China’s EV sector could offset looming EU tariffs with ‘friendly’ track diversions, but be prepared for countermeasures

Companies could mitigate the potential impact of the European Union’s conclusion of an investigation into China’s electric vehicle (EV) sector by building production plants in countries such as Turkey, Serbia and Hungary, but analysts have also warned Beijing to watch for stricter countermeasures from the bloc .

Next proposed rate increases on a wide range of electric vehicles, batteries, semiconductors, cranes, graphite and other key minerals from China disclosed by the United States earlier this month, Brussels is expected to complete your investigation subsidies in China’s electric vehicle sector until June 6, with temporary tariffs to apply in early July.

“Chinese electric vehicle makers are likely already developing plans to mitigate potential high EU import tariffs by replicating the Japanese model used in the U.S. in the 1970s and 1980s,” said Sebastian Contin Trillo-Figueroa, a Hong Kong-based geopolitical analyst who specializes in Relations EU-Asia.

Trillo-Figueroa noted that Honda, Nissan and Toyota established manufacturing plants in the United States in the 1970s and 1980s, hiring local workers and integrating into the supply chain.

However, if similar moves by Chinese electric vehicle makers had the “sole purpose” of bypassing EU import tariffs, the bloc “may interpret Turkey’s tariff circumvention as an attempt to undermine its trade rules.”

“(And it) could impose more stringent rules of origin for vehicles, which could complicate and increase compliance costs,” Trillo-Figueroa added.

Wang Yiwei, a professor of international relations at Renmin University in Beijing, also said the EU could respond by combining old accusations of protectionism – such as linking concerns about forced labor and the Xinjiang Uygur autonomous region – if investment decisions by Chinese companies are interpreted as attempts circumvention of import duties.

BYD, China’s largest electric vehicle maker, announced in December that it would was planned to be built its first passenger car factory in Europe in the south of Hungary, which would be the center of its European production activities. It already has a factory in the north of the country where it assembles electric trucks and buses.

Sanja Arezina, a senior adviser to the Serbian government, said that “at the request of the leaders of Hungary and Serbia” China is helping to make its partner countries “more visible on the global investment map.”

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French Finance Minister Bruno Le Maire also said earlier this month that France would welcome BYD if the Chinese company decided to build the plant.

An Automotive News Europe report published earlier this month shows that Turkey is in advanced talks with BYD and Chery regarding investment in the plant, which is expected to help increase sales in Europe.

Wang believes Turkey’s close ties with the Middle East and customs union with the bloc make it a “good option” for Chinese companies entering the EU market.

The EU Customs Union, formally known as the Community Customs Union, ensures the free movement of covered goods within the bloc that are either wholly produced in a member state or have been imported from a third country.

Li Lifan, a Russia specialist at the Shanghai Academy of Social Sciences, said China will not only rely on Turkey but also increase investment in Hungary and Serbia.

Arezina added that China’s investments in electric vehicle production in Hungary and Serbia will help gain “free access” to the EU market.

China is actually operating on several different paths in the European arena

Sanja Arezina, senior advisor to the Serbian government

Hungary is also an EU member state belonging to the European single market, she added, while Serbia has signed a Stabilization and Association Agreement with the EU, which allows duty-free access to imports of Serbian products to the EU market as it is considered for full membership in the bloc.

China became the largest source of direct investment for Serbia in 2022, and bilateral trade increased rapidly from USD 596 million in 2016 to USD 4.35 billion in 2023.

“Chinese companies, by expanding their production chains in Europe, are actually also helping… to switch from combustion engines to electric ones in vehicles – so as to achieve zero carbon dioxide emissions by 2035,” Arezina said, referring to EU regulations stating that all new cars launched on the market from 2035 should have zero carbon dioxide emissions.

She added that European companies do not have sufficient production capacity, knowledge and production chains to realize the EU’s green transformation.

“China is actually operating on several different paths in the European arena, while helping to develop a new growth model for the Chinese market based on high-tech production,” Arezina said.