Idiotic net zero rules are driving Europe’s carmakers to extinction

electric car factory
electric car factory

Europe’s motor industry, including that of the UK, faces an extinction event, and in large measure it’s because of fanciful net zero targets enacted in haste, and now being repented at leisure.

True enough, it’s not going to happen overnight; the threatened denouement is on a long fuse and will take some time to show through in significant job losses and decline in market share. But the threat is already real and growing, and shockingly, seems to have taken most policymakers entirely by surprise.

As on much else these days, the threat comes from China and it is not going away. Call it clever industrial strategy if you like, but China has positioned itself uniquely well to take advantage of punishing targets for zero emission vehicles, and on the present trajectory looks likely to clean up.

In the past, China never had much of a motor industry, and what it did have was vastly inferior to its Japanese, European and US counterparts.

Instead of trying to play catch-up, it therefore systematically targeted next-generation all-electric vehicles (EVs), ploughing billions of dollars in state subsidy into ensuring superior design, performance and price.

This is quite an achievement and to be fair on China, its purpose was not that of deliberately undermining the West, initially at least. Rather, the goal was to leapfrog the old technology into an entirely new era of less polluting cars that would ensure cleaner air for Chinese cities and galvanise the domestic vehicle market with home-grown products.

While high income economies pursued the technological cul-de-sacs of diesel and hybrids, China got on with developing the necessary supply chains and today has a stranglehold on many of the raw materials and components needed for battery powered vehicles. As is now generally agreed, its latest models are far in advance of anything that Europe, Japan and the US produces, and not just in terms of performance and price.

If cars are today as much travelling iPads as vehicles, then China has stolen a march in this area of the technology as well, with models believed by some to be superior in their IT even to Tesla.

Last week, the White House took matters into its own hands and slapped a 100pc tariff on all Chinese EVs in a throwback to similar charges that were imposed on Japanese vehicles by the Reagan administration back in the 1980s.

Coming on top of already very considerable tariffs and other barriers to entry, this is Smoot Hawley-style protectionism and is almost certainly illegal under World Trade Organisation (WTO) rules designed to prevent discrimination. Established rules on free trade are once more being tested to destruction by growing superpower rivalry. Whether it was ever possible to have free trade with a country now widely regarded as a hostile power is an interesting question. The US plainly believes not.

For the time being the tariffs shoot at a phantom threat, in that hardly any Chinese EVs are imported into the US market. The decision is instead instructed almost entirely by domestic political considerations. The United Auto Workers are still a powerful force in certain swing states. No one loses votes on a Sinophobic ticket.

But the tariffs also speak to a wider concern about the green transition, which is that if you are going to pursue net zero, you need to carry the voters with you by demonstrating tangible economic benefits.

If many of the transition’s jobs and industries are seen to be going to China, then politically the pursuit of a low carbon future becomes much more difficult.

The last thing the White House wants to see is its near trillion dollar package of green energy tax breaks and subsidies being channelled into Chinese EVs.

In any case, Biden’s tariffs have put the fear of god into Europe’s once mighty auto manufacturers. With the US essentially closed to Chinese EVs, Europe and the UK make an obvious target for China’s excess production.

Made-in-China cars already account for nearly 10pc of the UK market. Publicly, all the big mass market manufacturers say they welcome the competition, but it is plain as a pikestaff that they do not.

China’s EV assault is a far more potent threat than they have ever faced before, and without urgent government intervention, may even be existential.

For the moment, the Chinese manufacturers are treading warily for fear of inviting the same response in Europe as they have encountered in the US.

In its customary plodding and diligent manner, the European Commission is trying to build a case against China, but unlike America it aims to do so within the framework of WTO rules.

The EU is further constrained by the fact that many European manufacturers, as big exporters of conventional internal combustion engine cars to China, fear retaliation.

What’s more, Chinese EVs are much more expensive in Europe than they are back home in China, making it hard to accuse Beijing of dumping.

As ever, the UK finds itself caught in the crossfire.

On the one hand the Government is keen to limit the perceived costs to consumers of net zero by ensuring that EVs are as cheap as possible.

Poor EV take-up, to date, is largely because of high prices. For instance, the all-electric version of the Fiat 500 is £10,000 more than its petrol equivalent. Why buy?

Yet the Government won’t be thanked if low-cost Chinese competition ends up destroying the British motor industry, worth nearly a million jobs and £67bn of annual turnover.

As it is, the Chinese assault is being turbocharged by the Government’s insane zero emissions mandate, which progressively ramps up the proportion of sales that must be EVs.

Companies that don’t meet these thresholds must pay heavy fines. EU requirements are not quite as punishing as Britain’s “world leading” targets, but even so are bad enough. According to outside estimates, VW faces EU fines next year of around €4.5bn (£3.9bn) on its present sales mix. As pure EV manufacturers, most Chinese suppliers face no such penalty.

It is as if in pursuit of net zero we are deliberately allowing China to disable our key industries. Beijing meanwhile shows no sign of changing its economic model in a manner which would reduce these pressures.

Structurally, China remains addicted to an investment/export led economy. Lack of an adequate social safety net leads to very high levels of domestic savings, which in turn crimp consumption and create excess capacity across multiple different industries.

These surpluses are exported to the West at knockdown prices. EVs are only the latest example of it, with China already producing vastly more EVs than it can sell domestically.

Yet we scarcely help ourselves with an ill-thought-through net zero policy which seems almost designed to benefit Chinese producers at the expense of our own.

It’s an awkward choice; either the targets have to be eased, or the industry is going to require some tariff protection while it plays catch-up. Or very probably both.