China tells automakers to pause investment in tariff-supporting countries

China has reportedly already told its major automakers to hold off investments in EU countries that supported Europe’s new EV tariffs, according to Reuters.

While China started a little slow in the EV game, its investments into EV manufacturing have now started to bear fruit, and the country’s manufacturers have rapidly caught up and now passed western automakers, particularly on price.

As a result, both Europe and the US have recently imposed large tariffs on Chinese EVs, fearing that Chinese cars will undercut domestic industry with lower manufacturing costs. Chinese EVs are already quite popular in Europe, though very few sell in the US.

While the EU tariff vote passed handily, the voting patterns among countries mostly reflected fear of retaliatory tariffs. As is often the case with tariffs, a country can’t simply impose a restriction without expecting any pushback.

This is why, for example, Germany voted against the final tariff despite abstaining for the initial vote. German automakers do a lot of high-margin business in China, and worried that China would no longer purchase their autos either because of retaliatory tariffs or consumer animosity towards foreign brands (which is already happening, well before these tariff talks).

And China specifically has been quite effective in the past at responding to tariffs with targeted retaliatory tariffs of its own. Indeed, they’re already investigating EU dairy and wine products as potential tariff targets.

So it’s no surprise that today, on the same day as EU’s new tariffs went into effect, a report from Reuters says that the Chinese government has told automakers to think carefully before investing in Europe, particularly in countries that voted in favor of or abstained from the EU’s tariff imposition.

Several Chinese automakers are already considering building factories in Europe in order to localize production and bypass tariffs, including BYD, Geely and XPeng. This is kind of the intended effect of tariffs – ensuring that foreign automakers will invest in local production and local jobs.

But China wants to ensure that that investment money goes to countries that didn’t vote in favor of tariffs. BYD for example is currently building a plant in Hungary, a country that voted against the tariffs.

Meanwhile, other countries that did vote for the tariffs have attempted to get Chinese firms to invest in building factories there, like France and Italy. But this new directive would make their path towards investment tougher, if Chinese firms follow the government’s guidance.

This is likely not the only action that China will take in response to EU’s tariffs, merely a preliminary one. But it does show China’s willingness to swiftly respond to countries imposition of trade restrictions.

Concurrently, discussions are ongoing between EU and China about a potential minimum pricing deal to avoid tariffs. The hope was for those to conclude before tariffs were imposed, but it seems that they will have to continue.

Electrek’s Take

As I’ve said many times before, tariffs on China are not the answer to winning the EV arms race. I think countries would be much better off incentivizing local production than disincentivizing overseas production, and all the messy secondary effects that come along with the latter.

Further, tariffs can often lead to a sense of complacency for domestic manufacturers, who encourage them so they can have time to ramp up, and then take that time to slow-roll their ramp so that they end up back where they started. We saw this in the 70s with Japan in steel and autos – and the emergency tariffs did not forestall 50 years of Japanese export dominance (they were only kicked dethroned as #1 auto exporter last year – by China).

So despite the entrance of China onto the international automaker stage, most of the last year has been characterized by automakers doing their damnedest to slow down EV adoption. They’re scaling back production plans despite increasing EV demand , they’re begging governments to allow them to pollute more, and they’re generally not indicating that they’ll use the “time” these tariff impositions have given them wisely.

If this continues, then all Europe will get for its tariffs are a delay of the inevitable. They might still get some factories, but those factories will be owned by foreign entities instead of local ones. And this will come along with a lot of pain for whichever industries China decides to target with retaliatory tariffs, and with less competition and more inflation for local consumers as auto prices are buoyed by these tariffs.

I know I keep repeating myself (for more than a decade now…), but the true answer to this would have been to take EVs seriously from the get-go, instead of all the waffling that Western automakers have done that has left them now behind. That should have started long ago, but as the famous (possibly Chinese) proverb says: “the best time to plant a tree is 20 years ago, the second best time is today.”

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