Von der Leyen’s China policy faces make-or-break vote on EV tariffs

The stage has been set in Brussels for a decision that could either make or break Ursula von der Leyen’s China policy.

The 27 countries of the European Union have been called to vote on a proposal to slap additional tariffs on imports of China-made electric vehicles (EVs). The closely watched ballot, scheduled for Friday morning, will see capitals pitted against each other: Budapest is a forceful detractor, Paris and Rome are reliable supporters, Madrid is trying to make up its mind, and Berlin is reeling from a failed opposition campaign.

The vote by trade experts represents the culmination of a months-long investigation first announced by von der Leyen in September last year.

“Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies. This is distorting our market,” the Commission president told MEPs in Strasbourg back then.

“As we do not accept this from the inside, we do not accept this from the outside.”

The probe began shortly after that speech and saw EU officials visiting over 100 carmaking sites across China. Three prominent companies – BYD, Geely and SAIC – were picked as representatives for the EV industry and asked to fill out a multi-chapter detailed questionnaire about their business operation and relation with the Chinese government, which was also involved in the inquiry.

In the end, the findings were overwhelming: Beijing had for years lavished its domestic EV sector with enormous sums of public money, permeating “the entire supply chain,” as officials described it. Subsidies were detected from the mining of raw materials to the shipping of finished goods, creating an all-encompassing environment where preferential lending, tax reductions, direct grants, “green bonds” and consumer benefits (which, allegedly, never reached consumers) worked together to the benefit of carmakers.

As a result of this financial overflow, the Commission concluded that European firms risked being pushed out of the lucrative EV market and suffering unsustainable losses, with painful consequences for 2.5 million direct and 10.3 million indirect jobs in the bloc.

The dismal outlook led Brussels to propose additional tariffs in a bid to offset the damaging effect of the subsidies and close the price gap between China and the EU. The proposed duties, which will come on top of the existing 10% rates, vary according to brand and level of cooperation with the Commission’s probe, including Tesla (7.8%), BYD (17%), Geely (18.8%) and SAIC (35.3%).

Friday’s vote will see member states vote on a legal text to make these extra duties applicable for the next five years. The vote will follow the rules of qualified majority, meaning it will take 15 countries representing at least 65% of the bloc’s population to approve the proposal. The same threshold will be needed to reject it, which will trigger the appeal process and a second vote at a later stage.

There is, however, a third – and increasingly likely – possibility: some capitals could abstain, preventing the room from reaching the necessary number for a positive or negative outcome. It will then be up to the Commission, invoking its exclusive trade powers, to break the impasse and decide if it wants to go ahead with the tariffs.

At any rate, the final decision has to be taken by 30 October, the legal deadline established by the anti-subsidy investigation.

Referendum on von der Leyen

The stakes could not be higher for the Commission and, in particular, for its president, who has been credited with spearheading a major shift in how the EU thinks of China, putting an end to the political complacency that characterised bilateral relations since Beijing joined the WTO in 2001 at the peak of the globalisation fervour.

Von der Leyen has portrayed China as a nation “more repressive at home and more assertive abroad,” bent on achieving a “systematic change of the international order” with Beijing at its centre. In her view, unfair trade practices, such as massive injections of industrial subsidies to conquer market share and control nascent technology, are another tool to ensure the Communist Party succeeds in its long-term mission.

This hard-boiled vision, encapsulated in a landmark speech of March 2023, was the fuel that prompted a raft of inquiries into Chinese products and subsidies. Among them, the probe into EVs stood out as the most consequential and explosive due to its political and economic implications – not to mention its potential to unleash a trade war.

ADVERTISEMENT

The vote on the tariffs is, by extension, a referendum on von der Leyen’s China policy.

“The planned vote marks a pivotal moment for the future of EU-China relations,” said Janka Oertel, senior policy fellow at the European Council on Foreign Relations (ECFR).

“It serves as a litmus test for whether the rules-based solutions proposed by Brussels to strengthen Europe’s negotiating position with China will be undermined at the last minute by member state politics.”

If the duties are approved, Oertel noted, von der Leyen will be encouraged to continue pushing hard against Beijing in her second mandate. If the duties are, by contrast, rejected, “China’s leadership will view this as a significant victory for its sophisticated sticks-and-carrots strategy. It will reinforce the notion that there are always enough weak links in the European chain, giving Beijing the upper hand.”

ADVERTISEMENT

Germany’s flat crusade

From the onset of the investigation, China has adopted an antagonistic position, at least in public. It has denounced the probe as a “naked protectionist act,” consistently denied the existence of subsidies, called the findings “artificially constructed and exaggerated” and threatened retaliatory measures against the EU’s dairy, brandy and pork industries.

But underneath this fury, Beijing has engaged in intense talks with Brussels to secure a political solution that could avert the additional duties. An option on the table is for China to commit to establishing minimum prices for its electric cars, although implementing this solution could prove challenging in practice – and vulnerable to multiple loopholes.

In parallel, Chinese officials have been hard at work travelling to European capitals, including Berlin, Paris and Rome, to convince enough countries to reject the tariffs. This lobbying effort came to the fore last month when Spanish Prime Minister Pedro Sánchez, after a four-day trip across China, made a U-turn and urged the Commission to “reconsider” the proposal, surprising many in the Belgian city.

Spain, though, is not the country to watch out for on Friday morning. All eyes will be on Germany, an industrial powerhouse with a world-class automotive sector and deep commercial ties with the Chinese market. Traditionally, Berlin has advocated for a conciliatory policy towards Beijing, with the economy first and the politics second.

ADVERTISEMENT

The arrival of the Greens, with their outspoken views on China’s totalitarian regime, to the governing coalition was seen as the promising dawn of a new era. But growing fears of commercial retaliation, relentless pressure from car-makers, persistently high energy prices and stagnant GDP growth eventually dampened the German resolve to stand up to China, leading to a behind-the-scenes push to kill the tariffs.

“Of course, we have to protect our economy from unfair trade practices,” Chancellor Olaf Scholz said this week. “However, our reaction as the EU must not lead to us damaging ourselves,” he added, calling for EU-China negotiations to continue.

Remarkably, Berlin’s crusade has fallen flat. France and Italy, two countries that given their demographic weight will be much needed to stop the duties, have shrugged it off and stood by the Commission’s side. Poland and the Netherlands, two key actors, have chosen to go harder, rather than softer, on China. The lessons learned from Russia’s invasion of Ukraine have stirred similar emotions across the bloc.

The fact the campaign “appears doomed to fail” demonstrates that “Germany’s sway over China policy has been greatly diminished,” Noah Barkin, a visiting senior fellow at the German Marshall Fund, wrote in his newsletter ahead of Friday’s vote.

ADVERTISEMENT

“The last time a German chancellor ignored the concerns of the country’s closest European allies, the European Commission and the United States out of blind fealty to German industry, it ended with a strategic catastrophe: the Nord Stream pipelines.”