European Commission Sharpens Inquiry Into Chinese EV Subsidies

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Last October, the European Commission opened an inquiry into whether Chinese automakers are the beneficiaries of such significant subsidies by the Chinese government that they have an unfair economic advantage over domestic manufacturers. The question is ridiculous, of course. Everyone on Earth knows the Chinese government has been providing massive support to its automotive sector for 20 years. Thanks to its policies, Chinese companies control most of the world’s lithium deposits, 80% of the processes that convert raw lithium into battery-grade material, and much of the supply chain for other battery materials like cobalt, manganese, and nickel.

The assistance extends to such intangibles as getting official help with the permitting process for factories that build electric cars without rigorous environmental reviews, making sure there is a ready supply of workers, and guaranteeing the port facilities needed to export electric cars from China are in place. In short, the Chinese government has put all of its bureaucratic muscle into smoothing the path for its automakers in an effort to make them ultra-competitive in world markets.

China has been upfront about its commitment to electric car manufacturing. It didn’t hide what it was doing. It told everyone what its plans were and then made those plans a reality. So it should come as no surprise that Chinese companies can build electric cars in China, ship them overseas, and still undercut the price of electric cars from domestic manufacturers by 25% or more. What the EU Commission is doing is trying to find a way to lock the barn door after the horses have bolted and do it in a way that is not blatantly illegal under international law.

EU Commission Tackles Chinese Imports

According to Politico, the European Commission thinks it has found a way to protect European automakers. Starting last fall, it requested detailed information from three Chinese EV manufacturers — BYD, SAIC, and Geely — as part of its investigation. It now says those companies have not been forthcoming when it comes to providing the information requested about subsidies, operations, and supply chains. As a result, it notified all three companies in a letter dated April 23, 2024 that it would proceed based on “facts available.” Doing so will allow the commission to recommend imposing higher import tariffs on the cars they manufacture.

Basically what the European Commission is saying is, “We thought you were taking unfair advantage, you didn’t provide substantive proof to the contrary, and so we are going to assume what we accused you of is true. If so, we are within our rights to impose any tariffs we think are necessary to level the playing field so our companies and our workers are not harmed by your actions.”

EU trade commissioner Valdis Dombrovskis told Politico last week the EV probe was “advancing,” and he expected it to wrap up “before the summer break.” His comments come days before Chinese President Xi Jinping is due to visit France on the first stop of a European tour. Beijing has launched its own anti-dumping investigation into imports of European brandy, signaling its displeasure with the French government which lobbied behind the scenes for the EV probe. Sacré bleu! Who knew the Chinese were such avid imbibers of brandy? Speculation about what will happen when the investigation is done is intensifying. Analysts at Rhodium Group said in a report entitled Ain’t No Duty High Enough published last week:

“The European Commission is likely to impose countervailing duties on imports of electric vehicles (EV) from China in the coming months to head off the risk of subsidized cars damaging Europe’s auto industry. We expect the Commission to impose duties in the 15-30% range. But even if the duties come in at the higher end of this range, some China-based producers will still be able to generate comfortable profit margins on the cars they export to Europe because of the substantial cost advantages they enjoy.

“Duties in the 40-50% range — arguably even higher for vertically integrated manufacturers like BYD—would probably be necessary to make the European market unattractive for Chinese EV exporters. As countervailing duties at this level are unlikely, policymakers in Brussels may decide to turn to non-traditional tools to shield the European auto industry, including restrictions based on environmental or national security-related factors. The three companies are under investigation for allegedly receiving distorting subsidies to produce electric vehicles, potentially creating an unfair advantage on the EU market compared to European car makers.”

Such an anti-subsidy case normally results in a duty levied on EU imports. Duties would apply to all imports of EVs from China, though the EU can decide to tweak percentages per producer.

Testy Letters

The letters sent to the three Chinese companies outline how the European Commission requested information on their operations, sales projections, and their suppliers. One recurring complaint is that the three companies kept claiming their suppliers didn’t need to fill out a subsidy questionnaire. In the case of SAIC, Brussels already sent a letter in December complaining about the lack of cooperation. “Nevertheless, your client maintained its approach and continued to refuse access to some key information,” the letter reminded the lawyers for SAIC. That letter to SAIC was reviewed by Politico, which says it was particularly testy.  “Your client almost systematically presented requests for deadline extensions although it did not use this additional time to provide the necessary information requested by the Commission.”

Volkswagen has partnered with SAIC — which is wholly owned by the Chinese government — since 1984. Among the nine factories the joint venture operates is a controversial one in the province of Xinjiang, where the Chinese government is believed to have interned over 1 million Uyghurs. According to the European Commission, SAIC claimed it could not control its suppliers — whose names are redacted in the letter — and therefore could not compel them to submit questionnaires on their “provision of capital, loans, guarantees, or any other types of financing.” The EU’s trade department rejected the argument that such a survey would violate SAIC’s fundamental rights.

The Chinese company saw the consequences looming, and — the Commission alleges — argued that it had told Brussels enough. “The amount of information and data submitted thus far should be sufficient for the calculation of subsidy amount. It is therefore groundless and unnecessary for the Commission to apply Article 28 in determination of subsidy,” SAIC replied at one point during the investigation, referring to the article that allows for the “facts available” approach.

With regard to Geely — which owns Volvo Cars — the European Commission found that “none of the financing companies of Geely group provided a reply to Commission’s questionnaire.”

Does China Have An Oversupply Problem?

The Guardian reports that French President Emmanuel Macron told the French newspaper La Tribune that an update of relations was necessary “because China now has excess capacity in many areas and exports massively to Europe.” Cars are not the only products of concern. China also dominates the solar panel industry and is accused of dumping excess panels on the world market at prices below what it costs to manufacture them. The issue of forced labor also is part of international concerns about Chinese-made solar panels, as many of them are made in Xinjiang province.

EU president Angela von der Leyen told the press recently that China was “currently manufacturing with massive subsidies.” An oversupply of cars and steel due to weak demand at home was leading to unfair trade and unacceptable market distorting practices, she said, and added that the situation “could lead to de-industrialization in Europe” and loss of jobs, particularly in the German auto industry.

For his part, Xi told French daily Le Figaro he was coming to France with three messages — that Beijing was committed to opening up “new vistas” in its relationship with France, opening up “ever wider” to the world, and to upholding world peace and stability. “While opening up itself, China also encourages Chinese companies to go global,” Xi wrote. “France is advancing re-industrialization based on green innovation, whereas China is accelerating the development of new quality productive forces.”

The Takeaway

Trade disputes have been part of international affairs for as long as there have  been nations. On one hand, we want to be able to enjoy the endless bounty of the world. On the other hand, we don’t want our neighbors to be put out of business by foreign competitors. The brutal electric car price wars in China suggest there is massive oversupply in that country, so it is natural for its manufacturers to seek new markets.

What the European Commission decides to do may impact US trade policies as well. There are already calls in Congress for new tariffs of up up to 100% on Chinese made electric vehicles, which is pretty much an admission that the vaunted American industrial sector simply cannot compete with China. Meanwhile, countries that have little or no domestic automakers are turning to China and begging it to supply them with affordable electric cars.

The future of the EV revolution worldwide is being written as we speak. We are only in chapter two of what promises to be a long story. That story may play out differently in different countries and  will not always go smoothly, unfortunately. But it is essential the story be completed as part of the transition to a sustainable world, one that prioritizes efficiency and conservation instead of the profligate waste of precious resources. It will be a while before we get to the final chapter.