The EU is testing its courage to take on China in a new battle over electric car tariffs

(Bloomberg) — The European Union has used one of its most powerful economic tools against China by imposing tariffs on electric vehicles, raising the risk of retaliation and backlash for domestic consumers and businesses.

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The EU voted on Friday to increase tariffs by up to 45%, arguing that Beijing is giving its carmakers unfair subsidies. China denies this claim and is threatening its own tariffs on Europe's dairy, brandy, pork and automobile sectors. As the bloc joins the US in its more aggressive approach to dealing with Chinese trade practices, the latest move aims to comply with World Trade Organization rules.

French President Emmanuel Macron warned this week that Europe's economic model “needs to be redesigned” and that ignoring greater domestic investment and market protection measures from the US and China could pose an existential threat to the EU. The bloc's leaders are expected to unveil a new competitiveness roadmap next month.

Janka Oertel, director of the European Council on Foreign Relations, said the vote was “a crucial moment for the future of EU-China relations.” She said successful implementation of the tariffs would strengthen the EU and give it “the momentum to continue to address market distortions, critical interdependencies and emerging security challenges across various sectors.”

Former European Central Bank President Mario Draghi raised similar concerns to Macron last month when he presented a highly anticipated report on Europe's competitiveness. He said the EU would face a “slow agony” if the bloc did not invest in its economic transformation to better cope with competition from Beijing and Washington.

The China Council for the Promotion of International Trade said in a statement posted on its official Wechat account on Saturday that the country's electric vehicle makers had cooperated with the European investigation with “utmost sincerity” and hoped to resolve the disputes under the WTO -Rules through the price to properly resolve obligations and other means.

China's Commerce Ministry warned on Friday that the tariffs would “shake and damage” the confidence of Chinese companies investing in Europe. State media China Central Television said that by imposing the tariffs, the EU would lose investment from China's EV companies and the opportunity to transform its automotive industry.

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Economic growth in the EU has been consistently slower than in the US over the past two decades, reflecting slower productivity gains, Draghi said. And the consequences of the slow response to the challenge posed by China's aggressive industrial plans with billions of dollars in subsidy investments are already being felt in some key industries.

What Bloomberg Economics says…

“We still expect that the Chinese government is likely to respond proportionately to the tariffs, for example by targeting non-auto EU imports such as certain agricultural goods.”

—Antonio Barroso and Gerard DiPippo. For full REACT click here

While Volkswagen AG and Mercedes-Benz Group AG struggle with declining relevance in China, BMW AG has been hobbled by a costly recall and Stellantis NV is suffering from poor sales in the United States. They all issued profit warnings last month, with VW considering closing plants in its home market of Germany for the first time.

After the shares of European car manufacturers had come under pressure in recent weeks due to profit warnings, they recovered somewhat during the collective bargaining vote on Friday. The Stoxx 600 autos and parts index rose, but that's because the news was already priced in, said Tom Narayan, an analyst at RBC Europe. The index is still down more than 10% this year – despite the ever-rising Ferrari NV in the mix.

After years of failed attempts to address long-standing bilateral grievances, including China's industrial subsidies or limited access to its huge market, the EU has gradually toughened its stance as it monitors Chinese companies' steady progress in the digital and clean tech sectors observed. driven by their control over critical materials.

As the world's largest trading bloc, Europe is the main beneficiary of multilateralism, with half of its GDP tied to international trade. But the hostile international environment, marked by US-China rivalry and the fight to secure raw materials to accelerate economic growth, is forcing the EU to rethink its approach.

Why Europe is increasing tariffs on cheap Chinese electric vehicles: QuickTake

Although electric vehicle tariffs are in line with Europe's current political priorities, they are not without economic risks. As a result of a one-off inflation shock, the prospect of potential global trade wars breaking out risks renewed pressure on consumer prices.

ECB policymakers are expected to decide on a third rate cut when they meet on October 17, but the backdrop could still raise doubts about their resolve. Aside from the trade environment, which is further jeopardized by the possibility of Donald Trump retaking the White House, rising oil prices and a still-robust U.S. economy could also give officials pause.

The World Bank warned in August that the central banks' inflation war was not yet won. The Washington-based institution said protectionist measures such as tariffs increase production and shipping costs and, if such trade barriers remain in place, they could “ultimately encourage producers to pass them on to consumers.”

“We want equal and fair competitive conditions, but not a trade war. That’s why we now need a negotiated solution to the issue of countervailing duties,” said Federal Economics Minister Robert Habeck on Instagram on Friday. “Together Europe is strong, divided it becomes the plaything of others. And if Europe does not respond as one, China’s aggressive industrial war will continue in other sectors.”

– With support from Craig Stirling, Brendan Murray, Isolde MacDonogh, Kevin Whitelaw, Alberto Nardelli, Petra Sorge, Michael Nienaber, Stefan Nicola and Tian Ying.

(Adds China's response in sixth paragraph.)

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