The move of the European Union to impose duties of up to 87.6 percent on import of electrical vehicles made in China has thwarted the plan of Beijing to flood the markets in Europe with cheap electrical vehicles manufactured with subsidy from the state. Studies have found that China has been using subsidies extensively to take a leading role in the global markets for green-tech products such as battery electoral vehicles and wind turbines.
The World Trade Organization has stipulated under the WTO Subsidies Agreement that: “A subsidy granted by a WTO member government is prohibited by the Subsidies Agreement if it is contingent, in law or in fact, on export performance, or on the use of domestic over imported goods. Those prohibited subsidies are commonly referred to as export subsidies and import substitution subsidies, respectively. They are deemed to be specific and are viewed as particularly harmful under the Subsidies Agreement.” China has claimed that its subsidies on electrical vehicles are not in the nature of those prohibited by the WTO; without offering any explanation.
The EU has provisionally imposed tariffs of up to 38.1 percent on electrical vehicles shipped from China, on top of 10 percent duties for all imported electrical vehicles. Three of the biggest EV players in China have been imposed extra duties of 17.4 percent on cars from BYD, 20 percent on cars from Geely and 38.1 percent on vehicles exported by China’s state-owned SAIC. The provisional duties will be in force for three months to allow for negotiations with China to do away with harmful subsidies; after which the duty structure would be made permanent for five years.
The European Commission, the executive arm of the EU, has accused the Chinese government of distorting competition with subsidies for electric cars. In a recent report, the EU has said that the subsidies offered by China are causing “a threat of economic injury to European Union battery electric vehicle producers. The EU has been trying to reach solution compatible with the World Trade Organization standards. Any negotiated outcome to the investigations must be effective in identifying the injurious forms of subsidies.
The EC launched an official anti-subsidy investigation into electric cars in China in October 2023 to confirm the allegations of the EC that the manufacturers of battery operated electrical vehicles in China benefited from subsidies specific and advantageous to the receiving companies. These are causing economic damage to battery electrical vehicle manufacturers in the EU and justify the introduction of countervailing duties.
The move of the European Union has almost coincided with the announcement of the Joe Biden administration in the U.S. to slap new tariffs on Chinese electrical vehicles, advanced batteries, solar cells, steel, aluminium, and medical equipment. The tax rates on electrical vehicles imported from China will now rise to 102.5 percent in the U.S. from the earlier level of 27.5 percent.
On the other hand, it was estimated that public support for industries in China in 2019 added up to over Euro220 billion; or nearly two percent of the gross domestic product of China. This was far higher than the estimated support in other leading economies. Relative to the GDP, public support was about three times higher in China than in France at 0.55 percent and four times higher than in Germany at 0.41 percent and the United States at 0.39 percent.
The U. S. administration is worried that low priced models of electrical vehicles made with subsidies by the Chinese government, could soon flood the U. S. market. After the recent visit of President of China Xi Jinping to France, EC President Ursula von der Leyen had warned that government-subsidized electrical vehicles were flooding the European market and said: “The world cannot absorb China’s surplus production.”
On an earlier occasion, the U.S. had challenged Chinese subsidies in the auto sector before the WTO, saying: “These subsidies being challenged are provided to auto and auto parts manufacturers in China that meet certain export performance requirements and that are located in government-designed regions known as ‘export bases,’” according to the office of the United States Trade Representative. The subsidies take the form of cash grants for exporting and preferential tax treatment. These provide unfair advantages to Chinese auto industries.
These moves have hit hard at the Chinese design to undercut industries in the EU and the U.S. through unfair trade practices. China has threatened to impose retaliatory tariffs on the import of cognac and pork from the EU; without understanding the logic of the move by the EU. As EU trade chief Valdis Dombrovskis has said: “There is no basis for China to retaliate. Our aim is to ensure fair competition and level playing field.”
The communist rulers of China, however, have no respect for the rules of a competitive economy. Free market competition promotes efficiency in production. Costs are reduced and quality is assured so that producers can stay in the market only by offering consumers quality products at a competitive price.
The socialist economic system does not care about competition, however, as the markets for companies in socialist countries are protected by the government. This results in poor quality and high price of products. Beijing is now trying to export this inefficiency in the Chinese economic system in the international market by offering subsidies to its producers, say analysts. Protecting the interests of the consumer is not one of the priorities of the Chinese government. Predictably, China has expressed strong opposition to the anti-subsidy investigations by the European Union into Chinese electrical vehicles.
By offering subsidies on electrical vehicles for export, Beijing is helping to price out manufacturers of electrical vehicles in the EU and the U.S. who may be producing better vehicles at a lower cost. The consumers in the EU and the U.S. are also the losers as they may be buying less efficient electrical vehicles manufactured in China while the companies in their own countries have been priced out of the market.
Pointing out that subsidies introduce inefficiencies, a World Bank study in 2023 said: “subsidies can harm trading partners, fuel tensions and provoke countermeasures. They can nullify the benefits of global trade and investments by distorting international prices and limiting market access; and they can create inefficiencies in the global value chain.” The International Monetary Fund too has explained “what is wrong with subsidies” in an article titled ‘Subsidy Wars.’ “The classical economic argument against the use of subsidies is that they cause a misalignment between prices and production costs. In doing so, they can distort markets, prevent efficient outcomes and divert resources to less productive uses. If subsidies benefit some firms over others, they can snuff out innovation and force efficient firms to exit the market. They also harm smaller economies that cannot afford to subsidize.”