A. PREDICTION

The European Commission investigation into Chinese electric vehicle subsidies seems like a suspenseful thriller, but don’t be fooled—predicting its outcome is oddly certain.

Despite the flashy presentations by Frau President Ursula von der Leyen (VDL), navigating the myriad factors shaping its potential trajectory and the inherent complexity of its attainment, one would expect a cautious approach.

But no! The answer seems to be written in bold, even if deciphering feels like solving a cryptic crossword: yes, we can. It is going to be as straightforward as catching a fish in a barrel—highly successful:

• There is a 90 % chance that the EU will refrain from imposing extra tariffs on Chinese EVs throughout the ongoing anti-subsidy proceeding.

Let’s delve into the reasons behind this forecast.

B. INTRODUCTION

The EU inquiry serves as just one piece of the puzzle in the European broader strategy to confront the rising dominance of Chinese companies in the global electric vehicle (EV) market. The goal seems to establish a EU mechanism to levy supplementary taxes, currently set at 10 %, to counteract “artificial” market distortions caused by “huge state subsidies”.

The actual paramount concern is the profound impact anticipated to resonate across Europe in the years ahead. An effort to ensure a level playing field for European automakers, as their companies would allegedly be at a disadvantage.

However, the European Commission (EC) appeared tempted to use the investigation for political purposes, aiming to appease certain member states and court favor with the White House. This inclination was evident during the “State of the Union” address on September 13, 2023, where the investigation under scrutiny took center stage. VDL justified this stance by stating, “Europe is open for competition. Not for a race to the bottom”.

B1. Could This Move Be Framed as the Last Alignment with the US Policy?

One might very well think that. The measure certainly fits within the broader framework of American foreign policy for Europe. As VDL contemplates her future in European politics, she may be considering roles tied to Washington’s sphere of influence if she has/opts to depart.

However, if she is able/chooses to remain as President of the EC, seeking support from the Franco-German friendship could prove challenging, particularly given potential resistance from Germany. To strengthen this remote yet open perspective, VDL ultimately decided to align herself with these two foremost EU member states.

Paris and Berlin have thrown their weight behind the probe, with France arguing that the subsidies breach WTO regulations and Germany describing China’s engagements as unfair competition. Notably, despite France’s smaller auto industry, President Macron actively advocates for the measure, urging VDL to take a stand.

Meanwhile, major German car manufacturers heavily depend on the Chinese market, rendering them vulnerable. Germany’s auto sector contributes significantly to its GDP—10 %—and employs a substantial workforce—over 900,000 workers—. Both countries risk repercussions should China retaliate with economic coercion.

VDL’s decision appears, therefore, politically strategic but potentially conflicting with EU trade, industrial, and climate policies. This perspective gains further complexity when we factor in President Biden’s influence on the EU market through the Inflation Reduction Act (IRA). A legislation allocating $369 billion in state aid for various sectors, including clean energy, critical raw materials, and electric batteries, affecting every aspect of the supply chain. Furthermore, the IRA incentivizes US vehicle tax credits of up to $7,500, favoring American carmakers disproportionately.

To lend more credibility to her announcement, VDL might have entertained the idea of imposing tariffs on US green products benefiting from state subsidies. You know, just to keep things fair and square.

B2. But, Are Truly Chinese Taking Advantage of Everybody Else?

More accurately, China seems to have capitalized on the missteps of others.

Looking back a decade, the EV industry has evolved into a cornerstone of major international players’ renewable transition and green energy strategy. Its significance extends far beyond mere strategic competition to encompass geopolitics.

During this time, the global automotive industry underwent a seismic transformation, notably with China emerging as a dominant force in the EVs market. Surpassing traditional leaders such as Japan, Europe, and the US, China now reigns as the world’s largest EV manufacturer. This meteoric rise is credited to a blend of state-driven across all levels, top-down industrial policymaking and subsequent mobilization of private capital and investment. As a result, the Chinese industry has experienced a swift increase in the production of cost-effective, high-quality, and accessible EVs.

Meanwhile, European car manufacturers faced significant hurdles in China. Initially, they encountered stagnation, followed by a decline, particularly in specific segments. As China ramped up its EV production, European automakers grappled to sustain their foothold in the market, underscoring China’s dominance in EV manufacturing, intensifying competition and reshaping the industry’s landscape.

