China blasted the European Union’s probe into Beijing’s electric car subsidies as a “naked act of protectionism,” as the battle to access the bloc’s growing clean-car market risks sparking a trade war between the two economic powerhouses.
The decision to launch an investigation into Beijing’s state subsidies will have a “negative impact” on the E.U.’s relationship with China, the Commerce Ministry warned on Thursday. The E.U. said it is trying to protect jobs and supply chains at home, as it claims China is unfairly flooding the market with cheap vehicles.
“It is a naked act of protectionism that will seriously disrupt and distort the global automotive industry chain,” the ministry said in a statement. China’s EV industry has thrived due to “innovation” and a “complete industrial supply chain,” it added.
Shares of leading Chinese EV makers fell slightly Thursday. BYD ended 1.2% lower in Hong Kong while SAIC, which owns MG, declined 0.3% onshore after paring some losses.
The immediate impact of any European tariffs on China’s economy is likely to be limited, as more than 80% of the passenger cars produced in the Asian nation were sold domestically in the first eight months of this year. China’s EV market has been a rare bright spot in its sputtering post-pandemic recovery, maintaining growth and bolstering exports.
The bloc’s decision to push back against China’s growing EV prowess is a blow to President Xi Jinping’s strategy of courting the E.U. as a bulwark against U.S. challenges to the world’s second-largest economy. It also highlights the E.U.’s difficulties in fostering trade ties with China while also guarding against perceived supply chain and national security risks.
Henry Wang Huiyao, founder of the Center for China and Globalization research group based in Beijing, called the E.U.’s move surprising and “counterproductive” to the overall relationship.
“It’s certainly not helping the trend in the relations that were gradually heading toward recovery,” he said. “The E.U. is a champion of multilateral rules. If they have an issue they should go to World Trade Organization.”
The E.U.’s decision to hit China with the threat of tariffs will likely cast a long shadow over the bloc’s talks in Beijing later this month. The E.U.’s executive vice president and trade chief, Valdis Dombrovskis, is making a trip to the capital that’s designed to pave the way for a long-anticipated leaders’ huddle this year. The visit will give China a chance to present its case over the probe.
The Commerce Department in Beijing on Thursday said its EV sector had grown due to “persistent efforts of tech innovation” and its “complete industrial supply chain.” China’s EV car exports to the 27 European Union nations were worth 47% of the value of total exports in the sector last year, according to Chinese customs data. That number fell to 44% in the first seven months of 2023.
The E.U. clearly disagrees. European Commission President Ursula von der Leyen on Wednesday said the global market was overrun with cheap Chinese cars sold at “artificially low” prices due to Beijing’s support. While it’s unclear how united the bloc was over the probe, Berlin said the E.U.’s executive arm had given forewarning.
“I knew the commission was looking at it critically,” said German Economy Minister Robert Habeck. “There is a good relationship of trust and very close coordination with the commission on such issues.”
The probe that has a roughly nine-month time frame will likely result in new E.U. tariffs on Chinese EV imports and impact non-European automakers such as Tesla, which export cars from China. The Asian giant could face tariffs close to the 27.5% level already imposed by the U.S. on Chinese EVs, according to a person familiar with the matter.
Jens Eskelund, president of the European Union Chamber of Commerce in Beijing, said he supported a level-playing field on ruled-based trade practices. “The European Chamber expects to see a fact based probe with a view to ensure such principles for all market participants,” he added.
While the near-term impact of the E.U. probe will likely be limited, it will weigh on the “growth outlook of companies with aggressive expansion plans in the E.U., like BYD,” Morgan Stanley analysts including Tim Hsiao said in a note to clients.
Chinese brands most likely to be hit hard are Zhejiang Geely, which has the top Chinese presence, while BYD and Nio are also pushing into the continent and starting to challenge market leaders Volkswagen AG, Tesla Inc. and Stellantis NV.
Europe’s investigation, as well as aggressive moves by Washington to counter China, are part of a broader rethink by governments in developed economies to protect production closer to home. President Joe Biden has not only maintained a slew of tariffs imposed on China during the previous administration, but also instituted new curbs on cutting-edge chips citing national security concerns.
Europe’s decision is likely informed by experience of China dominating the steel and solar markets by exporting in huge quantities at low prices, said Deborah Elms, executive director at the Asian Trade Centre in Singapore.
“Once the domestic industry in other markets gets swept away,” she said, “the space is clear for foreign firms to dictate prices and standards.”
Bloomberg’s Yujing Liu, Peter Vercoe, William H. Davis, Chunying Zhang, Jinshan Hong, Jasmine Ng, James Mayger, Fran Wang and Petra Sorge contributed to this report.