The European Commission on Thursday (July 4) announced the results of a nine-month investigation into the Chinese electric car market. This is the largest trade case in the ongoing disputes between Europe and China. The report detailed how tariffs were calculated and the evidence collected to support its conclusion: the Chinese Communist Party provides unfair subsidies to businesses.
The report specifically outlined the lack of cooperation from the Chinese government and the state-owned car manufacturer SAIC in the investigation into whether Chinese electric car manufacturers benefit from unfair government support. As a result, SAIC faced the highest tariff of 37.6%, while BYD and Geely faced lower tariffs of 17.4% and 19.9% respectively.
With the release of this document, the EU announced on Thursday that a temporary 37.6% tariff on electric cars manufactured in China would come into effect on Friday. The Chinese government has threatened retaliation, but the EU stated that there is no basis for retaliation.
European Trade Commissioner Valdis Dombrovskis stated that China has no grounds for retaliation and emphasized the EU’s goal to “ensure fair competition and a level playing field,” in an interview with Bloomberg.
According to Reuters, if the Chinese government complains to the World Trade Organization about the EU imposing tariffs on Chinese electric cars, this report is likely to be part of the Commission’s defense for this action.
The report highlighted that the Chinese government’s strict control over car manufacturers prevents them from being “rational market operators seeking profit maximization,” essentially forcing them to function as a government department.
Therefore, the report concluded that European car manufacturers are evidently facing a “foreseeable threat of substantial harm” and that action is imminent.
This report is similar in content to a lengthy report released by the Commission in April regarding Chinese government intervention in the Chinese economy and strategic industries. Analysts believe that as the EU takes a tougher stance against the Chinese government, it lays the foundation for handling future trade cases.
The Commission found that subsidies received by Chinese car manufacturers include cheap loans, inexpensive land, and direct stimulus measures for electric car sales. They also receive assistance in battery costs, as batteries are one of the most expensive components of electric cars.
For example, SAIC and Geely obtained batteries at low prices, while BYD, though producing its own batteries, received subsidized battery materials, especially lithium.
Taking SAIC as an example, the EU estimates its total subsidies at 34.4%, with state-owned bank loans accounting for 1.38%, other forms of financing for 8.27%, grants for 8.56%, electric car sales incentives for 2.28%, cheap land for 0.67%, and low-priced batteries for 13.24%.
China complained that the Commission’s request for detailed information on supply chain in the subsidy investigation was unprecedented.
Beijing has engaged in lengthy tug-of-wars with the EU in many areas, either refusing to cooperate or failing to provide more fundamental information, including the number of electric vehicles registered in China by brand, model, and location.
The report stated, “The Chinese government cannot claim to lack information on the quantity of BEV (Battery Electric Vehicle) registered in China at certain periods.”
The report also detailed SAIC’s evasion behavior, with the company claiming it could not provide the requested information. The report noted that Chinese financial institutions providing loans to SAIC, BYD, and Geely “did not provide any credit assessment,” prompting the Commission to conduct its own investigation.
All three car manufacturers received the highest “AAA” credit rating from Chinese state rating agencies – the higher the rating, the lower the interest rates. However, due to issues such as high debt-equity ratios and using loans to repay debts, the Commission found that their overall financial rating is equivalent to a “B” grade.
Investors view bonds rated “B” as junk bonds.
The EU stated on Thursday that the anti-subsidy investigation into Chinese electric cars will continue until November 2, at which point a final tariff lasting five years may be imposed.
Meanwhile, the EU is also investigating a series of Chinese government over-subsidization practices, including whether Chinese clean technology manufacturers are dumping subsidized goods into the EU market and if Chinese businesses operating within the EU unfairly benefit from subsidies.
The European Commission conducting the investigation stated that its objective is to prevent unfair competition and market distortions.