The Coming Electric Vehicle (EV) Trade War

The electric vehicle (EV) industry is currently at the center stage of the ongoing trade conflict between Europe, the United States, and China. This trade war has significant implications for the global trade of electric vehicles and related technologies. Let’s delve into how this trade conflict is impacting the EV industry and the strategic moves being made by the key players involved.

One of the primary effects of this trade conflict is the imposition of tariffs on Chinese EV imports by the US and the EU. These tariffs have created barriers to the free flow of EVs in these markets, affecting the competitiveness of Chinese electric car manufacturers. Moreover, the trade war has disrupted the global EV market, leading to uncertainties and challenges for both producers and consumers.

As part of the probe into the trade conflict, there has been an investigation into the Chinese EV subsidies. The aim is to determine whether Chinese government subsidies provide unfair advantages to local EV manufacturers, distorting the global market and creating an uneven playing field for international competitors. Additionally, the EU has initiated investigations into Chinese EV imports to ensure compliance with trade regulations and safeguard the European industrial sector.

President Biden recently raised concerns that Chinese EV vechicles may pose a national security risk. This was done to counter the strategy of China of opening up plants in Mexico that would give it free access to US markets throught the NAFTA (now called USMCA) trade deal between the US, Canada and Mexico.

What Are the Implications for the European Union?

The European Union is also deeply impacted by the trade war, facing challenges such as supply chain risks for European automakers and threats to the European EV industry’s value chain. The EU has responded with policy measures to counter the effects of the trade conflict and has provided financial support to bolster the European EV market.

The European Union may deepen its involvement in the trade conflict by imposing trade policies to protect its economic interests. Measures such as imposing import tariffs on Chinese EVs aim to safeguard the European auto industry and promote fair competition in the market.

For the EU, the car industry is a key employer. Thus, if auto firms in Germany, Italy and France are hurt and lay off employees this would have domestic political implications. Therefore, for the EU this represents a huge business and political risk.

Our view is that the EU will be very defensive of its auto industry and will be agressive in investigating Chinese subsidies to the EV industry to justify trade barriers such as tariffs and potentially quotas. In international economics, tariffs are preferred by governments since they are able to collect revenue. Thus, a tariff can be seen as a tax.

How Does China Respond to the Trade War?

China, as a major player in the global EV industry, has responded strategically to the trade war. The Chinese battery industry has been a focal point of concern due to tariff threats, impacting both domestic production and export capabilities of Chinese EVs. Beijing has made strategic moves to mitigate these challenges and protect its interests in the global EV market.

This includes subsidies and investments to boost the technological capabilities and market presence of Chinese EV manufacturers.

There is now talk of promoting partnerships (joint ventures) with EU auto companies as a way to soften the EU political backlash and dampen protectionist measures. Another strategy is to move production to the EU.

This is already taking place with a Chinese EV investment in Hungary. This is called a natural hedge in international economics and has been used in the past by Japanese auto companies in the 1980s by moving production to the US.

In regards to the US market, China is considering Mexico as its base since they then can import autos to the US through NAFTA (now known as USMCA) Trade agreement between the US, Canada and Mexico.

Finally, China could retaliate by imposing its own tariffs on the EU and US vehicles or by making it more difficult to do business in China. Some actions to this effect have already taken place.