EU presents China with clear way to avert EV duties — good luck with that

5 months ago 2

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The train of EU-China relations is derailing in slow motion.

By announcing steep duties on Chinese electric vehicles, Brussels has urged Beijing to do some long-overdue track repairs to avert a massive crash.

The duties announced by the European Commission on Wednesday — higher than expected at up to 38.1 percent — will take formal effect from July 5, barring any errors that Chinese exporters can flag by early next week. Beijing has already threatened to file suit at the World Trade Organization and retaliate against European pork and large-engined cars.

It’s not too late to avoid the duties, say EU leaders, by addressing the huge Chinese subsidies they seek to counter.

“Our objective is to engage China and get Beijing to course-correct and address the problems at their root,” European Commission President Ursula von der Leyen told leaders at the G7 summit in Italy on Friday.

With the clock already ticking down on a negotiated solution, German Economy Minister Robert Habeck heads to China next week after a stop in South Korea, just two months after Chancellor Olaf Scholz was widely seen to have kowtowed to Beijing.

Realizing it cannot avert the duties, Berlin campaigned right up to the last minute to keep them lower, fearing retaliation against the German auto industry. That’s a course it’s set to stay on.

Shuttle diplomacy works in the other direction, too. Chinese Vice Premier Ding Xuexiang, one of the mandarins most trusted by President Xi Jinping, will visit Brussels next week to co-chair a climate dialogue.

Given how much China has been bashing the EU for backtracking on its green transition goals by imposing tariffs on emissions-free EVs, it would be a surprise if Ding didn’t quiz his counterpart, European Commission Executive Vice President Maroš Šefčovič, on the policy hot potato.

‘Solution’ in sight?

Ask Brussels, and the message is simple: Withdraw your subsidies, and we won’t hit your EV exports.

“The Commission does not want to introduce tariffs for the sake of introducing tariffs,” said Commission trade spokesperson Olof Gill.

“There could be a mutually agreed solution if the measures are not necessary. This means, essentially, that the identified subsidies are withdrawn, or companies do not benefit from them any longer.”

That’s Brussels-speak for: Please overhaul the entire economic model that you established over the course of decades.

In its investigation into China, the EU’s trade arm found subsidies flowing into everything from lithium refining to shipping assembled cars to Europe. Chinese companies making lithium batteries, for instance, act as extensions of the government, according to the EU executive.

A senior Commission official told POLITICO these companies behave “as public bodies, implementing national policies. They need to ensure a stable supply of lithium iron phosphate batteries to the EV producers at a below-market price.” The official was granted anonymity to discuss confidential details of the case.

Cosmetic changes

“The key question … is not only if China is serious about addressing the EU’s concern. It is also: How can China address them?” said Francesca Ghiretti, a senior geoeconomics analyst at the Adarga Research Institute.

The tentacles of subsidies are stuck all over Chinese industry. They roam the seas, too: BYD, the Chinese manufacturer facing a 17.4 percent duty, plans to launch a total of eight car carrier ships in the next two years. Shanghai-based SAIC Motor will even send out a dozen, each of which can carry 7,600 vehicles.

That’s just one indication of China’s resolve to continue to ramp up EV exports, which jumped a quarter in the first four months of this year to nearly 120,000 vehicles. Chinese models account for nearly one in five electric vehicles imported into the EU, according to Schmidt Automotive Research.

Subsidies are also doled out at the municipal or provincial level, for instance in the form of green bonds or free land-use rights. Because of how widespread subsidies in China are, removing them is “unrealistic,” said Mikko Huotari, executive director of Berlin-based think tank Merics. “Beyond cosmetic changes, I don’t expect any major changes on the Chinese side now.”

“I don’t think [withdrawing subsidies] would work well with the Chinese side,” said a person from the Chinese business sector, who was granted anonymity because they are not authorized to speak publicly. They pointed out that China considers many subsidies found by the EU in its probe “fake or untrue.”

Lawyers for the EV-makers will probably push back against the EU’s methodology, considering that the Commission asked them to submit information on subsidies to their suppliers, as well as on their proprietary technology. It’s a pivotal point, because Brussels argues it had no choice but to find the “best available facts” since, in its view, the three top exporters didn’t cooperate sufficiently with their inquiries.

Since the EU is keenly aware China will not be able or willing to sweep the broom through its own system of subsidies, what it really hopes for is actual dialogue on how trade should work in the future. Also in question is how to reduce the massive deficit between the two sides, and how China can start to work on driving consumption rather than industry for its growth.

Von der Leyen on Friday drove home the point that she has made repeatedly to Xi about industrial overcapacity: China generates just 17 percent of global GDP but accounts for a third of manufacturing production. China can only dispose of that through aggressive export promotion, she said.

Or, as she put it to G7 leaders: “Our objective has to be create leverage to get China to engage. Without such leverage, China simply ignores our demands for a level playing field.”

Hans von der Burchard contributed reporting from Berlin, Stuart Lau from Brussels and Barbara Moens from Borgo Egnazia, Italy.

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