(Bloomberg) -- The European Union unleashed one of its most powerful economic tools on China, imposing tariffs on electric vehicles in a move that increases the risk of retaliatory measures and backfiring on domestic consumers and companies.
The EU voted on Friday to boost tariffs as high as 45%, arguing that Beijing provides unfair subsidies to its carmakers. While the bloc is aligning with the US’s more aggressive approach to taking on Chinese trade practices, the latest move intends to comply with World Trade Organization rules.
French President Emmanuel Macron warned this week that Europe’s economic model “needs to be reset,” and failure to account for the US and China’s greater domestic investment and market protections could be an existential threat for the EU. The bloc’s leaders are expected to unveil a new competitiveness roadmap next month.
Janka Oertel, a director at the European Council on Foreign Relations, said the vote “marks a pivotal moment for the future of EU-China relations.” She said successful implementation of the tariffs would strengthen the EU, giving it “momentum to continue addressing market distortions, critical dependencies, and emerging security challenges across various industries.”
Former European Central Bank President Mario Draghi shared similar concerns as Macron last month when delivering a much-anticipated report on Europe’s competitiveness. He said that the EU would face a “slow agony” if the bloc didn’t invest in its economic transformation to better contend with competition posed by Beijing and Washington.
EU economic growth has been persistently slower than in the US over the past two decades, driven by smaller advances in productivity, Draghi said. And the consequences of the slow response to the challenge posed by China’s aggressive industrial plans, with billions of dollars invested in subsidies, are already felt in some of the key industries.
What Bloomberg Economics Says...
“We still think the Chinese government will probably respond proportionally to the tariffs, for instance, by targeting non-auto EU imports such as certain agricultural goods.”
—Antonio Barroso and Gerard DiPippo. For full REACT click here
While Volkswagen AG and Mercedes-Benz Group AG are struggling with waning relevance in China, BMW AG has been tripped up by an expensive recall, and Stellantis NV is getting hit by poor sales in the US. All of them have issued profit warnings in the past month, with VW considering closing plants in its home market Germany for the first time.
After European carmaker shares took a beating in the past weeks following the profit warnings, they recovered a bit on Friday’s tariff vote. The Stoxx 600 autos and parts index rose, but that’s because the news was already priced in, said Tom Narayan, an analyst at RBC Europe. The index is still down more than 10% this year — despite the ever-ascending Ferrari NV in the mix.
After years of failed attempts to address long-standing bilateral irritants, including China’s industrial subsidies or the restricted access to its vast market, the EU has gradually hardened its stance as it witnessed the steadfast progress of Chinese firms in the digital and clean tech sectors, fueled by their control of critical materials.
As the world’s largest trading bloc, Europe is the main beneficiary of multilateralism, with half of its GDP tied to international trade. But the hostile international environment marked by the US and China’s rivalry and the fight to secure raw materials to accelerate economic growth is forcing the EU to rethink its approach.
Why Europe Is Raising Tariffs on Cheap Chinese EVs: QuickTake
While EV tariffs deliver on Europe’s current political priorities, they’re not without economic risks. Coming in the wake of a once-in-a-generation inflation shock, the prospect of potential full-blown global trade wars erupting comes with the danger of renewed consumer-price pressure.
ECB policymakers are set to deliver a third interest-rate cut when they meet on Oct. 17, but the backdrop could yet stoke doubts in their resolve. Aside from the trade environment — further threatened by the possibility of Donald Trump retaking the White House — resurgent oil prices and a still-resilient US economy might also give officials pause for thought.
The World Bank warned in August that central banks’ war over inflation isn’t won just yet. The Washington-based institution said protectionist measures like tariffs raise production and shipping costs and, if such barriers to trade persistent, they “may eventually prompt producers to pass them on to consumers.”
“We want a level and fair playing field, but not a trade war. That is why we now need a negotiated solution to the issue of countervailing duties,” German Economic Minister Robert Habeck said in a statement Friday on Instagram. “Together Europe is strong, divided it becomes a pawn of others. And if Europe does not react as one, China’s aggressive industrial war will continue in other sectors too.”
--With assistance from Craig Stirling, Brendan Murray, Isolde MacDonogh, Kevin Whitelaw, Alberto Nardelli, Petra Sorge, Michael Nienaber and Stefan Nicola.
©2024 Bloomberg L.P.