Implications of EU-China trade dispute

Trade spat will not only affect auto sectors of both sides, but will also impact global value chains

KARACHI:

Undoubtedly, the relations between the European Union and China have played a pivotal role in the global business landscape and the repercussions of current parleys following a trade war about protecting their respective electric vehicle (EV) industries could envelope the economies of both countries, especially their automobile sectors.

Moreover, the economic interdependence and technological competition may trigger volatility and frequent adjustments in bilateral trade, resulting in reshaping their long-standing ties.

The elections of the European Parliament, held in early June 2024, have heralded a new era for European ties with China. This geopolitical shift has influenced the EU's approach, leading to conflicting perspectives.

In the aftermath of the 2024 vote, the increased fragmentation within the EU Parliament suggests a more complex and uncertain path to forming a cohesive strategy towards Beijing. This uncertainty poses challenges for the European companies conducting business with China as well as Chinese and global companies operating in Europe, which must now navigate a more unpredictable regulatory environment, according to China Briefing.

Amid these developments, the Chinese government is keenly observing the evolving dynamics. It aims to cultivate allies within the European bloc, reflected during President Xi Jinping's recent European tour, which included official visits to France, Serbia and Hungary. During the trip, Xi reiterated the significance of the 27-nation bloc as China's major trading partner.

The European Commission is formalising new import tariffs on Chinese EVs, soon after the EU's inconclusive vote left final decision to be taken by the commission. The EU remains divided on the imposition of tariffs of up to 45%. In retaliation, China is taking temporary anti-dumping measures.

The EU-China trade dialogue may impact automobile trade between the two sides and ultimately could take a heavy toll on the global auto industry following the US ban on China's internet-connected cars.

The restriction is actually an attempt to further cut off the entry of smart internet-connected cars into the United States, which imposed a 100% tariff on new energy vehicles, and sought to extend its "long arm" to allies as much as possible.

In the days to come, global automakers will reshape their supply chains around the two major markets of China and the US.

Those companies that rely heavily on the Chinese market, such as German and Japanese carmakers, and GM and Tesla in the United States, may have to use the dual supply chain of China and the US.

The Economist reported that new EU tariffs on imported Chinese-made EVs had come into force. The new duties, which come on top of an existing 10% levy, range from 7.8% for Tesla's imports to 35.3% for SAIC (Shanghai Automotive Industry Corporation)'s cars.

The EU says China's carmakers benefit from state aid that undercuts European rivals. A furious China has retaliated by imposing an anti-dumping measure and is considering other punitive policies.

In terms of earnings, quarterly revenue at BYD overtook that of Tesla for the first time. The Chinese maker of electric cars chalked up $28 billion in sales for the third quarter, ahead of Tesla's $25 billion.

BYD is facing an additional 17% tariff in the EU, a market that is driving its global growth ambitions. Elon Musk has pledged to increase Tesla sales by 20-30% next year, a goal that many investors doubt he will be able to achieve.

International trade expert and auto sector analyst Aadil Nakhoda said, "The EU and US both are likely to face retaliation from China if a trade war erupts. However, the impact of the trade war can be different as the bundles of goods are different.

"Also, the EU has several smaller economies that are in close proximity to China than the US and they often receive greater benefits from trading with China than the US as a whole. The implications are different."

The EU imported about 500,000 EVs from China last year, which accounted for about 10% of market share. It was roughly one-third of exports from China in 2023. This will likely impact the Chinese EV production strategies.

The US is not only one of the most important producers of technologically advanced products, its consumers are also likely to demand the most technologically sophisticated goods.

Cutting off access to such an important market will have far-reaching implications, which can hurt the overall research and development (R&D) work in the industry and the scope of technological advancements as the economies of scale matter much for such investments.

The auto industry relies heavily on regional value chains than the global value chains, where trading in parts and accessories is restricted within three blocs – the EU, North America and Asia.

It is likely that EVs will follow suit as technology becomes more widespread. China will find avenues to invest in regional neighbours to ensure that it continues to maintain its edge in the industry and take advantage of linkages across the US, EU and its Asian neighbours.

China not only has the cheapest EVs but it also is successfully developing the battery segment. The US and EU believe that protecting their markets (under a false pretense) is likely to hurt Chinese producers and reduce their competitiveness.

So far this has not been the case. Unfortunately, politicians have a completely different understanding of economics than the experts and this is quite obvious in the case of EVs and batteries as restrictions have not discouraged Chinese companies from investing in this industry.

Nakhoda said, "There will be a need to adopt different strategies as trade wars involve retaliations that lock out suppliers from the trading partner. Hence, it will be crucial for other firms to seek alternative avenues to enter China. We will see further divergence of investments into Southeast Asian countries. Also, Mexico is likely to be a beneficiary of such a trade war between the US and China."

The writer is a staff correspondent