Nevertheless, the narrative took a turn in 2020 as the EV sector embarked on a game-changing journey. Geopolitical tensions began to loom over the industry, while China contended with waning domestic demand despite solidifying its status as the world’s largest EV exporter. The COVID-19 pandemic further exacerbated economic challenges, and within the EU, discussions of protective measures on ‘economic security’ in strategic sectors where there were strong vulnerabilities—framed as the “de-risking” strategy—posed potential barriers for Chinese companies seeking access to European markets.

Let’s break it down step by step. First, let’s analyze why this forecast rests on six crucial factors.

C. CRITICAL ANALYSIS: FORECASTING SIX FACTORS

C1. Should Chinese EVs Be Deemed a Genuine Threat to Europe?

Not an immediate red alert or in the near future, but observing further down the road, they might start raising eyebrows.

Indeed, according to the latest insights from EV-volumes.com, China took the global stage by storm in 2022, making up a whopping 64 % of the global volume producing 6.7 million EV units. Interestingly, of the 580,000 EVs exported from China, a significant chunk, totaling 407,000, proudly sported Western brand names. Quite the unexpected twist, isn’t it?

This points to two seemingly contradictory situations:

Firstly, major European automakers, who have established production facilities in China, might find now themselves in a precarious position with the EC probe, as Chinese-manufactured EVs mainly bear Western brand names.

Secondly, despite gaining some traction in Europe, Chinese brands have yet to establish dominance, holding only a modest market share of around 5 %. However, projections suggest that this figure could significantly rise to between 9-18 % by 2025, potentially impacting domestic sales.

At this juncture, it’s imperative to acknowledge that the EC probe primarily seeks to scrutinize past events rather than predict future outcomes (“the investigation period” spans from October 1, 2022, to September 30, 2023). Thus, claims of substantial damage inflicted may be, to put it mildly, overstated.

The European market’s lag allowed China to not just dominate EVs, but also seize control of battery production and EV supply chains. Chinese companies dominate with a staggering 60 % the global market for battery cell production; China’s unchallenged dominance, spanning mining and possession of critical raw materials, mineral processing, and final manufacturing, is supported as well by subsidies and state control. And Chinese batteries are more affordable than European ones.

Strikingly, these pressing concerns appeared to have slipped past the EC’s radar at the time, even though Europe’s lack of significant players leaves it vulnerable due to its dependence on China. Is the EU’s dependency on China so deeply ingrained that it lacks the courage to confront it with a probe, given its reliance on Chinese batteries for its own EVs? These contradictions serve ample food for thought in forthcoming essays. Yet, the contradiction is apparent.

All in all, the EC must prioritize proactive industrial strategies over relying on sanctions as a band-aid solution to cover up any delays in response. The EU grapples with a critical dilemma in shaping its EV strategy, which should extend beyond simply imposing sanctions on others.

C2. Roadblocks Ahead: the Data Maze

The anti-subsidy proceeding commences formally with a Notice published on October 4, 2023. The EC asserts that

“On the basis of publicly available information, there is sufficient evidence demonstrating that imports of the product under investigation originating in the People’s Republic of China benefit from countervailable subsidies provided by the Government of the People’s Republic of China”.

First of all, the interplay between “publicly available information”, “sufficient evidence” and “subsidies provided by the Government of the PRC” creates a remarkably intricate web that is challenging to unravel.

Obtaining such data publicly in China poses significant impediments, especially for foreign entities or individuals. China enforces strict procedures regarding the release of government data, particularly on sensitive topics like subsidies, economic policies, and industry-specific information. Accessing data typically involves navigating complex bureaucratic processes, with requests often requiring multiple layers of government approval, leading to delays or denials.

Moreover, certain topics, such as subsidies, may be deemed politically sensitive, making public administrations hesitant to disclose data that could cast the administration in a negative light. Likewise, local governments may adhere to their own regulations and practices regarding data disclosure, adding further complexity. In cases of denied or restricted access to information, there may be limited avenues for appeal or legal action, especially for foreign entities or individuals.

Therefore, obtaining precise data on these subsidies may prove unbearable for the EU. Consequently, the EC has first opted to send detailed questionnaires to “all exporting producers”, requiring them to complete lengthy forms.

One might question whether the producers required to provide information will be able to meet the EC’s demands. And how this information can be deemed accurate without the affected party expressing their position.

