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On May 14, 2024, the United States announced tariffs for thirteen imports from China, the most notable of these being the 100 percent duties imposed on Chinese electric vehicles (EVs). Prior to this, in October 2023, the European Union started an anti-subsidy investigation against Chinese EVs, sampling three large EV manufacturers: BYD, Geely, and SAIC. Approximately a month after the publication of the U.S. tariffs, on June 12, 2024, the European Commission preannounced that the investigation had been concluded and that tariffs will be imposed on EV imports from China. Preliminary tariffs will be imposed from July 4, and then permanent tariffs, which normally stay in place for five years, will have to be voted on in November.

The time proximity of the imposition of tariffs on Chinese EVs by both the United States and the European Union triggers an unavoidable yet premature connection between the two. Yet, the two types of tariffs could not be more different. They do not only differ in content but also and especially in purpose, and they are a good reflection of the different Transatlantic approaches to the issues China poses. Additionally, for the European Union the imposition of tariffs on EVs may present a pivotal moment in its relationship with China, which is not the case for the United States. To avoid an unnecessary escalation, it is important to clarify that the European Unions tariffs are not about geopolitical competition, nor about protectionism or containment, but are about the good old search for the level playing field, a longstanding pillar of the European Unions approach toward Chinaeven before the two became systemic rivals. The clarification will not be a guarantee against an escalation but highlights a fundamental distinction in purpose and thus in what it is the European Union is seeking. Considering that the European Commission has made clear that it is open to solving the issue via negotiations with China, that distinction deeply affects how the situation can be solved and what China and the European Union can do to address the core issue currently on the table: the lack of a level playing field.

Before diving into what differentiates U.S. and EU tariffs, it is, however, worth noticing three points of connection between the U.S. and EU tariffs. The first is that albeit with different motivations, they both adopted tariffsin the case of the European Union, it announced the intention to adopt tariffs. The second point concerns the imposition of tariffs following processes of investigation. The United States imposed new tariffs following the review of the tariffs imposed during the Trump administration, and the European Union may impose tariffs following an investigation into nonmarket practices adopted by China. Yet, the processes in the United States and the European Union clearly differ: in the United States, 13 tariffs have been imposed all together. In the European Union, each open investigation has a different angle as different tools are implemented, from trade defense instruments to the new foreign subsidies regulation. Thus, each investigation will provide its own result, which may or may not lead to tariffs against the items investigated. The European Unions process will also trigger different types of tariffs depending on the type of investigation. All in all, albeit differently, both the United States and the European Union did their homework before reaching a decision.

The third contact point between the two is the preemptive approach that both tariffs embody. True, there are nuances in the preemption related to imports of EVs. The United States only imports about 2 percent of total EV imports from China, while the European Union imports about 37 percent. Additionally, the European Union has seen a growth in imports in the past years that the United States has not. If Chinese EVs are left undisturbed, their market share in the European Union will be set to grow further. That is not a given for the U.S. market. That said, both the European Union and the United States are attempting to prevent a future where Chinese EVs will have occupied their respective markets that is not here yet. In a previous piece, the author highlighted how prevention rather than response is the new guiding principle in economic security, and the United States approach to EVs, but also the European Unions approach, has proven that to be right.

The United States imposed 100 percent tariffs on EVs along with a much longer list of 13 items, spanning from raw materials to components and final products. None of the other items have tariffs as high as those imposed on EVs, but the list is long and may grow in the future. The European Union, on the other hand, has announced much lower tariffs, and, for the moment, it has only announced tariffs on EVs without officially imposing them yet. The European Commission announced the imposition of 38.1 percent tariffs to be added to the 10 percent already in place. The tariffs are higher than expected for an anti-subsidy investigation, which normally imposes tariffs between around 15 and 25 percent. There are, however, some caveats. A lower tariff, 21 percent, will be imposed on companies that have collaborated during the investigation. Tesla is undergoing a separate investigation and different thresholds have been proposed for the three sampled companies: 17.4 percent for BYD, 20 percent for Geely, and that same 38.1 percent for SAIC.

