China’s EV Case: A Testing Ground for the EU’s Genuine Foreign Economic Policy

Navigating Divisions

Since presenting the EU’s economic security strategy in the summer 2023, the European Commission, led by President Ursula von der Leyen, has made painstaking efforts to build a consensus among member states on the formidable economic and security challenges China presents for the EU. At the heart of this agenda has been the EV case. In September of last year, the European Commission President launched an anti-subsidy probe into imports of EVs from China, which some EU insiders view as an acid test for the very issues, like unfair competition, raised in Draghi’s report. Even though the investigation resulted in a plan to impose countervailing duties of up to 35%, the divisions among the member states have emerged.

First, the division has been epitomized by Germany’s Chancellor Olaf Scholz. Last year, the coalition government of Social Democrats (SPD), Liberals (FDP), and Greens, led by Scholz of the SPD, introduced a promising China strategy outlining the challenges posed by China and a strong commitment to developing a coherent European policy towards China. Despite the focused strategy, the parties have shown differing views on how to move forward in terms of cooperation with China. The Greens have taken a more pessimistic stance, while the SPD and Scholz have been cautiously optimistic. However, the cautious approach has been further complicated by tensions surrounding the EV case and Berlin’s concerns about potential retaliation from China against Germany’s auto industry, which is vital to its export-driven economy. Driven by these fears, Berlin has given in to China’s well-tested carrot and stick tactics—including offering to reduce tariffs on German luxury cars while simultaneously threatening to raise them if Brussels imposes tariffs. As a result, with the economy struggling and facing a surge in far-right sentiment one year before Germany’s federal election, Scholz has been actively trying to convince the EU members to oppose tariffs on EVs.

Spain also joined Scholz’s ultra-cautious camp. Spanish Prime Minister Pedro Sanchez implied that Madrid would shift from a vote in favor of duties to a vote against. This decision was made after Beijing initiated an anti-dumping investigation into EU pork imports, a significant amount of which originates from Spain. Additionally, Sanchez was presented with an offer for a $1 billion green hydrogen equipment plant by China’s Envision Group.

The Berlin and Madrid duo, tempted by the tradeoff for certain national benefits, have created a dilemma about whether they could trigger a domino effect, leading other capital cities to take a similar course that would force the European Commission to reverse its decisions—a move that would seriously weaken the institution.

Even if Germany were to abstain due to coalition factors and Spain were to vote against, it is still unlikely that the measures would be prevented, given that Italy and France have promised their full support. In case the proposed tariffs are enacted as planned at the end of October, they would illustrate the EU’s capacity to counter China’s unfair economic practices. However, simply imposing anti-subsidy tariffs will unlikely resolve the problem of Europe’s competitiveness and security, as this response lacks the necessary unity and strength. Furthermore, China’s adeptness at dividing countries through strategic incentives may leave the EU even more vulnerable to future challenges when engaging with China once the tariffs are implemented.

A Steep Uphill Climb Towards Unity

While tariffs on Chinese EVs are expected to spur investments in new European factories, create local jobs, introduce cutting-edge technologies, develop domestic expertise, and catalyze the climate transition faster and cheaper, these benefits come with important caveats. A significant concern arises from the risk to cybersecurity, as EVs are virtually connected products on the wheels reliant on uninterrupted data flow and sharing, and are subject to software updates, which make them hard to control. Given the considerable influence Beijing wields in the cyber realm, understanding who controls the data flows and software updates is vital for ensuring the security of the EU.

Moreover, there are concerns that substantial investments could deepen dependencies. With China commanding critical components of the EV supply chain, notably batteries, there exists a risk of European competitors being edged out of the market. To preserve Europe’s industrial base, policymakers should mandate that Chinese EV investors localize a portion of their materials and battery sourcing rather than merely assembling vehicles in Europe.

These caveats are a far from trivial question and will demand a strong and unified answer from the upcoming governance of the European Commission. In this matter, Spain and Slovakia could potentially play an important role. While Maros Šefčovič from Slovakia has been tasked with managing trade relations with China in line with the EU’s de-risking policy, addressing market distortions and overcapacities while avoiding full decoupling, Spain’s Teresa Ribera has been given a competition file, focusing on rigorously enforcing regulations regarding foreign subsidies and proactively identifying problematic practices. These two portfolios might steer the bloc in a much more robust and coherent direction toward China.

In addition to the European Commission, the European Council could also support the establishment of a more united approach to China. It has been suggested that the European Council could streamline economic issues within its work to gain more support from member states. Establishing an economic security council, similar to existing councils for foreign affairs and defense, would facilitate the involvement of ministers from member states, which could engage more effectively with one another to align their approach regarding China.

In the Netherlands, there has been some progress made in this regard, with a small operational group comprising all government ministries collaborating to address the government’s lack of knowledge and awareness regarding its relations with China. While this group does not fully replace a comprehensive economic security council, it represents a valuable starting point for the EU’s efforts to develop a united policy toward China.

However, without unity as regards the EU’s China policy, which is salient to the bloc’s geopolitical credibility and industrial future, it will not have the strength to develop a genuine foreign economic policy, and its economic growth will be headed towards a “slow agony” accompanied by much more complicated relations with China.