The European Union is set to vote on Friday on whether to back final tariffs on China's electric vehicle (EV) makers. 

The EU wants to protect its automobile makers against the increasing number of less expensive Chinese EVs entering the market. Of the total EV imports to the EU in 2023, 54% originate from China.

But the 27-member bloc's protectionist stance could cause a wider trade war with China. That could hurt the EU's export-dependent companies, its EV targets and threaten critical raw material supplies. 

The European Commission (EC) imposed provisional tariffs on China's EVs in July despite Beijing's previous warning that it would retaliate.

Beijing has denied that it improperly subsidizes EV companies, arguing that its leading role in EVs results from efficient manufacturing.

Source: JATO Dynamics, BNEF, ING Research

Europe-China EV Talks Stall

So far, both sides have been unable to compromise on their EV trade differences. 

The EU's Commissioner for Trade, Valdis Dombrovskis, and China's Minister of Commerce, Wang Wentao, held unsuccessful talks on September 19. 

"Both sides agreed to intensify efforts to find an effective, enforceable and WTO compatible solution," Dombrovskis said. 

The EC then told EU member countries that it would continue negotiations with China after the October vote, Reuters reported. 

EU members are split on whether to levy European tariffs for the next five years, adding a further complication. Spain has called on the EU to “rethink” the duties, aligning with Germany, while France supports them. 

Automakers Warn Against European Tariffs

Automobile industry leaders in Europe have pushed back against the tariffs. 

Executives from BMW AG (OTC:BMWYY) and Volkswagen AG (OTC:VWAGY) have warned that imposing tariffs on Chinese EVs was a bad idea.

“Protectionism risks starting a spiral," BMW CEO Oliver Zipse said in June. "Tariffs lead to new tariffs, to isolation rather than cooperation." 

China is a core sales market for BMW. It delivered 824,932 BMW and MINI vehicles in the Chinese mainland market in 2023.

Former Volkswagen AG CEO Herbert Diess reiterated a similar message. "An escalating trade spat between China and the West would fuel inflation," he said in June. 

Would European tariffs actually slow China's EV expansion into the region? The Rhodium Group, a New York-based independent research provider, doubts their impact. 

Source: ITC Trade Map, BNEF, ING Research

"Duties in the 40-50% range would probably be necessary to make the European market unattractive for Chinese EV exporters," it said in April.

Provisional European Tariffs On China

The EC launched its anti-subsidy investigation against Chinese EVs last year.

The investigation concluded that China's value chain of battery electric vehicles (BEV) benefited from unfair subsidization. This caused a "threat of economic injury to EU BEV producers," the EC said.

The EC then cut European tariffs marginally at the end of August. It considered submissions and technical corrections by EV companies operating in China.

European Tariff Trade Spat With China

In response to the threat of tariffs, China has accused the EU of violating World Trade Organization (WTO) rules. 

It then brought the case to the WTO's rules dispute settlement mechanism on August 14 to "safeguard the development rights and interests" of the EV industry.

A week later, China initiated an anti-subsidy investigation targeting EU milk, cream, and cheese products.

The EC challenged China in September at the WTO against China’s investigation into EU dairy products. China's investigation "is based on questionable allegations and insufficient evidence," Valdis said on X.  

Europe Depends On China For Raw Materials

But a trade war with China would likely hurt European companies and the broader economy.

European tariffs could increase the cost of EVs for consumers as Europe moves to phase out new gasoline and diesel cars by 2035, according to ING.

"Europe will not be self-sufficient in EV production or the EV supply chain any time soon," ING wrote on June 19. "It needs to act carefully, considering any further retaliation from China."

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