EU-China EV Slugfest: Are the Gloves Coming Off?

The European Commission’s assertive new subsidy probe shows that the balance of power in the EU is shifting on trade defense.

Ed Bithell, previously a UK civil servant and diplomat, is now writing from Brussels on trade and industrial policy.

European Commission President Ursula von der Leyen made waves last week with official confirmation that the EU is undertaking an anti-subsidy probe against the Chinese electric vehicle sector, confirming rumors that have built steadily in recent months. While couched in classic Brussels language, the probe marks a major step in the EU’s slow shift to a more assertive approach to trade defense against China, reflecting von der Leyen’s shift toward being a French-backed champion of European industry before Europe-wide elections next spring.

In her 2023 State of the Union address to the European Parliament on September 13, VDL focused on her program for a “green, digital and geopolitical Europe.” Following a preamble on how the EU learned the hard way from unfair competition in the solar panel sector, most of VDL’s section on trade distortion and China zeroed in solely on EVs, stating,

• The price of Chinese electric vehicles is “artificially low,” distorting the EU market,

• The European Commission will investigate PRC subsidies in the electric vehicles sector this year, but

• There remain key areas where dialogue with China is necessary, and she will promote a “de-risk, not decouple” approach, including at the EU-China leaders summit later this year.

For those new to EU Kremlinology: Ursula von der Leyen has been President of the European Commission, the executive branch of the European Union, since 2019. She is supported by a coalition of the European Parliament’s moderate political parties — from conservative to social democrat — and leads a team of twenty-seven senior officials, each representing one of the twenty-seven EU Member States.

On the one hand, there is broad consensus across VDL’s coalition, and almost all of the member states, to support her Commission’s three headline priorities: harnessing the green transition and digital economy to make the EU a global leader in these new technologies, and being a more serious geopolitical actor on the world stage.

On the other hand, however, there is real disagreement among (and within) parties and Member States on whether these ambitious goals require ambitious new methods, or whether they can be better achieved with familiar EU tools like regulation and tariffs, which have been its favored instruments since its inception as a trade-only organization. So far, Germany (often the casting vote in European policy deadlock) had been quietly dragging its feet against an increasing insistence from France and others that more drastic action is necessary in the trade defense space — but the interventionist camp’s victory in this case indicates that the balance of power is shifting.

“Chinese EV” prompted by, of all things, a Full Armor Gundam

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What can the EU expect to achieve with the anti-subsidy probe?

So what is the probe? As trade guru Sam Lowe notes, the first thing to say is that it is not an anti-dumping investigation. The EU won’t have to prove that China is selling below its domestic market rate, only that they are distorting prices. But that doesn’t mean it’ll be easy.

The EU’s default playbook here stems from its asymmetric capabilities compared to a competitor like China or the US. As a trade bloc that has slowly taken on more state-like functions, the EU’s greatest capability is in harmonizing rules and applying them to both internal and external frontiers — so much so that the technical word for a piece of directly effective EU is always “Regulation,” not “Act.” While obviously the EU is going to subsidize its own EV sector — and regulation can be used to defend European interests in some cases (Boeing has long alleged that EU aviation standards favor Airbus, but try selling “Wisconsin feta” in the EU…) — the EV space is evolving too fast to make subsidies alone workable, so more straightforward methods are more practical.

The Commission’s Directorate-General for Trade (DG Trade, for short) is highly capable in the trade defense space. And DG Trade can call upon much wider trade and industrial expertise across the Commission. The Commission has also acquired new powers since VDL took office in 2019, including on foreign subsidies in 2023. Even so, some key issues remain unclear:

1. Who will undertake the probe? It seems inescapable that much of the analytical work will have to be outsourced. But in an increasingly hostile and risky Chinese business environment, it may be very hard to find a company that has a credible footprint within China and yet is willing to risk that footprint by undertaking such analysis.

2. What sort of evidence can they hope to find? The Chinese subsidies (arguably having learned from previous WTO cases) are very complex and opaque, often operating through favorable loans and utilities — and transparency on this sort of microeconomic data is even worse now following the Counterespionage Law 反间谍法.

3. What will the immediate repercussions be for EU companies? Lots of big EU car companies (especially Volkswagen) have major joint ventures in China, and they may find their business environment becomes immediately more hostile. It even appears that the German car industry actually lobbied against the subsidy probe, despite the EU-wide auto lobby being in favor. And that’s without mentioning potential Chinese retaliatory targeting of non-automotive sectors.

4. If the EU takes countervailing measures against Chinese EVs, how will they define Chinese electric vehicles? The further you go into the value chain banning components, down to key components like batteries and even cathodes, the harder it will be to establish a credible alternative supply chain (at least in the short term).

But if the technical case is unclear, then this is where the core question of EU trade and industrial policy comes back in: is the EU going to deal with trade and market distortion by trying to enforce the traditional WTO paradigm rules with its traditional tools, or is it going to play China at its own game?

Paid subscribers get the rest of the analysis, which includes:

• Firm-level data on the past four years of Chinese auto imports;

• The difficulties in measuring China’s EV market share in Europe;

• The battle between Europe’s industrialists and free-market advocates — and who’s winning right now;

• The inside scoop on how long VDL has been contemplating the launch of this probe, and to what extent this move is politically driven.