Concerns about a potential tariff war between China and other major exporting nations are sustaining diplomatic efforts between the world’s second-largest economy and the European Union, despite stalled trade discussions over electric vehicles. While the U.S. election on Tuesday is expected to bring additional American restrictions on Chinese goods, European negotiators are focused on a longer-term strategy. Though it may not offer an immediate solution, this approach aims to prevent further escalation in trade tensions.
The EU’s decision to impose sharply higher customs duties on Chinese-made electric vehicles is the latest flash point in a broader trade dispute over government subsidies and Beijing’s burgeoning exports of green technology to the 27-nation bloc. After an eight-month investigation, the European Commission, the EU’s executive arm, found that companies making EVs in China benefitted from massive government help, enabling them to undercut rivals in the EU in terms of prices and take a significant market share.
Europe’s politicians are caught in a dilemma: They want cheaper EVs to facilitate the climate transition, but not at the expense of undermining their own car manufacturers—the likes of Ford and Volkswagen—and local jobs. They also want to avoid a trade war that might stifle cooperation in international efforts to reduce greenhouse gas emissions.
However, even if the European Union and China can agree on their EV tariffs, it will only be a temporary truce. The EU’s next move will likely be to use its newly developed anti-subsidy trade instrument to block China’s aggressive entry into European competitive industries. That will likely include measures aimed at the aerospace and pharmaceuticals sectors. The EU could also target Chinese investments in strategic technologies that it says are critical to its national security.
In the short term, however, European leaders will likely seek to defuse tensions by focusing on the economic benefits of continued trade ties with China. In addition to the billions of euros in foreign investment that China’s economy now provides, the EU is reliant on a steady stream of Chinese imports of raw materials and components for its manufacturing industry.
Moreover, many European companies have invested in Chinese factories and production facilities to exploit cheap labor costs. Justifying these investments will be difficult if they face large import tariffs. And it will be hard to persuade the public that retaining these businesses is in the interests of the EU’s citizens if they lead to the loss of jobs.
Consequently, Germany’s decision to vote against permanent EU tariffs on EVs mainly stems from its desire to protect these investments. To do so, the EU should propose a workable compensation mechanism for sectors and companies affected by economic battles with Beijing. This should also be accompanied by a strong signal that the EU will not compensate for losses arising from extreme and imprudent investment decisions. This will be key if the EU is to convince political leaders in member states that it has their best interests at heart.