China Accuses EU of ‘Naked Protectionism’ in EV Aid Fight

China blasted the European Union’s probe into Beijing’s electric-car subsidies, as the battle to access the bloc’s growing market risks sparking a trade war between the two economic powerhouses.

(Bloomberg) — China blasted the European Union’s probe into Beijing’s electric-car subsidies, as the battle to access the bloc’s growing 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 EU’s relationship with China, the Commerce Ministry warned on Thursday. The EU said it’s 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.

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 EU as a bulwark against US challenges to the world’s second-largest economy. It also highlights the EU’s difficulties in fostering trade ties with China while also guarding against perceived supply chain and national security risks.

Read More: From Cheap Money to Tax Breaks, EVs in China Get a Lot of Love

The EU’s move is surprising and “counterproductive” to the overall relationship, according to Henry Wang Huiyao, founder of the Center for China and Globalization research group based in Beijing.

“It’s certainly not helping the trend in the relations that were gradually heading toward recovery,” he said. “The EU is a champion of multilateral rules. If they have an issue, they should go to the World Trade Organization.”

The EU’s threat of tariffs will likely cast a long shadow over the bloc’s talks in Beijing later this month. The EU’s executive vice president and trade chief, Valdis Dombrovskis, is making a trip to the capital to help 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. 

China’s EV market has been a rare bright spot in the country’s sputtering post-pandemic recovery, maintaining growth and bolstering exports. Sales of electric vehicles to the 27-nation trade bloc were worth 47% of the value of total exports in the sector last year and 44% in the first seven months of 2023, according to Chinese customs data.

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. 

Shares of leading Chinese EV makers fell slightly Thursday. BYD ended 1.2% lower in Hong Kong while SAIC Motor Corp., which owns MG, declined 0.3% onshore after paring some losses.

While electric-vehicle sales in the EU are still relatively small, demand has been growing quickly, and the bloc is keen to prevent a replay of what happened to Europe’s solar industry a decade ago, when local manufacturers failed to keep up with state-backed Chinese rival.

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 “huge state subsidies.” While it’s unclear how united the bloc is over the probe, Berlin said the EU’s executive arm had given it forewarning.

“I knew the commission was looking at it critically,” said Germany’s Economy Minister Robert Habeck. “There is a good relationship of trust and very close coordination with the commission on such issues.”

France had pushed the EU to take action in recent months and was pleased with the move. The block’s anti-subsidy instruments can be implemented faster than taking a case to the WTO and it was good von der Leyen was taking action, a French finance ministry official said, adding that Beijing’s reaction was excessive.

Read More: No Chinese EV Is Cheaper in Europe Than a Cut-Rate Renault Model

The probe has a roughly nine-month time frame, and there are strong chances it will result in new EU tariffs on Chinese EV imports. The Asian giant could face tariffs close to the 27.5% level already imposed by the US on Chinese EVs, according to a person familiar with the matter. 

Those levies could also hit non-Chinese carmakers. BMW AG imports its battery-powered iX3 to Europe from China, with Mini models made by a local partner due to follow next year. Tesla Inc. also exports cars from the country. 

For Chinese manufacturers, the dispute will weigh on the “growth outlook of companies with aggressive expansion plans in the EU, like BYD,” Morgan Stanley analysts including Tim Hsiao said in a note to clients.

What Bloomberg Opinion says:

“Over the past 12 months, Europe has woken up to the fact that China is now capable of building technologically sophisticated electric models. Rather than seeking political favors, European auto manufacturers should focus on improving their own competitiveness and developing EVs that consumers can actually afford.”

— Chris Bryant, columnist (Read the full article here.)

Chinese brands most likely to be hit hard are Zhejiang Geely Holding Group Co., which has the top Chinese presence in Europe, while BYD Co. and Nio Inc. are also pushing into the continent and starting to challenge market leaders Volkswagen AG, Tesla Inc. and Stellantis NV.

Read More: No Chinese EV Is Cheaper in Europe Than a Cut-Rate Renault Model

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. US 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 past experience of China dominating the steel and solar markets by exporting 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, the space is clear for foreign firms to dictate prices and standards,” she said.

–With assistance from Chunying Zhang, Jinshan Hong, Jasmine Ng, Richard Bravo, Elisabeth Behrmann, James Mayger, Fran Wang, Petra Sorge, Yujing Liu, Peter Vercoe and William H. Davis.

(Updates with comments from French official, additional context)

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