China’s subsidy policies operate in a decentralized manner, with numerous local and regional entities administering assistance programs. The country’s expansive size and decentralized governance structure result in varying levels of data availability and transparency across different regions. Each entity may offer assistance to different companies for diverse reasons and based on specific criteria. As a result, accessing comprehensive and accurate data on subsidies demands routing through elusive information sources.

The opacity offers scant insight into decision-making at local and regional levels, further exacerbated by potential language barriers in the event data is obtained. Moreover, political considerations may influence subsidy allocation, possibly favoring specific companies with ties to local Chinese authorities, who may not readily cooperate. These factors heighten the already daunting task of obtaining accurate and comprehensive data.

Furthermore, even if some data becomes accessible, discrepancies in reporting standards and data collection methodologies across different regions may impede the EU’s capacity to conduct thorough analysis and comparisons. The vast scale and complexity of China’s EV market aggravate this challenge, with thousands of subsidiary companies potentially eligible for subsidies. Additionally, the regulatory framework evolves rapidly and lacks Western-style rule of law, including checks and balances and separation of powers. Consequently, external observers may struggle to stay updated on developments.

Hence, the lack of transparency in China’s subsidy allocation process adds another layer of complexity for the EU. The EC Notice provides no indication of the method or means by which they intend to collect the data otherwise.

Essentially, if the probe is inadequately constructed and lacks a strong foundation, the consequences could be far-reaching. They may include losing the case, damaging credibility, and beyond. This could manifest as strained diplomatic relations, diminished trust among EU states and stakeholders, tarnishing the EU’s reputation as a fair arbiter. It could also undercut the effectiveness of future regulatory measures and investigations by the EU.

This underscores the critical importance of upholding the “right to good administration”, ensuring procedural fairness in imposing sanctions. Without proper adherence to this principle, the integrity of the process and the legitimacy of the outcomes could be called into question, potentially undermining trust in EU institutions and eroding confidence in the justice system.

Preventively, the Ministry of Commerce of China stated that “the EU launched this anti-subsidy investigation based only on subjective assumptions” and criticized the “very short period of time and failed to provide effective consultation materials, which seriously damaged China's rights”.

How the EC plans to present a case that is impartial, fair, and timely under the circumstances described remains a mystery.

C3. Fearing Retaliation: A Concerning Reality

Forward-thinking leaders frequently anticipate the adverse consequences of their choices and their subsequent effects.

The self-proclaimed “geopolitical” EC is treading on precarious ground as it ponders how China views the ongoing probe. Could China construe this investigation as the prelude to a new trade war? What if China perceives the measure as a challenge to its sovereignty and interests? At first, China expressed “high concern and strong dissatisfaction,” foreseeing a detrimental impact on China-EU trade relations. They labeled it as “naked protectionism” and vow to “firmly safeguard” the interests of Chinese companies.

The uncertainty placed the EU in a precarious position, requiring a balance between diplomatic engagements and economic ties with one of its largest trading partners. Foreseeing potential retaliations or a further escalation of tensions posed a significant challenge for EU policymakers to address.

Undoubtedly, the prospect of imposing increased tariffs on Chinese EVs naturally raised concerns for the EC about possible retaliatory actions from China, which could further escalate trade tensions. Before proceeding with any such actions, meticulous consideration is imperative, considering China’s track record of employing inventive and strategic responses when it deems necessary. This accentuates the EC’s responsibility to approach the situation with careful consideration and foresight.

China wasted no time in taking action. The implementation of export controls on graphite, effective December 1, 2023, carries considerable ramifications, particularly for Europe, which depends entirely on this material as a fundamental component for lithium-ion batteries. Prior to the imposition of this ban, Europe was already forecasted to meet just 30 % of its projected graphite demand by 2033.

This action marks a critical juncture in the continent’s quest for sustainable energy and innovation, posing a direct threat to the core of the EV supply chain. It underscores how even a seemingly straightforward move can disrupt entire supply chains. The significance of key battery components’ availability and accessibility becomes paramount, especially in scenarios where domestic alternatives are scarce, diversification efforts are insufficient, or agreements with potential partners for mining and processing such materials are non-existent.

Hence, China’s measures could trigger a reassessment of the Union’s strategies and dependencies, revealing broader geopolitical implications. This is especially concerning given that EC data reveals the EU’s complete reliance on foreign suppliers for 14 out of 27 critical raw materials and is 95 % dependent on three additional critical raw materials.

