Europe wants affordable electric vehicles from China. But not at the cost of its own auto industry

The Biden administration is raising tariffs on Chinese EVs to 100% from the current 25% The U.S. currently imports very few Chinese cars, but like the European Commission, the administration worries that subsidies hurt domestic companies and cost jobs.

The U.S. tariffs block virtually all Chinese EV imports. In contrast, the European Union needs affordable electric cars from abroad to achieve its goals of cutting greenhouse gas emissions by 55% by 2030.

Chinese carmakers have learned to make electric vehicles cheaply amid ferocious price competition at home in the world's largest car market. BYD's Seal U Comfort model sells for the equivalent of 21,769 euros ($23,370) in China but 41,990 euros ($45,078) in Europe, according to Rhodium Group figures. The base model of BYD's compact Seagull, due to arrive in Europe next year, sells for the equivalent of around $10,000 in China.

As long as a competitive business environment is fair, cheaper Chinese cars benefit consumers and push European carmakers to lower their prices and improve their offerings, according to Niclas Poitiers, a trade expert at the Bruegel think tank in Brussels. “They are very cost-competitive and increase the pressure on other manufacturers that have been dragging their heels,” he said.

It’s the unfair access to subsidies that Europe objects to. “An EU green policy that would lead to the demise of domestic manufacturers because of unfair competition would not be politically sustainable,” Poitiers said.

In China's “market socialist” economy, state-owned companies play a leading role. The government also guides and supports privately owned companies to achieve Beijing's economic development goals.

For EVs, that includes orders for government fleets, low-interest loans from state-owned banks, cheap land for factories from local governments, tax breaks, and subsidized raw materials and parts from state-owned industries.

The various forms of financial help complicate the EU’s case because it’s difficult to gather data on some of the practices. The EU indicated it selected BYD, Geely and SAIC as a sample to calculate the duties. Other manufacturers in China that cooperated with the investigation but weren't sampled will face extra duties of 21%, while those that didn't cooperate will be hit with the 38.1% rate, the commission said.

Chinese cars are likely to cost more, reducing pressure on European carmakers to keep their prices down. But Chinese companies are able to make cars so cheaply they might still be able to sell at a profit, even with duties as high as 30%.

European carmakers that manufacture electric vehicles in China might wind up as collateral damage. They get some government support in China but less than their Chinese competitors.

Five of BYD's six models would still earn a profit in Europe even at a 30% tariff, according to Rhodium Group calculations. Meanwhile a China-made Tesla Model 3 would sell at a loss.

Duties at the 15-30% level could “wipe out the business model for foreign players such as BMW and Tesla, which are using China as a base for exporting to Europe,” the Rhodium Group said in a report.

China is almost certain to retaliate and to pressure European officials to negotiate. The China Chamber of Commerce to the EU warned that Beijing could raise duties on cars with engines larger than 2.5 liters, a move that could affect German luxury carmakers such as Volkswagen’s Porsche.

Beijing lashed out after the European Commission unveiled its plans. The higher tariffs are “a naked act of protectionism, creating and escalating trade friction, and ‘destroying fair competition’ in the name of ‘safeguarding fair competition,’" the Commerce Ministry said. It urged the EU to “rectify its wrongdoings immediately” and said China would “resolutely take all necessary measures,” without elaborating.

Yet the impact may be smaller than feared, according to analysts at research firm Sanford C. Bernstein.

Mercedes-Benz, BMW and Volkswagen now make most of the cars they sell in China at factories there. Only 2% of Volkswagen’s China sales are imports and thus vulnerable to higher tariffs; it’s 15% for BMW and 19% for Mercedes-Benz.

European cars at risk of getting slapped with Chinese tariffs tend to be luxury vehicles that bring juicy profits, like Mercedes' S-Class vehicles and BMW's X6 and X7. However, such cars cater to rich customers who might be inclined to pay higher prices “as long as their purchase behavior is not deemed to be unpatriotic,” the Bernstein analysts noted.

Over the longer term, Chinese carmakers could avoid tariffs by making cars in Europe. BYD is building a plant in Hungary, while Chery has a joint venture to build cars in Spain's Catalonia region.