[SMM Analysis] What is the impact of the EU's tariff increase on Chinese car producers?

The European Commission announced the imposition of provisional countervailing duties on electric vehicles imported from China.

As part of its ongoing investigation, the Commission has provisionally concluded that the battery electric vehicles (BEV) value chain in China benefits from unfair subsidisation, which is causing a threat of economic injury to EU BEV producers. The investigation also examined the likely consequences and impact of measures on importers, users and consumers of BEVs in the EU.

Consequently, the Commission has reached out to Chinese authorities to discuss these findings and explore possible ways to resolve the issues identified in a WTO-compatible manner.

In this context, the Commission has pre-disclosed the level of provisional countervailing duties it would impose on imports of battery electric vehicles (‘BEVs') from China. Should discussions with Chinese authorities not lead to an effective solution, these provisional countervailing duties would be introduced from 4 July by a guarantee (in the form to be decided by customs in each Member State). They would be collected only if and when definitive duties are imposed.

The individual duties the Commission would apply to the three sampled Chinese producers would be:

• BYD: 17.4%;

• Geely: 20%; and

• SAIC: 38.1%.

Other BEV producers in China, which cooperated in the investigation but have not been sampled, would be subject to the following weighted average duty: 21%.

All other BEV producers in China which did not cooperate in the investigation would be subject to the following residual duty: 38.1%.

Procedure and next steps

On 4 October 2023, the Commission formally initiated an ex-officio anti-subsidy investigation on imports of battery electric vehicles for passengers originating in China. Any investigation shall be concluded within maximum 13 months of initiation. Provisional countervailing duties may be published by the Commission within 9 months after initiation (i.e. by 4 July at the latest). Definitive measures are to be imposed within 4 months after imposition of the provisional duties.

Following a substantiated request, one BEV producer in China – Tesla – may receive an individually calculated duty rate at the definitive stage. Any other company producing in China not selected in the final sample that wishes to have its particular situation investigated can ask for an accelerated review, in line with the basic anti-subsidy Regulation, just after imposition of definitive measures (i.e. 13 months after initiation). The deadline for concluding such a review is 9 months.

Official website disclosure of Q&A summary:

Would the proposed duties be added on top of the current import duties of 10%?

Yes, countervailing duties would be added on top of the ordinary import duty of 10% levied on imports of battery electric vehicles.

Is the level of duties sufficient to protect EU industry from injury?

The purpose of the provisional countervailing duties would be to remove the substantial unfair competitive advantage of Chinese battery electric vehicles (‘BEVs') producers due to the existence of unfair subsidy schemes in China. The duties would therefore aim to ensure that EU and Chinese industries compete on a level playing field. The aim is not to close the EU market to such imports.

How were the provisional countervailing duties calculated?

The provisional duties are the result of an EU anti-subsidy investigation which revealed that the entire BEV value chain is heavily subsidised in China, and that imports of Chinese BEVs presented a threat of clearly foreseeable and imminent injury to EU industry.

The Commission analysed a large volume of evidence relating to each of the investigated companies and on this basis was able to calculate a level of provisional duties corresponding to the levels of subsidisation found in each case.

Is the EU examining the possibility of investigations into other countries?

We have not seen any evidence of a recent rapid rise in imports of BEVs from other countries. Therefore, we cannot substantiate the possibility of a threat of injury to EU BEV industry needed to trigger the initiation of an investigation.

Were Member States informed? What is their role?

Member States were informed at the same time as interested parties in the investigation.

Following the ordinary trade defence procedure, Member States do not vote on the level of provisional countervailing duties. However, they will be briefed on the provisional findings of the Commission ahead of their publication and will vote afterwards, by simple majority pursuant to the advisory procedure under comitology rules. This vote will follow the so-called advisory procedure (no binding effect).

At definitive stage, before the imposition of definitive measures, Member States will vote pursuant to the examination procedure under comitology rules. This vote will have binding effect. In order to oppose the measures, qualified majority is needed, as for approval. However, measures can be imposed even if the qualified majority is not reached, provided the votes against do not reach a simple majority.

Will the duties be collected retroactively?

The pre-disclosure is limited to informing interested parties about the level of the provisional countervailing duties. Any potential retroactive collection of the duties on imports that is registered as of 90 days prior to the date of imposition of provisional measures (e.g. as of 5 April 2024, if duties enter into force on 5 July 2024) would be addressed at a later stage in the investigation, which would decide whether legal conditions for such a retroactive collection are met.

Are the duties on electric vehicles expected to negatively affect the green transition?

A successful green transition worldwide will be achieved most effectively and rapidly through fair competition and adherence to global rules. While the EU welcomes imports of goods necessary for the green transition and to achieve the relevant targets, these imports must compete on fair terms with the corresponding EU goods. If these imports are unfairly subsidised, they unduly hurt the EU industry and ultimately undermine the achievement of these goals.

