Europe awaits China’s response to new EU tariffs on Chinese electric cars

With Europe having imposed tariffs on Chinese-made electric cars, the continent is now anxiously waiting to see if China will retaliate.

Will China respond by imposing tariffs on European cars, targeting German manufacturers like BMW and Mercedes? Or will it target agricultural products, hitting European farmers who wield significant political influence? Could luxury goods from Italy and France be in the crosshairs?

Analysts warn that an escalating trade war could unfold, leading to higher prices for consumers and harming exporters and their workers on both sides. China, a rapidly growing economy with over a billion people, and Europe, with its relatively affluent population exceeding 400 million, are major markets for each other.

“It’s a little bit like seeing a slow motion traffic accident unfolding,” Jens Eskelund, the president of the European Chamber of Commerce said earlier this year. “The accident has not happened yet and … it is still possible to find an off-ramp. It is getting urgent.”

The Chinese government has stated that it will take “all measures necessary to protect our legitimate rights and interests” in response to the tariffs on electric vehicles, but it has not specified what those measures might be.

China launched an anti-dumping investigation into European brandy exports in January, a warning shot aimed at French cognac. France was a supporter of the European Union investigation that resulted in Wednesday’s EV tariff announcement.

The EU is also investigating subsidies provided to Chinese wind and solar companies and whether China is unfairly restricting access to its market for medical devices, a long-standing complaint of European manufacturers.

said it had reached out to China to discuss the findings of the EV investigation, and that the tariffs would take effect on July 4 if the two sides fail to resolve the issue. The tariffs would be provisional and finalized only after four months.

China’s Global Times newspaper has reported that Chinese companies are planning to ask the government to launch an anti-dumping investigation into certain EU pork products and an investigation of subsidies for some dairy products.

The state-owned paper has also quoted a leading Chinese auto industry expert calling for raising the tariff on imported vehicles with larger engines to reduce carbon emissions, a move that would impact high-end German exports from Mercedes and BMW.

Volkswagen expressed concern that the EU tariffs on Chinese electric vehicles could result in an escalation of trade conflicts and said the European Union is promoting an ongoing trend toward protectionism, nationalism and isolationism.

“The negative effects of this decision outweigh any potential benefits for the European and especially the German automotive industry,” VW said in a statement.

Research firm Sanford C. Bernstein noted that the impact on German makers would be muted by the fact that most of their cars sold in China are made locally. Only 2% of Volkswagen’s China sales are imports vulnerable to higher tariffs, along with 15% for BMW and 19% for Mercedes-Benz.

China could also impose retaliatory tariffs on French and Italian luxury goods, cosmetics, wine, chocolate or furniture, wrote Gabriel Wildau, a China analyst at the Teneo consultancy, in an analysis ahead of the announcement.

While Germany fears retaliation against its automakers and chemical producers, France and Italy have been the primary advocates within the EU for tariffs , he wrote.

How big an impact the provisional tariffs would have on Chinese EV sales is unclear. Some Chinese companies might still be able to sell at a profit, even with duties as high as 30%.

The provisional tariffs range from 17.4% to 38.1%, depending on the carmaker, and come on top of an existing 10% tariff on vehicles. The new rates would pose a serious market barrier to Chinese EV exports, the China Chamber of Commerce to the EU said.

Calculations by the Rhodium Group found that five of six models from BYD, China’s largest EV maker, would earn a profit with a 30% tariff, while a made-in-China Tesla Model 3 would sell at a loss.