The instrument chosen by the European Union to investigate Chinese EVs encapsulates the purpose of the European Unions action. The official issue is the subsidies that the Chinese EV sector has been receiving from the Chinese state. The argument is that those subsidies have allowed Chinese companies to produce cheaper items and, to a certain extent, granted those companies the global success that they are witnessing. By this reasoning, had China not provided the EV sector with state subsidies that facilitated its success, and had Chinese EVs been successful and widely present in the EU market anyway, the European Union would not have adopted the recently announced additional duties. This is, perhaps, a counterfactual that is difficult to imagine for a China so embedded in a system that promotes industrial sectors via state subsidies. But a thought exercise is needed to understand where the European Union is coming from with these tariffsessentially, not geopolitical competition, not protectionism, but the issue of the lack of a level playing field. And that alone puts miles between the motivations of the United States and the European Union with regard to the adoption of tariffs.

Opinions within the European Union, and even within EU institutions, may differ, and some may seek and perceive more protective goals rather than a level playing field in the duties against EVs. After all, concerns about the prosperity of the EU automotive sector have triggered the thinking around the issue and its investigation. However, ultimately, the importance of respect for the rules in the European Union trumps the more protective drives that may emerge more prominently in the United States actions. Additional proof of the fact that this is hardly a protectionist move lays in the quantity of the new tariffs. Unlike U.S. 100 percent tariffs, the maximum imposable tariff of 38.1 percent plus the 10 percent tariffs that already exist will still not shied European car manufacturers from Chinas competition, as proven in a report by the Rhodium Group.

To avoid tariffs, China has used a mix of carrots and sticks, offering to find a solution to the European Unions concerns while warning it of the consequences of its actions. The threats as well as the offers have been mostly directed to the European Union not only because, unlike in the case of the United States, China saw the possibility to change the outcome in the European Union, but also because the EU market is already an important one for Chinese EVs, and losing it would be painful. This is despite the fact that, again, the tariffs imposed by the European Union are unlikely to amount to a loss of the EU market for Chinese EV producers; rather, the tariffs will make production more expensive.

Nonetheless, the fear is that this will start a trade war between the European Union and China in a tit-for-tat, retaliatory exchange. That is why the European Union has made quite clear in its announcement of the tariffs that it is open to negotiate with China. This is quite the challenge and at the same time an important test of the relationship between the European Union and China. The European Union has explained what its concerns arenamely, that Chinese EV manufacturers have been receiving unfair advantages that damage the European industry. China has expressed openness to the idea of addressing the European Unions concerns; if this expression is sincere, then there is space to negotiate a solution. Unfortunately, two major obstacles persist. The first is setting up a process that would somewhat guarantee that China implements whatever agreement is settled upon. The second relates to the European Union spelling out what it needs from China; after all, we are speaking of advantages in EV production built over decades. Would a temporary suspension of those advantages and/or a temporary imposition of tariffs by the European Union, alongside a clear plan on how to progressively lift them, suffice, for example? Or does the European Commission want China to impose higher costs on its EV producers? Considering the already emerging calls to use investment screening mechanisms for greenfield investments in the EV sector, it seems unlikely that the European Union is after a solution that views Chinese automakers investing in the production of EVs inside the EU single market. However, Chinese EV manufacturers are already considering localization in the EU market as an option.

Ultimately, U.S. and EU tariffs differ not only in quantity and intent; perhaps most importantly, compared to the United States, the announcement and potential imposition of tariffs is a much more pivotal moment for the European Unions approach to this issue and for the future of its relationship with China.

Francesca Ghiretti is an adjunct fellow (non-resident) with the Wadhwani Center for AI and Advanced Technologies at the Center for Strategic and International Studies in Washington, D.C.

Excerpt from:
Not All Tariffs Are the Same: The Core Differences between U.S. and EU Tariffs against Chinese EVs - CSIS | Center for Strategic and International...