Breaking the European bloc: China’s counter-tariff playbook

The European Union’s decision to impose a 38 per cent anti-dumping duty on Chinese Electric Vehicles (EV) appears to be the opening salvo of a trade war with China. The provisional duties, announced just after the European Parliament elections in June 2024, have been applied since 5 July 2024 and will continue for four months, after which they turn into permanent ones.

The final decision on making the tariffs permanent will be put to a vote among member states in October. An initial non-binding vote held on the subject on 15 July indicates that the EU is divided over the application of tariffs, with some countries signalling their preference for a negotiated outcome with Beijing and others willing to proceed with the tariffs.1 China has until the final vote in October to lobby the EU into abandoning its campaign of limiting the flood of Chinese EV imports into Europe.

China is likely to escalate its pressure campaign to erode the EU consensus

Since the European Union began investigating unfair state subsidies for Chinese EVs in October 2023, Beijing has engaged in a comprehensive counter-tariff pressure campaign to derail the application of punitive tariffs on Chinese EVs. China has deployed several tactics – from threats and inducements to the promise of resolution from dialogue.

With three months remaining to prevent the tariffs from restricting Chinese EV makers’ access to the EU market, China is likely to escalate its pressure campaign to erode the EU consensus on how to manage China’s participation in Europe’s free market.

Tariff tit-for-tat
Just days before the European Commission announced its decision on tariffs, Beijing threatened to retaliate with tariffs on European exports to China.2 The targets and products were chosen carefully to impact countries advocating for anti-dumping duties on Chinese EVs, like France and Italy. China opened an investigation into “spirits made from distilled wine originating in the EU”, specifically aiming tariffs at producers of high-profile French brandies who have the ear of the French political elite.3

Targeting expensive wines and alcohol is a common and mostly effective tactic in China’s counter-tariff strategy to pressure trade partners into abandoning punitive measures. Beijing threatened to target EU wines in 2014 when the bloc was mulling anti-dumping duties on Chinese solar panels, forcing the EU to rethink its approach.4

Beijing is well attuned to the varying positions among European states regarding trade issues and strategically exploits these differences

Luxury goods in general, such as high-end cars, alcohol and expensive meats, are China’s preferred targets for retaliatory tariffs. China’s chamber of commerce to the EU stated that China might consider raising tariffs to 25 per cent on imported cars with large displacement engines from the European Union and United States, targeting luxury car manufacturers from Germany, Italy and France.5 Additionally, a Global Times article had previously hinted at potential tariffs on China’s pork imports from the EU, which account for 31 per cent of the EU’s export volume.6 As expected, just days after the provisional tariffs were announced, Beijing retaliated by announcing an anti-dumping investigation into pork imports from the EU.

Tariff tactics are meant to persuade EU officials and industry bosses to oppose the punitive measures against Chinese EVs. By threatening retaliatory tariffs on products outside the automobile sector, like agriculture exports, China aims to prompt various sectors within the EU economy to pressure the European Commission.

Targeting the agriculture sector appears to have had some effect, evidenced by statements of the EU Agriculture Commissioner, Janusz Wojciechowski, who is keen to avoid a spillover of EU-China trade problems into agriculture goods.7 Additionally, imposing tariffs on agriculture products were meant to pressure a politically sensitive and influential voter base in the EU, especially when elections for the EU Parliament were underway.

Divide and disrupt
Beijing is well attuned to the varying positions among European states regarding trade issues and strategically exploits these differences. China has tried to create the impression of disunity within the EU by lobbying countries to vocalise their opposition to EU’s tariffs or, at least, to provide a platform for China to criticise the EU’s stance. Most recently, China’s Minister of Commerce, Wang Wentao, visited Spain and expressed hope that the country would encourage the EU to maintain an open attitude.8 His tour to mobilise European countries against tariffs also included a visit to Portugal and Greece, where he criticised the EU’s measures targeting Chinese exports.

Earlier in May, even China’s President Xi Jinping visited France, Hungary and Serbia – countries that have recently expressed a desire for better relations with Beijing. The visits by Xi and the commerce minister were intended to strengthen relations with nations that will lobby on China’s behalf, divide the European bloc and ensure the absence of a consensus on how to manage trade issues with China.

China has also played up the positions and statements made by political and business elites that oppose the tariffs. Both German Chancellor Olaf Scholz and Swedish Prime Minister Ulf Kristersson have expressed reservations about imposing tariffs on Chinese EVs. “We don’t want to dismantle global trade. That’s a stupid idea”, said Kristersson regarding punitive tariffs. Scholz also echoed these concerns by stating that “50 percent of electric vehicle imports from China currently come from Western brands that produce there (in China) themselves and import to Europe”.

