Deloitte Perspective: what is the impact of EU tariffs on Electric Vehicles in China?

29 Oct., in Brussels, the European Commission brought its anti-subsidy investigation into China’s Electric Vehicles (EVs) to a close. It announced to impose countervailing duties of up to 45% on EV imports from China over a period of five years. What implications does this have for the automotive industry’s market landscape? How should Chinese enterprises going overseas make strategic adjustments to navigate their future paths effectively?

In light of these developments, Dolly Zhang, National Leader of Customs and Global Trade Advisory Services at Deloitte China Tax & Business Advisory, was invited by CGTN (China Global Television Network) in an interview to share her professional insights on the far-reaching impact of the countervailing duties on Chinese automakers and the broader EV industry, as well as the challenges and opportunities presented by this new trade dynamic.

TV Program Interview Clips
Video source: CGTN

Dolly has also taken a deep dive in analyzing the implications of these newly imposed countervailing duties:

Q1: What prompted the European Commission's countervailing investigation into Chinese EVs?

The investigation was driven by a concern of the increasing imports of Chinese battery electric vehicle into the European Union.

Chinese automotive industry has seized opportunity of the global push towards decarbonization, and rapidly expanded its international presence, driven by the electrification trend. The European Union has become a pivotal growth market for Chinese battery electric vehicle (BEV) exports. For instance, based on the data released by the European Commission, in 2020, China exported a total of about 190,000 BEVs, of which 17.4% were exported to the EU. By 2022, this figure increased to roughly 940,000 units, with the proportion exported to the EU rising to 34.7%.

The rapid growth of China’s BEV industry has raised concerns within the EU. On 4 October 2023, announcing the commencement of a countervailing proceeding regarding imports of new battery electronic vehicles (BEV) originating from China.

This investigation marks a rare instance where the European Commission has self-initiated a countervailing proceeding without a complaint from third party.

On 4 July 2024, the European Commission issued a preliminary determination imposing provisional countervailing duties on Chinese-origin BEVs, effective from 5 July 2024, with rates ranging from 17.4% to 37.6%. The disclosure of the final determination, published on 20 August 2024, set the rates ranging from 17% to 36.3% for most affected Chinese automakers. On 29 Oct., the European Commission announced the imposition of definitive countervailing duties on imports of BEVs, with effect from 30 October 2024, and the rates ranging from 17% to 35.3% for most affected Chinese automakers.

China and the European Union continue negotiations aimed at mitigating the impact on Chinese enterprises through solutions such as price commitments.

As an introduction, anti-dumping and countervailing investigations are commonly used trade remedies by the European Union. Countervailing investigations seek to counteract subsidy practices that are found to cause economic injury to European Union industries. The so-called subsidy practices include financial or credit support that enables companies to lower prices and enhance their market competitiveness. The European Commission is the authority responsible for conducting anti-dumping and countervailing investigations.

The European Commission has a history of conducting trade remedies on Chinese products. Since 2010, the European Commission has conducted 18 countervailing investigations against Chinese products, with only 6 cases concluded without measures, indicating that the majority have led to the imposition of countervailing tariffs.

The application of countervailing tariffs typically affects businesses for a minimum of 5 years and may continue after a “sunset review,” if such review concludes that the tariffs need to be maintained thereafter.

Q2: How do you think the new EU tariffs on Chinese EVs will shake things up for Chinese carmakers in Europe?

Although the new tariffs imposed by the European present a speed bump for Chinese EVs, Chinese EV manufacturers’ commitment to growth, quality and advanced technology, signals a steady course towards a greener and more sustainable horizon in the European automobile marketplace.

In short term, the imposition of countervailing tariff, with a rate between 17% and 35.3% on top of the 10% normal tariff, could markedly affect the price competitiveness of Chinese EVs in the European market. Should Chinese EV carmakers choose to pass the extra costs onto consumers or absorb themselves by trimming profit margins, their price advantage will inevitably wane in the immediate term.

In the medium term, it is important to acknowledge that if countervailing measures do not achieve the desired outcomes, the European Commission could consider revising the measures or exploring alternative trade remedy measures. This could involve additional anti-dumping investigations, which are more frequently utilized and often impose higher tariff rates. Moreover, it should be closely monitored whether other countries and regions might follow suit and launch their own investigation on Chinese EVs.