The battery electric vehicle sector is crucial for the EU to achieve its green transition and ensure that by 2035 all new cars registered in Europe are zero-emission. We must therefore prevent strategic dependencies on foreign partners in this critical sector.

The EU's green transition cannot be based on unfair imports at the expense of EU industry.

Event Analysis

The proposed tariffs will be added on top of the current 10% import tariff, resulting in the actual tariffs faced by Chinese car producers as follows: (1) Sampled companies: BYD 27.4%, Geely 30%, SAIC 48.1%; (2) 31% for non-sampled companies participating in the survey, such as Tesla (which may receive a separate tax rate later), NIO, XPeng, Leap Motor, Changan, Great Wall, Chery, JAC, FAW, etc.; (3) 48.1% for non-cooperative companies.

Analysis: 1) The scope of this tariff increase is for pure electric vehicles and does not involve PHEVs. This indicates that Europe is firmly committed to the pure electric route, concerned about local consumers' over-reliance on overseas pure electric vehicle producers and the inability of local producers to compete with Chinese producers due to high costs. PHEVs may become a breakthrough for Chinese producers to make exports to Europe, with potential growth as a transitional product in Europe in the future.

2) The differences in tariffs imposed on car producers can be attributed to several factors. The main factor is price and sales volume, with producers having high sales and low prices currently facing higher tariffs. The second factor is the degree of cooperation in the survey. The imposition of tariffs by EU aims to protect its BEV industry. As European producers are unable to reduce costs in the short term, imposing tariffs on Chinese producers to raise prices at least levels the playing field with European producers.

Impact

(1) Impact on car producers

In 2023, Chinese car producers (excluding Tesla) exported about 230,000 units to Europe, while Tesla is expected to export about 200,000 units, together accounting for 15% of the European market share, with a significant proportion from pure electric models. Among them, SAIC ranks first in exports, and the tariffs may have a negative impact on SAIC's future exports. According to SAIC's May production and sales report, exports in May were 88,000 units, with a cumulative decline of 7.26% YoY. The negative feedback on export data before the tariffs take effect has already become apparent.

According to the Kiel Institute's research conclusions, the EU's imposition of a 20% tariff on Chinese electric vehicles will lead to a significant trade shift, with the number of electric vehicles exported from China expected to decrease by 25%. SMM forecasts that this tariff increase will impact the exports of Chinese NEVs by about 100,000 units.

(2) Impact on battery demand

As of May 2024, the average battery capacity of pure electric models in 2024 is 55 kWh.

Assuming 100,000 units of electric vehicles are influenced, 5.5 GWh battery demand is expected to be impacted.

Statements from Relevant Stakeholders

BMW Group Chairman Zipse: The European Commission's proposal to impose temporary anti-subsidy tariffs on Chinese electric vehicles is a wrong decision. BMW Group firmly supports free trade.

Ola Källenius, Chairman of the Board of Management of Mercedes-Benz: We need to think about how Europe has achieved economic prosperity over the past few decades, not by relying on closed markets, but by relying on open markets.

Volkswagen Group: The tariff increase exacerbates weak demand in Europe. Volkswagen Group opposes the imposition of such "anti-subsidy tariffs," stating that "the negative impact of this decision outweighs any potential benefits for Europe, especially for the German automotive industry," and that "raising import tariffs could trigger a series of severe measures and countermeasures, leading to an escalation of trade conflicts."

Countermeasures

Returning to the original intention of the EU's tariff increase, it aims to protect the local automotive industry and achieve the transfer of the electric vehicle industry chain, thereby boosting European employment rates. The tariffs are not intended to completely block Chinese brands from entering Europe but to give European local industries time to grow.

Therefore, for Chinese car producers, gaining a share in Europe requires going global. Since China joined the WTO, the journey of automotive producers going global can be divided into three stages: the stage of joint ventures introducing advanced technology, the stage of automotive exports, and the stage of overseas factory construction. Against the backdrop of the EU's tariff increase and the push for localized supply, transitioning from automotive exports to overseas factory construction is also an inevitable trend.

Currently, some car producers with overseas layouts include:

To avoid tariff barriers and reduce logistics and transportation costs, BYD has planned five overseas production bases with a total capacity of 700,000 units. The Thailand base not only covers the Southeast Asian market but also exports to the UK and Australia. The Indonesia production base mainly meets the needs of the domestic market, the Hungary production base mainly covers the European market, the Uzbekistan base mainly meets the needs of the Central Asian market, and the Brazil production base mainly covers the Brazilian and South American markets. Chery's factory in Spain will start production of models such as Omoda in 2024 Q3 and Q4, with an expected annual production of 50,000 units by 2027, increasing to 150,000 units by 2029. SAIC Group and others are also actively planning factory construction in Europe.

As overseas production capacity is released in the future, the impact of European tariffs on the sales of Chinese car producers will diminish.