Several political and business elites in Germany have also spoken against the imposition of tariffs.9 China has amplified these statements to accentuate the divisions among EU countries on the tariffs issue.

Inducements and incentives
While China has wielded the stick to compel the EU to oppose tariffs, it is also dangling carrots to induce favourable treatment from trade partners in Europe. Hungary and Serbia in particular have been recipients of Chinese investments in automobile factories, battery manufacturing plants and other facilities. Aware that the EU remains receptive to Chinese investment in the battery and auto sector, Beijing has proposed further investments to sway European countries away from supporting tariffs on Chinese EVs.

The EU’s decision to persist with provisional duties on Chinese EVs could indicate the beginning of a trade war between China and Europe

For instance, Hungary hosts two EV and two battery manufacturing plants set up by China, a reward for Hungary’s support of Beijing. In Finland and Sweden, Chinese companies have announced investments in cathode and anode manufacturing plants for batteries. Several Chinese auto part companies have also established factories in Serbia, which is becoming a hub for automative parts for the EU market. These investments are made to motivate countries to act in self-interest and abandon the EU’s pursuit of applying tariffs on China.

Chinese automakers are also closing subsidiary units in European countries to signal their dissatisfaction with the EU’s tariff agenda. Great Wall Motors, which recently closed its German subsidiary, stated that the company shuttered the German unit due to the unfair measures to pressure Chinese EV companies.10 China is aware that most EU countries are keen to attract Chinese EV investments and is willing to leverage this to secure its foothold in the EU market.

Diplomacy and dialogue
China has repeatedly advocated for dialogue to manage trade frictions with the EU. This emphasis on dialogue and diplomacy was an effort to de-escalate the EU’s position on China and buy time until the results of the EU Parliament elections were confirmed.

The Chinese commerce minister reiterated his country’s interest in resolving trade disputes through dialogue, partly anticipating negotiations with a potentially more fragmented but pragmatic European Commission following the elections.

However, this strategy backfired as far-right parties gained ground at the expense of the left and green parties in the election, solidifying the centre-right European People’s Party of Ursula von der Leyen as the dominant group. China’s waiting game has not worked in its favour, given the victory of Von der Leyen’s party, the gains made by right-wing parties and the wins secured by China hawks in the European parliament.

This will be a significant test of Europe’s appetite to defend its free markets

Despite China’s efforts to apply counter-tariff pressure, the EU’s decision to persist with provisional duties on Chinese EVs could indicate the beginning of a trade war between China and Europe. Beijing has three months to engage and lobby the EU to ensure that 65 per cent of the vote from EU member states is in Beijing’s favour to prevent the provisional tariffs from becoming permanent.

During this period, China is likely to intensify its campaign against tariffs, aiming to thwart EU consensus and safeguard an export market for Chinese EV products. The newly elected EU Parliament and Commission face a critical challenge in countering Beijing’s pressure tactics effectively. Successfully defending their policy decisions against Beijing’s efforts to disrupt the EU’s agenda will be a significant test of Europe’s appetite to defend its free markets.

• 1Reuters, ‘Italy, Spain back EU duties on China-built EV imports’, 15 July 2024.
• 2Ministry of Foreign Affairs, ‘Foreign Ministry Spokesperson Mao Ning’s Regular Press Conference’, 30 May 2024.
• 3Bloomberg News, ‘China Probes EU Liquor, Sinking Shares as Trade Spat Worsens’, Bloomberg, 5 January 2024.
• 4European Commission, ‘European Commission welcomes agreement reached between European and Chinese wine industries which will put an end to China's anti-dumping and anti-subsidy cases’, 21 March 2014.
• 5China Chamber of Commerce to the EU, ‘CCCEU’s Note to Press’, 21 May 2024.
• 6Wang Cong and Ma Tong, ‘EU postpones decision on Chinese EVs, showing internal division’, Global Times, 5 June 2024.
• 7Alessandro Ford And Lucia Mackenzie, ‘China is threatening EU agriculture. Should farmers squeal?’, Politico, 7 June 2024.
• 8‘EU urged to meet China halfway, address each other’s concerns through dialogue’, Global Times, 4 June 2024.
• 9Natalie Carney, ‘How European tariffs on Chinese EVs could hurt German companies’, CGTN, 17 May 2024.
• 10‘Chinese Great Wall Motor denies allegations of European market withdrawal’, Xinhua News, 7 June 2024.