The European Union voted on Friday to impose tariffs of up to 45% on electric vehicles imported from China, raising the prospect of a broader trade conflict with Beijing, which has already pledged to defend its companies.

The European Commission, the EU’s executive body, can now implement the tariffs, which will last for five years. According to sources familiar with the outcome, ten member states supported the move, while Germany and four others voted against it, and 12 abstained.
The EU’s decision comes after an investigation revealed that China was unfairly subsidising its industry. Beijing denies these allegations and has threatened to impose tariffs on European dairy, brandy, pork, and automotive sectors.

Europe’s decision to pick a fight with its largest trading partner is part of its ongoing quest to become “less dependent on China.” Just last month, Mario Draghi, the ever-wise former European Central Bank president, warned of the dangers posed by Chinese “state competition” and how it could leave the EU vulnerable to coercion. Yet, despite this €739 billion trading relationship, Europe is surprisingly divided on whether this particular hill is worth dying on.

The EU and China will continue negotiations to find an alternative to the tariffs, exploring the possibility of a price and export volume control mechanism as a substitute for the duties. China’s Ministry of Commerce acknowledged the EU’s willingness to negotiate but warned that the tariffs would “shake and hinder” the confidence of Chinese businesses investing in Europe.

Meanwhile, Europe’s automotive industry is hardly in tip-top shape. Faced with shrinking demand and brutal competition in the Chinese market—now dominated by local EV brands—companies like Volkswagen are contemplating factory closures to cut costs. It’s almost poetic: Europe targets Chinese EVs; in return, its automakers feel the squeeze.
Following weeks of dire profit warnings from Stellantis, Mercedes-Benz, and BMW, the EU’s tariff vote has given European automakers a fleeting respite as their shares finally rebounded. However, French cognac producers, not ones to miss an opportunity to criticise, accused the government of abandoning them—after all, what’s an economic dispute without a little French outrage?

The tariffs will hit different Chinese automakers at varying degrees: SAIC gets the lion’s share with a 35.3% duty, followed by Geely at 18.8%, BYD at 17%, and Tesla at a comparatively modest 7.8%.
These manufacturers face a dilemma: absorb the cost or pass it on to European consumers. With slowing domestic demand and tighter margins, some Chinese automakers are even considering investing in European factories to dodge the new levies altogether.
The tariffs have already taken their toll, with Chinese EV sales in Europe plunging by 48% in August—the lowest in 18 months. This is not ideal, considering Europe was shaping up to be a rather attractive market for Chinese manufacturers, where EVs are sold in higher volumes and at loftier prices compared to other regions.

However, before we start playing violins for China’s automakers, it’s worth noting that Europe represents a tiny slice of their total sales. The region contributed a mere 1-3% to BYD, Geely, and SAIC Motor’s revenues. Even with tariffs, Chinese cars remain, on average, cheaper than their European counterparts. The real losers in this escalating spat? German carmakers, of course. With China accounting for a third of their car sales in 2023, a full-blown trade war could be disastrous for them.

So, in true European fashion, we’ve embarked on a grand economic chess game, complete with abstentions, indignation, and tariffs galore. What could possibly go wrong?