What Brussels found when it probed Chinese subsidies and electric cars

The subsidies pumped by the Chinese government into battery electric vehicles (BEVs) are so distortive that extra tariffs are needed to counteract them.

This is the preliminary conclusion of the European Commission's trade investigation, announced on Wednesday after weeks of mounting speculation. Diplomats and lobbyists had eagerly waited to see how far the executive would go to confront Beijing, a task that, despite its pressing nature, remains divisive among member states.

The muscle-flexing took many by surprise.

The Commission has proposed a robust range of tariffs to even things out: 17.4% for BYD, 20% for Geely and 38.1% for SAIC. The other BEV producers based in China that cooperated in the investigation, including Tesla and BMW, will be subject to a 21% duty. Those that did not cooperate will fall under the 38.1% category.

The tariffs will enter into force on 5 July on a provisional basis. A proposal for permanent measures will come in November and be put to a make-or-break vote.

Wednesday's announcement exceeded industry and experts' expectations of a 20% rate and showcased a firm determination to challenge Beijing's unfair practices, which the bloc had previously excused for the sake of cooperation until it backfired on its face.

The Commission's findings are a damning indictment that appears to be designed to convince skeptics about the urgent need to take hard-hitting action.

"In this particular case, we had no option but to act in the face of soaring imports of heavily subsidised BEVs produced in China and their rising share of this market in the EU," said Valdis Dombrovskis, the Commission's Executive Vice-President.

Here's what has emerged so far.

The subsidies were everywhere

During the investigation, which began in early October, Commission officials found that subsidies were virtually ubiquitous in China's BEV sector.

Public money was detected across the entire supply chain, from the mining of raw materials to the production of battery cells and the manufacturing of cars. Even the shipping services needed to bring the goods to EU ports received state backing.

Some subsidies, such as preferential lending, tax reductions, direct grants and cheap land, were familiar to Brussels as they had been spotted in other fields before. But others, officials said, were "case-specific" to accommodate the needs of BEV production. These included the supply of lithium and batteries "below their market price," the issuance of "green bonds" that companies were compelled to buy, and the distribution of consumer benefits that were – in fact – paid out to producers.

The roll-out involved authorities at all levels – national, regional and local – and favoured BEV plants operated by Chinese and Western firms, like Tesla and BMW.

Over 100 companies were involved

The Commission's investigation encompassed 21 groups of China-based producers who were asked to provide financial information about their businesses. Given the sheer size of the market, the executive hand-picked three firms – BYD, Geely and SAIC – as representative samples to understand the extent of the subsidies.

"Tesla was not considered representative and was not included in the sample," an official said, speaking on condition of anonymity.

The selected trio was asked to fill out a multi-chapter detailed questionnaire that asked questions about their chain of command, production capacity, turnover, export volumes, supply chains and, crucially, use of subsidies and relation with the Chinese government.

This phase led to on-the-ground verifications, which took place between January and March this year and saw visits to about 100 production sites. The evidence collected in this period helped beef up the case and calibrate the tariffs according to brand.

Investigators also reached out to the Chinese government but the overture proved disappointing: Beijing was "very active" sending arguments to defend its industry but was "very hesitant" to give full replies to the inquiry's questions, officials said.

But not everybody cooperated

Once the facts were on the table, Commission officials set out to decide the tariffs.

BYD received the lowest levy (17.4%) because it engaged with investigators, whereas SAIC was slapped with a 38.1% rate for being uncooperative. Additionally, the subsidies received by the former were lower than those of the latter. As the proposed tariffs will come on top of the existing 10%, SAIC will face a 48.1% import duty as of 5 July.

Faced with a scarcity of information, Commission officials had to resort to the "best facts available," meaning data and insights from "similar sources" that could fill the missing links. This method – and the probe as a whole – has been vehemently contested by the Chinese Ministry of Commerce, which claims the Commission "artificially constructed and exaggerated" the existence of subsidies.

Vice President Dombrovskis insists due diligence was carried out.

"We have given every opportunity to Chinese companies, and to the Government of China, to provide their own data, so that we can draw up the most accurate picture possible of the subsidy situation," he said in a statement.

"We also gave as much time as possible for the Chinese parties to provide this information – in fact, we went beyond the strict legal deadlines. However, both the Government of China and a number of companies chose not to cooperate in full."

The 'injury' is both present and future

The inquiry's core objective is to determine whether China's use of subsidies might cause "injury" to the EU industry. In other words, European firms risk suffering unsustainable economic losses because they cannot compete with low-cost imports.

When the probe was announced in September by President Ursula von der Leyen, the "injury" was depicted as a future threat that had to be prevented with pre-emptive action. But on Wednesday, the Commission indicated some damages were already done.

The market share of Chinese BEV producers jumped from 1.9% in 2020 to 8.8% in the third quarter of 2023, an astonishing rise in a very short period of time. "This market share is likely to increase to 17% by 2025 as Chinese producers are also planning to increase their exports to the EU," Dombrovskis said.

The sudden influx of China-made BEVs, with their attractive price tags, put EU producers at an immediate disadvantage because it precluded the increase of prices that should have otherwise occurred, decreasing profit margins, officials explained.

If this financial tightening worsens, EU car-makers will fail to succeed in their transition from fossil-fuel engines to electric batteries, as is foreseen under EU legislation. The automotive sector is responsible for 2.5 million direct and 10.3 million indirect jobs, so the bloc's inability to keep up in the BEV race could have painful consequences.

The Commission therefore identified "a threat of clearly foreseeable and imminent injury" that justifies the imposition of measures to close the pricing gap.