China-EU trade friction: What’s next?

By Muhammad Zamir Assadi

Five days after the European Union Commission announced a tiered anti-subsidy tariffs ranging between 17% and 35.3% on electric vehicles imported from China, China’s Ministry of Commerce filed lawsuit with WTO on Monday, calling EU’s decision “unacceptable and a serious violation of WTO rules.”

Bilateral talks are still going on after Brussels dispatched a technical team to Beijing for a new phase of talks on price commitment. Italian President Sergio Mattarella is visiting China from Thursday on the heels of French Minister Delegate Sophie Primas, which are considered as moves to avoid further escalation.

Still room for negotiation

“Considering that EV is only one of the 30 plus Chinese products the EU is probing into, there are definitely possibilities of worsening of situation. But if you look at the measures that China has taken in response, the retaliation is targeted,” Chim Lee, Senior China Analyst at the Economist Intelligence Unit told China Economic Net (CEN).

So far, China has already launched probes into brandy, dairy, and pork imported from the EU. Following a preliminary ruling without any duties against the confirmed brandy dumping from the EU, provisional measures on in the form of cash deposits were imposed only after the EU member states agreed to impose the long-discussed tariffs earlier last month.

“China and the European Union reaffirmed their political will to resolve differences through dialogue”, according to a latest announcement of China’s Ministry of Commerce.

In her visit to China this week, Minister Delegate Sophie Primas of France, major brandy exporter to China and potential destination where China’s second largest auto exporter planned to build an auto parts factory, said, “France does not wish to see further escalation of current EU-China trade tensions and hopes both sides will resolve trade disputes through consultation.”

Chinese automakers “going-global” trend not to change

In 2023, Europe took up 41.27% of China's Battery Electric Vehicle (BEV) exports, most of which are western brands, with Tesla alone accounting for 28%.

“Chinese firms will still see Europe as a very important market, and they will continue to seek ways to gain market share, not only by establishing their own plants, but also by working with their European partners to set up production locally”, Chim Lee said, adding that there are also easier opportunities in some Eastern European countries that are considered to have better ties with China.

S&P Global Mobility predicted on Tuesday that while the tariffs will lead to a drop in imports of Chinese-made passenger cars into the EU compared with previous estimates, the increasing number of car brands and models made in China and the replacement of BEVs by other power systems will push EU’s vehicles imported from China to continue to grow in the coming years. In 2023, a total of 508,700 Chinese-made passenger cars were registered in the EU. This figure is projected to rise to 563,100 in 2024, 12,700 in 2025 and a peak of 977,600 units in 2027, representing a substantial growth trajectory.

“Beyond Europe, Chinese companies are looking at other regions as well such as Latin America and Southeast Asia in terms of not just exports, but also localized production,” Chim Lee noted.

On the very day the EU announced its tariff decision on October 29, Chinese company CNGR Advanced Material announced to invest $10 billion in building a battery materials factory in Indonesia, showcasing China’s flexibility in global supply chain.

“Chinese companies are exploring these opportunities very proactively, not just to respond to the European barriers, as the surge in EV exports to Southeast Asia started to take place about the same time as to Europe,” Chim Lee said, highlighting the strong price competitiveness of Chinese EVs.

According to International Energy Agency, EVs from China accounted for 60% of the global market, hitting over 800 vehicles. A study by Rhodium Group, a U.S. consulting firm, found that even if the duties come in at 30%, some China-based producers will still be able to generate comfortable profit margins on the cars they export to Europe because of the substantial cost advantages they enjoy.

U.S. President-Elect Trump to exacerbate fragmentation

Having been long positioning itself as a critical ally of the US, EU has been backed by a “unified front” with the US in its China policy, which is subject to reversal as “American-first” agenda is expected to prevail over US-EU alignment under the presidency of newly-elected Donald Trump.

“When Trump returns to the White House, the US will probably pursue a more isolationist approach in its foreign policy. There will be not as much trans-Atlantic cooperation when it comes to supply chain security, trade, and critical technologies”, Chim Lee said.

On the European side, he said, there will be a stronger push within the EU for what some politicians call “strategic autonomy”. “There will be stronger emphasis to look at its own supply chain. There have been discussions on these topics already regardless what happens in the US as we have seen the EU has its own Critical Raw Materials Act and the European Green Deal. These competition dynamics is also about having its own industrial policy vis-a-vis that of the US no matter who is in the White House,” Lee said.

“Looking at some of the recent elections, we do see that green policies are increasingly less popular whereas re-developing the manufacturing capabilities remains a very important goal. In the coming years, I think when it comes to EVs, there will be stronger voices for localized production and re-industrializion in Europe”, Lee said.