(Bloomberg) -- The European Union has imposed higher tariffs peaking at 45% on electric vehicles from China, ratcheting up trade tensions between the world’s leading export powers.
The regulation introducing the levies was published in the EU’s official journal Tuesday evening Brussels time, paving the way for their entry into force after months of negotiations, threats of Chinese retaliation and auto-industry pleas to avoid escalation.
Europe’s EV tariffs are a setback for Chinese producers already effectively shut out of a massive potential market in the US, which quadrupled its duty to more than 100% this year citing “extensive” government subsidies and exports that surged 70% last year.
The EU levies differ depending on the manufacturer and will range from about 8% to just over 35%, on top of the existing 10% rate.
The latest volley of tariffs from the west comes amid fears China is on the cusp of global auto dominance at the expense of American and European rivals. Since introducing a new battery technology in 2020, BYD Co. — the leading Chinese EV brand — has gone from being one of many producers in a crowded domestic market to cracking the top 10 automakers in the world.
Still, major European carmakers Mercedes-Benz Group AG and BMW AG lobbied against the tariffs on concern the dispute will hurt their sales in China at a time when they’re already struggling. Earlier this week, Volkswagen AG’s top labor leader said Europe’s biggest automaker plans to close at least three factories in Germany.
The EU and its No. 2 goods trading partner will continue discussions aimed at seeking alternative solutions even after the tariffs take effect, but those talks have so far failed to yield a breakthrough. The standoff raises the risk of an escalating tit-for-tat confrontation in a relationship valued at €739 billion ($799 billion) in bilateral merchandise trade in 2023.
China still hopes to find an acceptable resolution with the EU over the tariffs, the nation’s Ministry of Commerce said after the regulation introducing the levies was published in the EU’s official journal, adding that China will take all necessary measures to defend its companies’ rights.
Negotiators in Beijing and Brussels have been exploring whether an agreement can be reached on so-called price undertakings, a complex mechanism to control prices and volumes of exports used to avoid tariffs the EU justified as measures aimed at countering Chinese industrial subsidies.
People familiar with the discussions said Beijing had yet to put forward proposals that meet the EU’s strict requirements, including alignment with World Trade Organization rules and matching the effect of the duties. The 27-nation bloc also wants to ensure the EU can monitor the arrangements for compliance.
However talks have made some progress in recent days and EU officials are open to accepting an invitation to go to China for a new round of negotiations, one of the people said.
Beijing appears to be mostly preoccupied with trying to secure a better deal for SAIC Motor Corp., the state-owned manufacturer hit with the highest rate, according to the people, who spoke on condition of anonymity.
The EU has been eyeing individual pricing agreements with some car markers, including those looking to move production of some models to Europe in the near future. Such arrangements would see the tariffs lifted on models covered by the alternative deals.
Beijing has accused the EU of “divide and conquer” tactics and warned manufacturers to not seek such deals, as it wants everyone under an umbrella agreement as part of talks being led by a Chinese trade body. According to the EU’s regulation, that trade group made a pricing proposal on behalf of 12 exporters, including SAIC, BMW Brilliance Automotive Ltd., and Zhejiang Geely Automobile Co. Ltd.
The EU has said that individual agreements are possible under WTO rules.
China has also threatened to freeze investments in member states that backed the tariffs and retaliate with penalties of its own on European goods, including dairy, pork and brandy, as well as cars with large engines. China launched an anti-dumping probe into European pork in June, although that hasn’t been finished yet.
The EU has said it will defend its interests against any improper investigation and has already taken China to the WTO over its anti-subsidy investigation into the European dairy industry.
European officials said they expected China’s retaliation to materialize next month and that member states would in turn keep pushing the EU to conclude a deal once that happens.
China reduced tariff rates on vehicles with large engines to 15% in 2018 and is now warning it could bring them back to as high as 25%.
China’s response has so far been mostly within the usual bounds of trade disputes. A bigger worry would be if it goes beyond that by, for example, curbing exports of raw materials. In a territorial dispute with Japan more than a decade ago China temporarily blocked exports of rare earths and more recently it has imposed export controls on a number of other critical minerals.
While China’s officials have said little publicly about the progress of the talks, they have begun to roll out retaliatory measures and through proxies in the media and trade associations they have talked about the negotiations and hinted at possible future measures if the EU does impose tariffs.
Chinese carmakers have been pressured by Beijing to pause expansion plans in the EU over the trade spat, Bloomberg reported last week, citing people familiar with the matter. That threat was repeated in an article recently from a social media account linked to state media which has been used as a channel for messages on the dispute with the EU.
“Once the European side implements discriminatory measures, Chinese enterprises will completely lose the motivation to develop technical cooperation with European enterprises in China,” the article said.
‘Consequences’
To emphasize that message, the China Chamber of Commerce to the EU then emailed a summary of the article to journalists, calling it “of significant relevance to the ongoing EV discussions.”
The article also attacked the EU for trying to negotiate with individual carmakers as well as collectively. “If the European side insists on obstructing the negotiation process, it needs to recognize the consequences,” it said.
Still, both Brussels and Beijing may soon need to divert some of their attention across the Atlantic. The US election next week could see Donald Trump return to the White House, along with his promises to hit both the EU and China with tariffs.
It’s possible officials in Beijing opt to withhold any immediate reaction to the new EU tariffs while they wait for the results of the US elections, according to Henry Gao, a law professor at Singapore Management University who researches Chinese trade and policies.
“The only people more worried about the US election than Americans are the Chinese,” said Gao. “Everyone in Beijing is tuned into the US election now.”
(Updates with Chinese Ministry of Commerce comment in 8th paragraph.)
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