Inside Europe’s China Dilemma
from RealEcon and Greenberg Center for Geoeconomic Studies

Inside Europe’s China Dilemma

People look at the newly unveiled Onvo L60 SUV, the first vehicle of Chinese electric vehicle (EV) maker Nio's new lower-priced brand.
People look at the newly unveiled Onvo L60 SUV, the first vehicle of Chinese electric vehicle (EV) maker Nio's new lower-priced brand. REUTERS/Zoey Zhang

The EU’s new tariffs on Chinese electric vehicles signal a more cautious approach to trade with Beijing. 

June 17, 2024 10:47 am (EST)

People look at the newly unveiled Onvo L60 SUV, the first vehicle of Chinese electric vehicle (EV) maker Nio's new lower-priced brand.
People look at the newly unveiled Onvo L60 SUV, the first vehicle of Chinese electric vehicle (EV) maker Nio's new lower-priced brand. REUTERS/Zoey Zhang
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The June 12 decision by the European Commission (EC) to apply provisional import duties up to 48 percent on Chinese electric vehicles (EVs) reflects the difficult trade-offs facing European policymakers in their relations with China. Should Europe try to avoid a trade conflict with China and turn a blind eye toward the economic challenge that Beijing’s ambitious industrial policy and massive overcapacity poses? Or instead, should it leverage the EU’s combined economic power and strike back, preserving its industrial core but risking a trade war with China? Those trade-offs also imply a larger question for Europeans: How to balance economic prosperity and economic security in relations with China? U.S. economic leadership should support Europeans to steer through those difficult choices and help mitigate the consequences of either outcome. 

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Europe’s recent relations with China have been governed by the three-pronged approach of the 2019 European China strategy that described China simultaneously as a partner, competitor, and rival. In the last five years, the pandemic and Russia’s war against Ukraine have shifted the focus increasingly toward China as a competitor and rival. Under the leadership of EC President Ursula von der Leyen, the EU has adopted a number of mechanisms—including anti-coercion and international procurement instruments and foreign subsidies regulation—designed to improve the EU’s economic security against economic coercion and supply-chain dependence. The economic security strategy unveiled at the beginning of the year also includes white papers on outbound investment screening and export controls—areas where the EU is catching up with the United States.  

However, perspectives among EU member states vary on how far de-risking from China should go. For some member states, such as Germany, de-risking does not mean less China, but more alternative trade partners (i.e., diversification). Others, such as France, have supported import duties as an instrument of Europe’s strategic autonomy but continue intense trade and business ties with China, which could ultimately undermine the credibility of their approach. The good cop, bad cop dynamic between member states and the European Commission has raised hopes in Beijing that it can divide and rule in Europe, at the same time driving a wedge between the United States and Europe. For the time being, the EU has walked a fine line: keeping trade and business relations with China intact, while also developing the instruments to protect Europe’s economic security in the future. 

So far, the EU has been able to avoid difficult choices and trade-offs in its relations with China, hoping that it was possible to have China as partner, competitor, and rival all at the same time. However, two factors have changed that will eventually force Europeans to make a trade-off between economic security and economic prosperity. 

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First, China’s ambition to lead the fourth industrial revolution, especially on green technology, raises fears in Europe that another “China shock” is imminent, similar to the one that the United States experienced in the 2000s. The sheer amount of Chinese EVs could in a worst-case scenario lead to a fast and painful death of the European automotive industry, making a deindustrialized Europe little more than an export market for Chinese advanced technology.  

Second, China’s support for Russia’s war effort has escalated in quantity and quality to an extent that makes China an indirect security threat, building up a Russian military industrial base that can take on not only Ukraine but also European NATO member states. Europeans, who have long hoped for a positive Chinese role in the war, will have to acknowledge that their warnings toward Beijing have gone unheeded and consider a response, such as sanctioning China for its military dual-use sales to Russia. 

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The provisional duties that the EC has announced are designed to buffer the China shock to Europe’s automotive industry, but they are unchartered territory for EU-China relations. The EC does not want Beijing to solve the problems of the Chinese economy on the back of the European car industry. The import duties are thus higher than expected, but they have to be confirmed by member states in November (with some member states, Germany included, being very skeptical). The EC has left the door open to negotiations, and it also remains open to Chinese investments in the EV sector with local facilities and European workers employed, unlike the United States’ more protectionist approach. 

Nevertheless, as some analysts argue, the tariffs might still not be high enough to shield the European car industry due to the subsidized cost and technology efficiency of China’s cars—an “industrial cocooning” strategy has been proposed by some experts in addition to tariffs. If the tariffs do not have the desired effect, German carmakers will be hit especially hard, and they are also the ones most afraid of Chinese retaliation against their production or sales in China. According to Politico and Schmidt Automotive Research, BMW, Audi, and Mercedes-Benz sell 30 percent to 40 percent of their cars in China, whereas Chinese EV sales grew by 23 percent in the EU in the first four months of 2024. 

The dispute over Chinese EVs will not be the only sector in which Europeans will have to make trade-offs. The future of EU-China economic and trade relations will likely continue to be dominated by conflicts spilling over into other sectors. Further spillover could arise from potential sanctions on China for its support of Russia’s war against Ukraine.   

U.S. economic leadership should pursue a smart approach and support Europeans in those difficult choices as well as help mitigate the consequences when possible. Strengthening U.S.-European trade as an alternative to potentially diminished European trade with China, if trade conflicts with China intensify, should be a priority, which includes working on a solution to European’s concerns with the Inflation Reduction Act. The United States should not force its own preferences on Europeans or—with a potential return of Donald Trump—bully Europeans into following its lead on China. Otherwise, Europeans will perceive U.S. China policy as a greater problem than China itself. They could then be tempted to pursue a hedging strategy, especially with a second Trump administration. To be sustainable, Europeans need to arrive at the realization by themselves that China offers not only economic prosperity but can also pose an economic threat to important industrial sectors, as well as an indirect security threat to Europe’s core security interests in Ukraine. 

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