The European Commission (EC) has this month announced an investigation into imports of Chinese-made electric vehicles (EVs) into the EU that could see these shipments hit with large extra tariffs.
In a speech to the EU Parliament, EC president Ursula von der Leyen said: “Global markets are now flooded with cheaper electric cars ... and their price is kept artificially low by huge state subsidies.”
The EC will therefore conduct an anti-subsidy investigation to assess whether this assistance is unfair. It will study a range of factors, from prices for raw materials and batteries to preferential lending or cheap provision of land to evaluate what help Chinese companies are receiving. It will also cover non-Chinese brands that are manufactured in China, such as Tesla, Renault and BMW.
While it is expected to be a year or more before any definitive conclusions are reached, any tariffs could have a major impact on the global EV markets. So what's behind the investigation and how is China expected to respond?
Why is the EU looking at Chinese car imports?
Until recently, Chinese imports only made up a small percentage of the EU's automotive sector, but their share of the market has been growing rapidly. The EC has noted that at present, Chinese firms account for eight percent of EV sales in the EU, with this figure forecast to reach as high as 15 percent by 2025.
Although current shipments are already subject to a standard tariff of ten percent applied to any non-EU vehicle imports, they remain around 20 percent cheaper than EU models on average, and the Commission is therefore concerned that more new entrants to the market could undercut its own industry.
Several Chinese automakers have announced plans to expand their operations in Europe this year, including XPeng, BYD and Nio. TechCrunch reports that with domestic demand in China weakening due to a slowing economy, many brands are looking at exports for growth.
According to figures from consulting firm AlixPartners reported by Reuters, Chinese state subsidies for electric and hybrid vehicles amounted to $57 billion between 2016 and 2022.
Ms Von der Leyen emphasized the EU does not want to repeat the experience of its solar panel sector, which struggled to compete with cheap Chinese imports. "Europe is open to competition. Not for a race to the bottom," she said.
What could the next steps be?
The process is expected to be a lengthy one, with EC vice-president Maroš Šefčovič telling CNBC shortly after the announcement: “We are very far from imposing import duties for Chinese vehicles, because [for] these investigations to be fair, [they] must be conducted properly.”
Once a formal anti-subsidy probe is underway, the EC will have up to nine months to decide whether to impose provisional measures, and a further four months to put in place a definitive response.
"In the meantime, it’s clear that we have to redouble our efforts to make sure that our car industry remains very competitive," Mr Šefčovič added.
Should the investigation recommend higher tariffs, these are likely to be in the range of an additional ten to 20 percent on top of existing duties. This would bring the EU into line with the US, which already imposes tariffs on 27.5 percent on Chinese EV imports.
How has China reacted?
China has "high concern and strong dissatisfaction" with the proposals, according to a spokesperson for the country's ministry of commerce. They added Beijing will be paying close attention to the "protectionist tendencies" of the EU and is prepared to take actions in order to safeguard the rights of Chinese enterprises.
This could come in the form of retaliatory tariffs or other restrictive trade measures on EU imports, potentially even leading to a full trade war.
Some European industry groups have also given a cautious reaction to the investigations. Germany's VDA auto association has warned the EU must be prepared for a backlash from Beijing. Reuters notes that German brands rely on China for a significant portion of their sales, and so are keen to keep trade ties strong.
One trade lawyer told Politico that this will not be a typical anti-subsidy case and will be "very, very political", so there could be a long road ahead for the dispute.