The EU and Its EV Duties

Nearly four years ago, German Chancellor Angela Merkel pushed through an investment deal between the EU and China that unsettled allies from Washington to Tokyo. At the time, Joe Biden had just beaten Donald Trump in a hotly contested presidential election, and the president-elect was promising to work more closely with Europe to address China challenges after a year marked by Beijing’s aggressive pandemic diplomacy and security crackdown in Hong Kong.

The EU-China pact, or Comprehensive Agreement on Investment (CAI), was widely seen as a geopolitical gift to President Xi Jinping, just as transatlantic leverage with Beijing was rising, in the aftermath of Trump’s defeat. Biden’s incoming national security adviser, Jake Sullivan, could barely hide his frustration.

Fast forward to 2024, and a similar drama is playing out among Brussels, Berlin, and Beijing in the shadow of another US election. The cast of characters has changed, as have the stakes, which are higher than ever.

This time, it is not about an investment deal, such as the one Merkel pushed over the finish line in the final days of 2020 only to see it collapse in a flurry of sanctions months later. Instead, it involves the most consequential trade case ever between the EU and China. 

One year ago, European Commission President Ursula von der Leyen announced an anti-subsidy investigation into imports of electric vehicles (EVs) from China, warning that an influx of cheap cars risked devastating Europe’s own auto industry. Since then, trade officials at the Commission have been painstakingly building their case.

If all goes according to plan, the Commission will next month impose additional duties of up to 35% on a range of cars that are exported to the EU from China. This would be on top of a 10% levy that is already in place. The EU duty levels pale in comparison to the 100% tariffs announced by the United States and Canada. But that has not stopped China from threatening to retaliate with tariffs on EU brandy, pork, and dairy products as part of a finely choreographed pressure campaign to force Europe to back down.

It is not hyperbole to describe this case as a litmus test for European policy on China writ large. For the past year and a half, von der Leyen has been pushing member states to take the economic and security challenges posed by China more seriously. She has unveiled an economic security strategy, launched investigations into Chinese wind, solar, and rail firms, and pushed European capitals to respond more forcefully to the flow of dual-use items from China to Russia.

The EV case is at the heart of this agenda. Its outcome will tell us whether the EU can deliver a united response to years of unfair competition from China that now threatens Europe’s economic well-being, or whether it will allow itself to be divided and weakened through threats and gifts doled out skillfully by Beijing to the bloc’s individual states.

Europe’s leverage over Beijing is higher than it has been in many years. The US market is closing to Chinese technology. China’s economy is in the midst of a deep structural slowdown. Duties or no duties, Chinese leaders desperately need Europe to remain open to their exports.

But leverage is not a weapon all European capitals are comfortable wielding. German Chancellor Olaf Scholz, Merkel’s successor, opposes the duties out of fear that China could retaliate against his country’s carmakers. BMW, Mercedes-Benz, and Volkswagen remain heavily dependent on China’s market, even as their prospects in the country dim in the face of intense competition from local rivals. Any measures that might further complicate their eroding market share there are considered anathema. 

With a deadline looming next month to finalize the duties, Scholz has been working overtime to build a coalition of EU states to block them. Recent problems at Volkswagen, which is threatening to close factories in Germany for the first time in its 87-year history, have only deepened the chancellor’s anxiety over the Commission’s plans, officials in Berlin say. Deeply unpopular and facing an election next year, Scholz is desperate to avoid further damage to the struggling German economy.

Last week, he received some good news. Spanish Prime Minister Pedro Sanchez, a day after meeting with Xi in Beijing, urged the Commission to reconsider its case and cut a deal.

Opposition from Scholz and Sanchez will not be enough to stop the duties. But were other countries to jump on the bandwagon, the pressure on von der Leyen to back down could become intense. Such an outcome would be a devastating blow for the Commission, its returning president, and her broader China agenda. It would open a worrying divide within Europe, pitting Germany against France, a prominent supporter of the duties. It would also put Europe at odds with the United States and other G7 partners on the eve of the American presidential election.

The final act looms this week as China’s commerce minister, Wang Wentao, passes through Rome, Berlin, and Brussels. On September 19, he will meet with EU Trade Commissioner Valdis Dombrovskis. He may have a new offer in his briefcase, or he may feel that compromise is unnecessary given mounting pressure on the Commission. Chinese state media have signaled in recent days that Beijing will not give an inch.

Regardless, Europe cannot afford to cut a dirty deal with Beijing that does not address its core concerns about China’s distortive economic policies, as it did at Merkel’s urging back in 2020. The EU should hold firm, not because a new US administration will want it to, but because its own geopolitical credibility and industrial future are on the line.