Here’s a conundrum: Who reigns supreme with an oligopoly, and sometimes even a monopoly, over the possession and refining of these vital materials indispensable for the green transition? The EC confesses: “The supply of many critical raw materials is highly concentrated. For example, China provides 100 % of the EU’s supply of heavy rare earth elements”.

This brings to light neodymium, a material reliant on rare earth metals essential for EV motors, of which China owns 97 % of the global market share. Back in 2011, China enforced export quotas on neodymium, resulting in a temporary price surge of 700 %. Quite the unexpected turn, right? It’s almost comical, if it weren’t for the gravity of the situation.

China’s potential response may encompass diplomatic protests, economic pressures, or other retaliatory measures, both those already initiated and those awaiting implementation. The nature of the response will hinge on China’s evaluation of the measures’ effects and its overarching strategic goals, or the continuation of the probe. Past incidents, such as Lithuania permitting Taiwan to open a diplomatic office, Australia’s call for a COVID-19 investigation, or the recent restriction on gallium and germanium exports in retaliation against US, Dutch, and Japanese semiconductor control measures, demonstrate that such actions typically result in punitive measures.

C4. The State Aid Minefield

If China opts for a legalistic approach, it may choose to escalate the matter to the World Trade Organization (WTO). In doing so, China could potentially argue that the issue is political in nature rather than strictly economic, thereby seeking to challenge the validity of the investigation under WTO regulations.

However, an alternative perspective may center on the substantial EU state aids provided following the COVID-19 pandemic. In response to the economic challenges posed by the crisis, relaxed state aid regulations were implemented to support struggling businesses. Countries like Germany and France, with significant resources, have provided extensive support to their companies in the interest of economic stability. However, this approach has sparked concerns about potential single market imbalances and beyond, in particular, if they distort international trade and competition, causing adverse effects to other WTO members, namely, China.

A Financial Times report highlights a considerable increase in EU state aid expenditure, rising from €103 billion in 2015 to €334 billion in 2021. Moreover, between March 2022 and August 2023, Europe approved an additional €733 billion in state support.

Interestingly, concerning the ongoing investigation under examination, Europe vindicates significant aids under the guise of investments in the “just energy transition” policy and bolstered energy security as part of the Green Deal initiative.

What is more, various EU member states, such as Germany, France, and Spain, have already introduced subsidies to incentivize the purchase of EVs, with the goal of accelerating the transition to environmentally friendly transportation and reducing carbon emissions. While demonstrating a dedication to sustainable mobility, these initiatives could contradict the position that the EC accuses China of.

Finally, on January 8, 2024, the European Commission greenlit a significant state aid package of 902 million euros from Germany. This financial support aims to bolster Northvolt in its endeavor to set up an EV battery production facility. Notably, this decision introduces the use of a mechanism known as “matching aids”, reflecting a proactive approach to preventing their diversion to non-EU countries. The potential for third parties to interpret these actions as subsidies distorting the free market remains uncertain and open to interpretation, for the time being.

In essence, while the EU’s investigation into Chinese EV subsidies is purportedly aimed at safeguarding the integrity of its market and protecting the interests of its automotive industry, the coherence of this objective, particularly in light of its own actions, remains legally uncertain and subject to question.

C5. Balancing Interdependence and Climate Objectives in EU-China EV Trade

While the green argument may have been briefly explored upon previously, it’s essential to ensure it receives further attention, particularly considering the issue of consumer affordability, a critical factor in driving the transition to EVs.

The European climate objectives face jeopardy due to potential trade disruptions. Introducing additional taxes on Chinese EVs could impede progress toward ambitious European targets by restricting access to cleaner—and more cost-effective—EVs.

In this context, the probe directly conflicts with three core EU goals: advancing the European Green Deal and achieving decarbonization, promoting climate-friendly mobility (which contradicts the 2035 combustion engine phase-out), and ensuring affordable, competitive access for European consumers.

This is especially critical given the substantial 40 % price differential between European and Chinese EVs. Compounded by challenges such as inflation and the sluggish growth experienced by EU households, addressing these discrepancies becomes paramount in ensuring equitable access to sustainable transportation options.

C6. Probing the Past, Gauging the Future: Timing and Previous Investigations

Several inconsistencies arise concerning timing, context, and historical precedents, all of which warrant careful consideration.

