Competition from Chinese EVs is a test of Europe’s trade defenses

Europe, the world’s second largest producer of passenger cars, has long taken pride in its automotive industry. But the global auto industry is seeing new business models, entrants, and competitors as it shifts to electric vehicles. Europe risks losing ground, fast.

Research published last month by the German think tank Mercator Institute for China Studies (MERICS) shows that Europe is now the main destination for Chinese EV exports. That’s not because consumers are clamoring for Chinese EV brands, note MERICS analysts Gregor Sebastian and François Chimits. Rather, US and European carmakers are increasingly moving production to China.

The risks for Europe of “Made in China” EVs

Shifting its EV production to China has implications for Europe, not least of them the risk of hollowing out an industrial manufacturing base that’s an important contributor to the EU economy. Losing auto production to China would also set back the EU’s goal of building a battery industry, a strategic sector in the global energy transition. That’s because a sustainable battery industry requires demand, and EVs will drive the bulk of battery demand in the coming decade.

“If you allow China, especially through distortive practices, to capture the entire value chain of the sector…you do recreate the issue of is having too much production in a single country,” said Chimits.

Indeed, the Chinese government helps tilt the playing field toward its own EV sector by using an industrial-policy playbook it has deployed across numerous strategic industries, including rare earths. As Sebastian and Chimits describe in their report, three measures in particular are distorting the EV market to China’s benefit:

  • Limiting consumer subsidies to domestically produced EVs and making local production conditional on tech transfer to Chinese competitors
  • Shutting out foreign battery companies from the Chinese market
  • Providing cheap financing to China-based EV producers, whether domestic or foreign brands.

Measures like these, write the authors, “mean that ‘made in China’ global EV exports — which are likely to increase over coming years — pose a challenge to market-based competition.”

Trade offense vs. trade defense

The EU’s central challenge is figuring out how to respond to Beijing’s self-serving industrial policies. One option is what the EU calls trade defense instruments (TDIs), a set of policy tools designed to counter unfair trade practices.

Currently the most widely used TDI is anti-dumping measures. If a non-EU country is “dumping” goods by selling them to the EU more cheaply than its domestic sales prices, or below the cost of production, then the EU can impose duties in response. Also used are anti-subsidy measures, which aim to counteract any trade-distorting subsidies that a foreign government grants its companies to lower their costs.

Another measure whose details are currently being hashed out is what’s called a foreign subsidy instrument, a proposed regulation targeting foreign businesses operating in the EU that receive potentially market-distorting subsidies from a non-EU country.

If well-calibrated and deployed effectively, the EU’s trade defense tools could go a long way towards ensuring a level playing field for businesses in the region. And given the centrality of the auto industry to the EU’s economy, Chimits says “this sector seems to be a good test bed” for a more assertive European response to Chinese trade measures.

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