Risk Category – Economic/ Geopolitical Risk
Introduction:
In a recent move by the European Union (EU), cars imported from China will face additional duties of up to 38.1%. The import duty will come into effect from July 2024. The EU stated that additional import duty has been placed on Chinese electric vehicles (EVs) after a nine-month-long investigation into the unfair state subsidies to Chinese EVs. The EU’s decision is based on the belief that these subsidies give Chinese EV manufacturers an unfair competitive advantage in the EU market.
Companies like SAIC will face the highest tariff, while Geely and BYD will face a tariff of 20% and 17.4%, respectively. The additional tariffs are on top of 10% on imported cars into the EU, bringing it to 48%. The EU also stated that manufacturers of electric vehicles who complied with EU inspectors would pay a charge of 21%, while those who didn’t, would pay a top-tier penalty of 38.1%.
The EU placed these tariffs after the US, under President Joe Biden, announced that tariffs on Chinese EV imports were quadrupled (from 25% to 100%) as a response to China’s unfair trade practices.
Analyst Comments:
The EU’s decision is anticipated to impact the Chinese electric vehicle market significantly. It will likely result in a decrease in exports and a shift in market dynamics, potentially altering the competitive landscape.
In response to the EU’s decision, China is expected to take similar measures to protect its rights and interests. A spokesperson for the Chinese foreign ministry, Lin Jian, has already labeled the EU’s investigation as a typical case of protectionism, hinting at a potential retaliatory move. An instance of such a retaliatory move was seen as China has launched an anti-dumping investigation into mostly French-made imports of brandy and cognac.
Volkswagen, Europe’s largest auto manufacturer, is expected to face losses as it has a joint venture with SAIC in China. As of 2021, Volkswagen sold 2.4 million cars, and sales are expected to drop substantially after the tariffs.
Chinese car manufacturers may shift outside the Eurozone, causing a significant drop in the local GDP as half of EVs imported from China were produced by Western manufacturers.
While an additional import tariff of 20% would reduce Chinese EV imports by 25%, largely offset by higher European production, European carmakers would not be able to fill the gap. In a scenario like this, Indian carmakers like Tata have an opportunity to expand their Jaguar fleet in Europe. By focusing on EV production and sales, Indian EVs can fill the void while complying with European standards.
It is expected that after the additional tariffs are levied on Chinese EVs, European manufacturers can fairly price their vehicles (they were forced to suppress their car prices to match with Chinese EV prices) and will be able to invest their profits better.
