On October 4, the European Commission launched an investigation into state subsidies for Chinese-made electric vehicles (EVs). The probe stems from increasing EU concern that the European auto sector will be eclipsed by less expensive Chinese cars as the sector shifts toward EVs, where China holds supply chain dominance. The investigation is supported by France, whereas Germany and its auto industry are skeptical for fear of Chinese retaliation.
In recent years, Chinese EV companies have made significant inroads in European markets, where they receive a preferential import duty and square well with EU climate goals. This trend has intensified in 2023 amid economic downturn in China, with Chinese EV exports soaring and contributing to a record-high EU trade deficit with China.
Chinese-made EVs, both from Chinese and European brands, enjoy a massive price differential in the EU. While state subsidies play a role in this price gap, the success of Chinese companies is also honed by a decades-long focus on developing EV technology and supply chains. This effort has seen billions of dollars poured into R&D initiatives that have generated cutting-edge IP and human capital at leading EV companies across the supply chain.
The EU and China are no strangers to trade spats, having previously engaged in a similar dispute in 2013 over subsidies for Chinese-made solar panels. While the EU and China resolved that dispute via a negotiated settlement, early indicators suggest this is an unlikely outcome for the EVs case. The official announcement of the EV investigation specifically references the 2013 settlement as a failure by the EU to protect its emerging green industries. Additional investigations into Chinese wind and steel subsidies are also possible.
Moreover, the overall status of EU-China relations has deteriorated since 2013, when it was generally marked by hope for mutual market access and investment flows. Ten years later, with the EU seeing these promises as unfulfilled while China tacitly supports Russia’s war in Ukraine, the context is far less forgiving. Aside from the subsidy investigations, the EU is also preparing new curbs on exports of sensitive technologies to China.
Beijing has called the EU’s investigation “blatantly protectionist” and stated that it will have consequences for the EU-China trade relationship, but these statements have had little effect on EU leaders. This indicates a potentially more confrontational road ahead for EU-China relations before a bilateral summit in December where EU leaders will stick to their guns while hoping to avoid a tit-for-tat trade conflict with China, the bloc’s largest trading partner.
