Editor's letter: Why Chinese EV tariffs could backfire on Europe

The European Commission’s four-week countdown to impose additional tariffs as large as 38% on Chinese electric cars could ultimately do more harm than good to European car makers.

While the EU tariffs may protect European car makers in the short term from a price war with lower-cost Chinese cars in Europe, and in the medium to long term encourage more European production of Chinese electric cars that would be bring significant investment and jobs to the region, the threat of retaliatory tariffs in China would hurt profit margins and thus slow down investment in the EV development of Europe's own.

Beijing has already made such threats. "China will take all necessary measures to firmly safeguard its legitimate rights and interests," Lin Jian, the Chinese foreign ministry's spokesperson, said in response to the European Commission's report.

A tariff aimed specifically at large combustion-engined cars that European car makers still make considerable hay on in China has been mooted. So it's unsurprising that the premium giants of the German car industry have all spoken out against the EU tariffs.

"The true test from today's announcement will be whether Beijing will retaliate in kind, or come to an amicable solution," Will Roberts of research firm Rho Motion told Reuters. "Europe's manufacturers still rely on the Chinese market, so declining profits from the East would only slow their ability to transition effectively."

The report itself makes for remarkable reading into just how great an advantage Chinese car makers enjoy on cost and state support.

It reveals that Chinese car makers gain state support at every stage of an EV's manufacture, from mining the raw materials in the batteries to the shipping containers that take them to Europe. There are tax breaks and other financial support measures every step of the way.

It's no wonder, then, that the sentiment among analysts is that Chinese electric cars will still enjoy a cost advantage and bigger profit margins over European electric cars even if tariffs are imposed.

Citi analysts told the FT that BYD could still expect profit margins of 8% even after being hit with its specific 17.4% tariff, which is a greater profit margin than it enjoys in its domestic market.

It remains to be seen whether the UK will follow the EU's lead, but this will not be a serious issue in the general election and it is unlikely to be an immediate priority for a new government. One European executive told Autocar it was inevitable the UK would follow suit, given the close policy relationship between the UK and EU in the automotive sector.

The Chinese companies now have four weeks to respond to the European Commission's report. However, given the lack of cooperation from some car makers, China's language in response and the detail and extensiveness of the European report that took nine months to compile, it’s hard to see how this plays out any other way than tariffs.

While it is bold action from the European Commission and might appear necessary at face value, the widespread dissatisfaction from European car makers in response could make this a case of 'be careful what you wish for'.

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