EV subsidies: Will EU-China row lead to a tariffs war?

European Commission President Ursula von der Leyen sounded the alarm bells on Wednesday when she warned EU parliamentary lawmakers that China "is flooding global markets with cheap electric cars." At the same occasion, she echoed concerns from the continent's auto industry leaders that it was difficult for them to compete because Beijing was offering "massive government subsidies" to undercut the prices of electric vehicles (EV) made in Europe.

As the price wars on the EV markets around the globe heat up, the fate of Germany's solar power industry could serve as an example of what might happen if the EU underestimates the Chinese challenge.

The solar technology was mainly developed in Europe, notably in Germany, where the nascent industry was helped by government subsidies and quickly found a market at the beginning of the millennium. China adopted the model, but was faster and cheaper in developing the solar technology further. Now, German manufacturers have virtually vanished from the market.

Chinese subsidies galore?

With Chinese EV makers recently announcing a massive sales offensive for their cars in Europe, Swiss investment bank UBS has calculated the cost advantage of their cars compared with European manufacturers.

In a note to investors, UBS auto analyst Paul Gong wrote: "The Chinese BYD Seal car has 15% lower cost than [Tesla's] Model 3 made in Shanghai, and >35% lower than VW ID.3 made in Germany." Gong added, however, that those costs are not necessarily the result of Chinese state subsidies. "Chinese manufacturing efficiencies as well as substantial supplies of core components contribute to its cost advantage, but also technology know-how."

But Gabriel Felbermayr, director of the Austrian Institute of Economic Research (WIFO), disagrees. He told the German daily Frankfurter Allgemeine Zeitung this week that there is ample evidence that Beijing is subsidizing its auto industry, "in a way that is not in line with the rules of the World Trade Organization."

Felbermayr said China isn't only supporting the production of cars with direct subsidies, but there are also "indirect subsidies through the promotion of batteries and rare earth elements in various forms."

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While it is not seriously disputed that the Chinese auto industry enjoys plentiful subsidies, the overall picture is more complex.

Gregor Sebastian from the Mercator Institute for China Studies (MERICS) in Berlin said international carmakers like BMW and Tesla, which are producing cars in China for both domestic and global markets, "are receiving favorable loans from Chinese banks that they would not get anywhere else."

Sebastian told DW that they can "acquire real estate for free or at extremely low costs, and they benefit from China shielding its battery production from international competition."

To counter the EU's subsidies' claim, the Chinese Commerce Ministry said its automakers had achieved their strong position "through hard work" and "continuous technological innovation." It called on Brussels to work together with Beijing to create "a fair, nondiscriminatory, and predictable market environment."

EU-China tariffs war emerging?

Meanwhile, the French government has sought to calm the situation, suggesting that, for now, an investigation should be initiated and hasty conclusions should be avoided.

And Volker Treier, a senior member of the German Chambers of Commerce and Industry, added that distortions of competition from the Chinese side should indeed be addressed, but preferably "not through excessive subsidies or new tariffs resulting from lengthy anti-dumping procedures."

As the specter of a trade war between the EU and China over auto subsidies looms larger, economists from the German Economic Institute (IW) noted that German carmakers increasingly manufactures cars in China for Chinese customers. "The Chinese government has no interest in obstructing German car companies; it would only harm itself and put Chinese jobs at risk," the IW experts said in an email to DW.

Globalized car production on the line

That statement illustrates how intertwined the industry has become. If the EU were to impose tariffs on electric cars from China, VW and BMW would have to pay these tariffs when exporting to the EU, making their cars even more expensive in Europe.

Furthermore, European companies also support their automakers, not only in Europe, said MERICS analyst Sebastian. "In the first quarter of this year, 40% of French state subsidies for the auto industry were spent on cars built in China."

Looking ahead, WIFO's Gabriel Felbermayr fears that If the EU tariffs do indeed materialize, "China will certainly retaliate and accuse the EU of similar practices." Referring to a multiyear aviation industry dispute over state subsidies between the EU and the US, he added: "This will run similarly to the Airbus versus Boeing dispute, where both sides argued they were in the right."

At the moment, Felbermayr sees the EU as "throwing stones in a glass house." When an industry comes under pressure, like the auto industry, states usually turn to tariffs to shield it from foreign competition, he noted, adding. "It's a form of economic policy that can backfire."

This article was originally written in German.