Economics Update July 2024 - Tariffs on car imports are neither in China's nor the EU's interest

The EU Commission has now introduced additional tariffs on imports of electric cars from China, but has also granted a four-month grace period during which a negotiated solution will be sought. For its part, the Chinese State Council has announced new rules for dealing with rare earths: the deposits belong to the state. The government will now supervise the development of the industry. Companies that mine, smelt, separate or export rare earths are to set up a traceability system. These rules will come into force on October 1. This is clearly linked to the threat that China reserves the right to retaliate against European tariffs.

Escalation helps no one 

In fact, neither side has any interest in real tariffs and subsequent retaliation. European industry benefits from trade with China. German car manufacturers in particular are heavily dependent on the profits they make in China. Conversely, however, China also has a veritable interest in not wantonly torpedoing trade with Europe: China achieved a surplus of 220 billion US dollars in trade with the EU last year. That was roughly as much as with all other countries outside the G7 group combined. In the difficult economic times that China is going through, this is a stabilizing factor that will not be risked lightly in Beijing either. This is all the more true as China is already in a kind of trade war with the USA, its real geopolitically relevant rival, and must therefore worry about the approximately 340 billion dollar trade surplus with the USA.

Much criticism of China's economic policy

However, it is likely to be difficult to find a solution just for the issue of dealing with electrically powered vehicles. The subsidies for Chinese manufacturers criticized by the EU are not measures that China could partially refrain from. Rather, they are part of the Chinese government's fundamental strategy, which aims to achieve a leading position on the global market in certain areas. China is systematically pursuing this goal through various measures. It is therefore unrealistic to expect the Chinese leadership to abandon or fundamentally change this economic policy. However, it is conceivable that China could commit to certain minimum prices for the sale of electric vehicles in Europe.

If we look beyond the automotive industry, the list of European criticisms of China is long. It should therefore be conceivable to extract concessions on issues such as industrial espionage, hacker attacks or the unequal treatment of European investors in China, which the EU can sell as a success. Tariffs and countermeasures would then be superfluous, at least for the time being. It is uncertain whether an agreement will actually be reached before the beginning of November. However, in view of the mutual interests involved, an imminent trade war between the EU and China is not the most likely scenario.