Who is affected by the trade conflict between the EU and China

The EU is expected to impose tariffs on electric vehicles (EVs) imported from China next week.

Dr. Jörg Krämer, Bernd Weidensteiner

Commerzbank Economic Research

June 7 2024

Following recent tariff hikes by the United States, the European Union is expected to raise tariffs on several goods from China – most currently electronic vehicels (EVs). Bejing has already threatened retaliation and we believe that China will likely target a combination of cars, airplane parts and spirits. This would hit the German car industry in several ways. While the current dispute will have very limited effect on the resurging European inflation. A full-blown trade war with China and worldwide deglobalization would, however, increase inflationary pressure and dampen growth prospects.

An escalation of the conflict is imminent

Geopolitical tensions have risen between China on the one side and the United States and the European Union on the other. As a result of the tensions, calls for a more protectionist trade policy towards China have become louder – particularly in the US where the two presidential candidates want to display a tough stance on China. Proponents of trade protection typically point to the high level of industrial subsidies that help Chinese companies undercut world prices. Even before the pandemic, public institutions in China spent 1.7% of GDP on direct or indirect forms of industrial subsidies. This is more than four times the share that Germany or the United States spend on subsidies. A recent study even estimates that China may currently spend as much as nine times as much as OECD-countries. Consequently, the Biden administration levied additional tariffs on US $18 billion worth of imports from China this year, notably raising tariffs on electronic vehicles to 100%. The US has called on the European Union to follow suit.

The European Commission is already investigating unfair trade practises by China in several cases. Given Brussel's recently set aim toincrease its production capacity in green technologies, it is not surprising that the investigations of unfair trade practises launched against China have targeted electronic vehicles (EVs, October 2023), biodiesel (December 2023) and wind turbines (April 2024). According to media reports, the investigation into electronic vehicles is about to conclude soon. Brussels has also investigated individual Chinese companies bidding for photovoltaic park projects in the EU, but has refrained from any largescale investigations. If the investigations do find unfair trade practises, the EU could introduce tariffs that counteract the unfair advantage of Chinese exporters.

European tariffs will target skyrocketing EV imports from China

Imports of goods potentially affected by customs duties now involve large volumes: In particular, Europe's imports of EVs from China have grown strongly to almost 10 billion Euros worth of cars in the past year. This also implies for Germany, for example, that a quarter of all EV imports were from China – the single most important exporter of EVs. In terms of volumes biodiesel and wind turbines are less important, although purchasing biodiesel from China has also more than tripled within five years. The import of wind turbines reached its peak in 2022 with a volume of 460 million Euros. If the European investigators find evidence of unfair trade practises by China, the European Commission will likely raise tariffs on Chinese cars from the current level of 10% to the range of 25% to 40% (implying a punitive, "anti-dumping" tariff of 15% to 30%).

The effect of this tariff on imports mainly depends on whether Chinese exporters lower their prices in response. A study finds that Chinese exporters may be able to absorb additional tariffs up to 30% due to their very high profit margins. If the import price overall does increase, however, will European consumers either have to pay a higher price or switch to cars from alternative sources.

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