Commerzbank : Economic Briefing 12.06.2024 EU threatens tariffs on Chinese electric cars

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Economic Briefing

EU threatens tariffs on Chinese electric cars

The European Commission has issued China an ultimatum to reach an agreement on subsidies for electric cars. Otherwise, additional tariffs of up to 38.1% will be imposed on electric cars by July 4 at the latest, depending on the manufacturer. This is also likely to have an economic impact on German car manufacturers who produce electric vehicles in China and import them to Europe. In addition, China has already threatened retaliatory measures. This would also affect the German automotive industry, as China is an important sales market for German car brands. However, we believe that an escalation into a full-scale trade war is unlikely overall.

The outgoing European Commission has issued China an ultimatum to withdraw subsidies for battery-electric vehicles (BEV). If talks with the Chinese government do not reach an agreement, additional tariffs on BEV imports from China will come into effect by July 4 at the latest. Depending on the producer, the additional duties range from 17.4% to 38.1%.

The EU had investigated three Chinese manufacturers in particular. However, the higher tariffs apparently affect all producers, as can be read in the press release. Depending on whether other producers - such as German car manufacturers exporting from China - cooperate with the EU, either 21.0% or 38.1% will be due. In our analysis last Friday, we had expected an increase of 10 to 30 percentage points. This is the EU's response to massive subsidies for the electric car industry in China, which exceed the expenditure of developed countries many times over and distort fair competition in the Commission's view. The additional tariffs will apparently be added to the regular tariff rate of 10% and affect a trade volume of 9.7 billion euros. Imports of electric cars by European member states had risen rapidly over the past five years (Chart 1).

The measure is also likely to affect German car manufacturers, because they produce electric cars in China and import them to Europe. In the future, this will hardly be profitable in many cases without considerable price increases. On the other hand, according to a study, Chinese exporters have such high profit margins that they can compensate for additional tariffs of up to 30% and continue to export their cars to Europe at a profit.

12 June 2024
Dr. Vincent Stamer
Table of contents
Who will be hit by Chinese	2
retaliation?
Impact on inflation low, full-	3
blown trade conflict unlikely

Important disclosure Information at the end of the document

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Economic Research

Chart 1 - European imports of electric vehicles from China have risen rapidly

In billion euros

12

10

8

6

4

2

0

9.7

6.9

3.5

0.6

0.1

2019

2020

2021

2022

2023

Source: Eurostat, Commerzbank Research

Who will be hit by Chinese retaliation?

China has already threatened to retaliate if the EU raises tariffs. The goods mentioned in this context are dairy products, wine, spirits and liqueurs made from grapes such as brandy, special polymers, aircraft parts and cars with internal combustion engines and a cylinder capacity of 2.5 liters or more.

Due to the volume of trade, cars are the most likely target. Europe exports 12.4 billion euros worth of cars with an engine capacity of 2.5 liters or more to China, which is roughly equivalent to the volume of BEV imports from China.[1] Furthermore, this would impact an influential voice in Europe: Germany's share of car exports to China is comparatively high at 24%, while for France and Italy it is negligible for both cars and other goods (Chart 2). This leads to a further division within Europe.

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Chart 2 - Few European products depend on the Chinese market

The share of European countries' exports going to China (including other European countries) in %, the size of the bubble represents the trade volume in US dollars

30

25

20

15

10

5

0

-5

Dairy	Wine	Spirits	Polymeres	Airplane	Cars,	Cars, large
				parts	medium

Germany

France

Italy

Source: UN Comtrade, Commerzbank-Research

Impact on inflation low, full-blown trade conflict unlikely

At the same time, the effect of the trade conflict on inflation in the euro area is likely to remain low. For every 100 euros spent by the average German consumer, for example, only 0.3 euros can be traced back to Chinese production in the automotive industry.

The low impact on inflation relies on the assumption that the conflict does not develop into a full-scale trade war. However, due to the inflation in Europe and recovering economic growth in China, neither party has any incentive for a trade war at the moment. Furthermore, the trade volume at stake in this trade dispute is a relatively small proportion of the total trade volume between the two blocs.

1. China had mentioned vehicles with an engine capacity of over 2.5 liters in its communication. According to the Chinese statistics authority, the country imported cars worth 12.4 billion euros from the EU in 2023. Eurostat only classifies vehicles between 1.5 and 3.0 liters (called medium-sized vehicles here) and 3.0 liters or more (large vehicles). (Back to the text)

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Analysts

Dr. Vincent Stamer

Economist [phone] [e-mail]

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