Major economies are taking aim at China’s EV industry. Here’s what to know

China’s electric vehicle (EV) industry faces a wave of unilateral trade restrictions in major export markets, heightening trade tensions between the world’s major economies.

In May 2024, the United States increased tariffs on Chinese-made EVs from 25% to 100%, this follows its longstanding concern about China’s 'unfair trade practices.' In July this year, the European Union imposed a provisional anti-subsidy tariff of up to 37.6% on EVs imported from China. This comes after an anti-subsidy investigation launched by the European Commission in October 2023 without a petition by domestic EV producers. In August, Canada followed suit increasing its 6.1% import tariff on Chinese EVs to 100%, also citing well-known issues relating to Chinese industrial policies and subsidies, which cause overcapacity and unfair competition.

China reacted immediately and forcefully through a range of countermeasures. The most high-profile ones are a series of anti-dumping actions. These actions first targeted EU pork and brandy. In the brandy investigation, China’s Ministry of Commerce suggested a positive dumping margin of up to 39% in its preliminary determination, but it decided to not impose provisional antidumping duties, yet. As a countermeasure, the dumping rate apparently mirrors the level of the EU’s anti-subsidy tariff on Chinese EVs.

The decision to hold on the imposition of antidumping duties provides a window for diplomatic dialogue and solutions. At the same time, China also brought a dispute against the EU’s tariff at the World Trade Organization (WTO). This dispute provides another opportunity for the two sides to negotiate a solution via consultation.

In the case of Canada, China’s retaliation is even more harsh. The toolkit of forthcoming countermeasures, announced by the Ministry of Commerce on 3 September 2024, encompasses antidumping investigations on Canadian canola oil and chemical products, as well as a separate anti-discrimination investigation. Under China’s Foreign Trade Law, China may take corresponding actions in retaliation of discriminatory trade restrictions imposed by a foreign government against China. While the anti-discrimination instrument has been a policy option since 1994, it has never been used before. It, therefore, remains unclear how the investigation would be conducted and what measures may be applied.

The EV tariffs and Chinese countermeasures are leading to an escalation in trade tensions amid already heightened geopolitical frictions and uncertainties. The US and its allies have long been concerned about China’s ambitious industrial policies supported by massive subsidies, particularly in strategic sectors. These policies and subsidies are behind the unparalleled success of China’s EV industry over the past 15 years.

While the goal of the Chinese policies is to facilitate a transition to a low-carbon economy, the strategy also involves making China the world leader in EV technologies and innovation and production. A major consequence is 'overcapacity', which led to allegations of cheap Chinese EVs flooding into other markets and harming foreign EV industries. Since 2017, China’s EV exports surged 13,300% to $42 billion in 2023, when China accounted for nearly 70% of global EV production.

The unilateral actions taken by the US, the EU and Canada, therefore, seem to be supported by legitimate concerns. These actions, however, must not be viewed in isolation from the broader geopolitical context. While targeting Chinese industrial policy and subsidies, the West has introduced similar policies and subsidies, such as the US Inflation Reduction Act and various state aid programmes in EU member states. The superpower competition for global leadership in strategic sectors adds fuel to the already heated industrial policy race worldwide.

If the goal of the EV tariffs is to force China to change its policy and practice, they are destined to fail. China’s entrenched commitment to its economic model, strategic development goals and industrial policy was reaffirmed in the Communique of the Third Plenum in July 2024. Unilateral actions will most likely provoke retaliation, as evidenced by the protracted and still evolving US-China trade war and China’s responses to the EV tariffs.

China’s reaction is not difficult to understand. The Chinese government sees the EV tariffs as blunt discrimination and protectionism to contain China’s development, while policies and subsidies in similar forms and at similar scales are growing rapidly in these competing economies with the aim of overtaking China. In this sense, US and EU policies face a classic ‘glasshouse’ dilemma and fall short of market-based norms and standards.

To mitigate the impact of foreign tariffs, Chinese EV makers may continue to move their production to a third-country market as some have already done to countries like Thailand. Nevertheless, such practices may trigger inquiries about circumvention of existing antidumping and anti-subsidy tariffs, which may lead to the application of these tariffs to EVs produced and exported from these third-country markets.

At the same time, Chinese EV producers may accelerate export diversification into emerging markets, such as Australia. Indeed, BYD, China’s largest EV maker, is making good progress in overtaking Tesla's EV sales in Australia. Since Australia does not maintain an EV industry, it would unlikely pursue antidumping or anti-subsidy actions, which require evidence of material injury suffered by the relevant domestic industry.

WTO litigation remains an option. The EU, Canada and China are members of the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), an interim appeal process established to fill the vacancy of the Appellate Body. The recourse to the MPIA would avoid the situation of 'appealing into the void' whereby a losing party blocks the WTO dispute settlement process by appealing to the paralyzed Appellate Body. WTO litigation, however, may not be an effective approach to resolving disputes with the US, which is not an MPIA member and hence is more inclined to appeal unfavourable rulings of WTO panels – WTO’s first instance court – into the void.

The biggest problem though, is that WTO litigation does not provide a systemic solution. Similar measures can always be taken against each other again and again, resulting in a vicious cycle that perpetuates the problem. To provide a meaningful long-term solution to the growing widespread proliferation of industrial policy and subsidies, all major players must work together to craft multilateral rules that redesign rules of global competition in the relevant sectors. This would require all countries to pick up the tools of multilateral diplomacy and abandon the weapons of unilateral lawfare.