EV Tariffs End An Era Of EU-China Engagement

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China's leverage arises from two major European weaknesses. First, the EU is unable to speak with one voice, even on trade, its most centralized competence after monetary policy. Second, the EU depends on China much more than the US or Canada.

The EU's main dependence comes from imports, especially critical components for digital and energy transitions. In addition, some large European companies depend on China's market.

The situation has not improved despite the EU plan to“de-risk” from China – meaning to manage the risks related to economic and technological dependence. On the contrary, EU dependence on China continues to rise, while the opposite is true for the US.

EU dependence on China also arises from years of European investment (mostly German) in China's auto industry. European automakers now export EVs from China into Europe, exposing them to the EU's countervailing duties.

While it seems logical that any company – including those from Europe – that receive foreign subsidies to enter the EU market should be penalized to avoid unfair competition, the German government voted on October 4 to protect these automakers over the single market.

The fact that the largest EU country is ready to make such a move should sound the alarm about how much some major European companies operating in China are influencing EU trade strategy.

This also makes EU de-risking from China all the more urgent if the EU wants to preserve its independence over economic policy-making.

De-risking and economic security will, no doubt, come at a cost, but so will inaction. To reduce the cost, the EU must move from relying on defensive measures, such as the countervailing duties on EVs, to aggressive action to increase competitiveness.

The cost of producing an EV in China is still lower than elsewhere, even if subsidies are not factored in because of China's impressive technological upgrade and massive economies of scale.

Most analysts focus on the former as the main barrier for the EU in competing with China on green tech, but this might not be the case. In fact, part of the technology embedded in much of Chinese green tech originated in the EU or the US but received no government support while still unprofitable.

The US is clearly trying to change this situation with a massive industrial policy push, including through the CHIPS and Science Act and the Inflation Reduction Act. Whether these policies will succeed is still unclear.

The EU, by contrast, is still scrambling to build a credible industrial policy plan that will make its innovation commercially viable. This is particularly important for the EU because, compared to the US, it lacks the capital markets needed to scale up innovation.