Firstly, the investigation’s ex officio nature, initiated by the EC, underscores its proactive stance, independent of automotive industry demands. Notably, there are no precedents for an EC-initiated investigation of this magnitude without specific complaints from primary stakeholders, such as EV manufacturers. Interestingly, major brands, all of which produce EVs in China, have not voiced concrete objections.

This implies that the investigation may be more speculative than responsive to established evidence of harm. Essentially, it appears to be politically motivated rather than solely driven by trade and economic considerations. This introduces a level of uncertainty surrounding the outcome.

Secondly, the EU’s historical inclination towards cautious approaches, exemplified by past instances like the probe initiated on Chinese photovoltaic solar panels a decade earlier, suggests a preference for measured and deliberate negotiation on agreed trade measures. Europe paid a high price in that scenario: while innovation was European, the EU market fell victim to Chinese subsidized production. However, this alike investigation had to be prematurely closed due to the mediation of German Chancellor Merkel.

Thirdly, the investigation’s timing neatly coincides with the imminent European Parliament elections in June 2024. These elections hold the promise of reshaping the next EC, heralding the possibility of new political visions and priorities that could diverge from the current leadership triumvirate of VDL, Michel, and Borrell.

The potential for a more complex European Parliament raises intriguing questions about the future EC’s stance. Will it lean towards alignment with the US or adopt a more neutral approach, possibly favoring agreements with China? Furthermore, the next EU leaders are likely to prioritize stability in a year when Donald Trump could be re-elected POTUS, steering clear of contentious decisions that could carry significant political repercussions.

Fourthly, the anticipated delivery date for the “Definitive Measures” is November 2, 2024. Consequently, the main masterminds will likely not be in place when decisive actions are required. The new EC-designated Commissioners will undoubtedly weigh the potential for Chinese retaliations, which could impact various sectors and undermine the outset of their EC’s mandate.

They will need to assess whether the investigation’s legitimacy hinges on the EC’s response to formal complaints about revealed market distortions, particularly concerning EVs being sold below production cost. This consideration requires substantial support from both industry stakeholders and member states, presenting a formidable challenge. Negotiation may emerge as the pragmatic solution as the EC navigates a problem inherited from its predecessors, one that lacks straightforward solutions.

D. PROPOSALS FOR EU EV POLICY IMPROVEMENT AMIDST ENHANCED CHINA-EU RELATIONS

D1. Europe must cultivate its own strategies to enhance EV supply chains, foster the production of cost-competitive EVs, and safeguard and bolster the automotive sector and associated employment opportunities. This entails investing in research and development to innovate within the EV ecosystem, incentivizing sustainable manufacturing practices, and establishing robust regulatory frameworks to ensure fair competition. Additionally, fostering collaboration between industry players, government agencies, and academic institutions can facilitate knowledge-sharing and drive collective efforts.

D2. EU leaders must carefully assess the potential ramifications of Chinese bans on European vehicles and companies, particularly in terms of their impact on European deindustrialization. Priority should be placed on fortifying the EV industrial strategy, rather than risking the affordability of EV market options and complicating the green transition.

D3. Amidst the challenges posed by Chinese innovation, the upcoming EC must prioritize recalibrating the EU’s industrial and investment strategies. This involves an emphasis on enhancing EV technology, fostering green innovation, and championing environmental excellence, rather than resorting to protectionism. Furthermore, initiatives outlined in the Critical Raw Materials Act, responsible de-risking measures, and revisions to state aid prohibitions are essential for bolstering global competitiveness across industries.

D4. A more expedient approach might involve negotiating export quantity quotas for EVs, considering the European automotive industry’s heavy dependence on the Chinese market. This responsibility should be entrusted to trade negotiators rather than representatives motivated solely by personal and political interests, safeguarding more effectively the automotive sector’s interests.

E. CONCLUSION

The anticipated culmination of the EC investigation is poised to present a political setback, as EU policymakers navigate the complex interplay of economic imperatives, environmental obligations, and geopolitical realities. This process underscores the intricate nuances of the China-EU relationship within the dynamic dominion of electric mobility.

As Europe grapples with the imperative to safeguard industrial interests, promote sustainable innovation, and navigate global trade dynamics, the outcome of this investigation will serve as a litmus test for the EU’s ability to strike a balance between geopolitical competing priorities while shaping the future of electric mobility on the global stage.