Time to be open, sustainable, and assertive: Tariffs on Chinese BEVs and retaliatory measures

From 4 July, the EU will impose provisional countervailing tariffs of 21% on battery electric vehicles (BEVs) imported from China. It is the last large market - and in itself largest export market - to impose new substantial trade barriers against Chinese BEVs. According to simulations of a large-scale trade model (KITE model), this measure raises the car prices in the EU and lowers them in China in the long-run. Yet, the effects are small. Short-term effects are likely to be larger. Car imports from China are expected to fall by 42%, but this effect is largely offset by diversion of European sales to domestic markets and higher imports from other third markets. EU car exports are only marginally affected. Value added in the EU's car industry rises by 0.4%, while it falls by 0.6% in China. In most EU countries, welfare increases, but by less than 1/100th of a percentage point. The EU imposes regular (MFN) import tariffs of 10% on car imports from WTO members with which it does not have a free trade agreement. If it reduced the tariffs on BEVs to zero, prices in the EU could fall by as much as 0.8% (EU average). If the EU maintains the countervailing duties on Chinese BEVs, car imports from China would fall by more than 20% while those from third markets would go down by about 1%. EU car exports would be little changed. A combination of a reduction of MFN tariffs coupled with countervailing duties on Chinese cars would be a perfect implementation of the EU's new trade policy doctrine which is meant to be, at the same time, "open, sustainable and assertive." An increase in the Chinese BEV industry's productivity by 50% would depress car prices in the EU by some 0.5%, and by 0.3% if these were coupled with countervailing duties. Imports of cars from China would increase by around 160%. EU car exports would decline about 7%; countervailing tariffs mitigate this effect, but only slightly. EU welfare falls. China has announced anti-dumping duties of 50% on EU pork. This measure has a very modest and qualitatively mixed impact on EU welfare. Given that the EU investigation has found evidence of WTO-incompatible subsidies for BEVs in China, the EU is right to respond with countervailing duties. However, the Commission should better explain its methodology and, if needed, make adjustments before imposing definitive duties. Moreover, to avoid the risk of a spiral of escalation, the EU should make every effort to reach a negotiated outcome. To facilitate such an outcome and limit adverse price effects, the EU could offer to reduce its most-favored-nations tariffs on BEVs, which would address the issue of excessive Chinese subsidies while lowering BEVs as a whole.