undercut any technological and market advances they have built and wish to acquire in and alongside China.
In a product market characterised by a once-in-a-century transition, the risk may not be a race to the bottom, as Von der Leyen suggested, but a race to the death powered by an internal combustion engine.
• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.
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