Despite these hurdles, in the long term we are confident that the application of countervailing tariffs will not deter Chinese EV manufacturers from pursuing opportunities in the European market. This confidence is grounded based on three key factors. Firstly, Europe remains one of the largest EV markets. Secondly, Chinese EV manufacturers have achieved a first-mover advantage through rapid advancements in technology and a robust supply chain ecosystem. Their ability to offer diverse and innovative products may differentiate themselves from traditional brands. Additionally, the high domestic economic costs in Europe afford Chinese manufacturers a competitive edge.

Q3: What strategies should Chinese EV manufacturers adopt to stay competitive in the European

To remain competitive in the European market, Chinese EV manufacturers must establish overseas capabilities across the entire value chain.

A recent report by Deloitte addresses the globalization efforts of Chinese automotive manufacturers, highlighting four key factors to sustainable growth in international markets. Of particular significance in light of rising trade remedies is the need to accelerate expansion by leveraging cooperative ecosystems and global supply chains.

In the near term, Chinese EV manufacturers should prioritize the establishment and strengthening of local cooperative ecosystems. Over the long haul, they should aim to construct their own overseas value chains and consider adopting “China +1” or “China +N” strategies to develop a more agile and globally diversified supply chain.

We have noted that Chinese EV manufacturers are actively accelerating the setup of production facilities across various overseas locations. They are engaging with multinational corporations to establish strategic collaborations and form joint ventures.

This strategic shift indicates a progression beyond mere exporting vehicles. Chinese manufacturers are now focusing on a comprehensive international market expansion, establishing localized systems, and embedding themselves within the global industrial chain. This transition represents a significant shift from traditional trading practices to a more integrated model of overseas investment. As such, it is important to undertake a rigorous and comprehensive feasibility study, covering aspects such as strategic planning, sustainability, cybersecurity, taxation, and others. Specifically, companies must develop and refine early warning systems to anticipate trade remedies (such as anti-circumvention probes) , preparing to respond effectively to such investigations.

This strategic shift indicates a progression beyond mere exporting vehicles. Chinese manufacturers are now focusing on a comprehensive international market expansion, establishing localized systems, and embedding themselves within the global industrial chain. This transition represents a significant shift from traditional trading practices to a more integrated model of overseas investment. As such, it is imperative to undertake a rigorous and comprehensive feasibility study, covering aspects such as strategic planning, sustainability, cybersecurity, taxation, and others. Specifically, companies should develop and refine early warning systems for anti-circumvention investigations, preparing to respond effectively to such inquiries.

Q4: Besides the tariffs, what other rules or changes should Chinese carmakers be ready for in the European market?

In addition to the tariff barrier, Chinese automakers entering the European market must also anticipate and prepare for a range of non-tariff rules and regulatory changes. For example:

• The EU Foreign Subsidies Regulation could subject Chinese EV companies to closer examination and potential action by EU authorities in the context of mergers, acquisitions, joint ventures, or public procurement processes.
• The EU’s stringent regulations concerning batteries and waste battery management, which enforce rigorous carbon emission assessment criteria throughout the battery lifecycle.
• Other critical regulations include the Supply Chain Due Diligence and Corporate Sustainability Due Diligence, as well as the General Data Protection Regulation (GDPR).

Chinese automakers must be proactive in addressing these compliance challenges.

Q5: What is your long-term outlook for Chinese EV manufacturers in Europe?

For Chinese EV manufacturers, the European market is characterized as a coexistence of challenges and opportunities.

The European Union’s attempts to establish tariff barriers may necessitate strategic adjustments and global supply chain restructuring, however, they are less likely to stop the progress of Chinese automakers towards globalization. The long-term success of Chinese EV manufacturers in Europe would be based on their continued strengths in technology innovation, quality improvement, and adaptability to the challenges. If Chinese EV manufacturers can effectively address the challenges and seize the opportunities, they stand a good chance of achieving sustainable development and growth in the European market.

Contact:

Dolly Zhang
Partner, Customs and Global Trade Advisory Services
dozhang@deloittecn.com.cn
Tel: +8621 6141 1113