Europe gives China a taste of its own trade medicine

Europe is using the threat of tariffs to press Chinese electric car makers to set up in the EU and share know-how.

BY JAKOB HANKE VELA AND JORDYN DAHL - JUNE 18, 2024

BRUSSELS — The EU is having a radical rethink of how to cope with the trade threat from Beijing — and its response has a very Chinese flavor to it.

Over the past years, EU trade policy has traditionally focused on building protective fortress walls, and last week's decision to impose punitive tariffs on Chinese electric cars initially looked like another example of the classic defensive playbook in Brussels.

In a remarkable turn of events, however, the EU is now considering a next step that invites China's electric vehicle (EV) makers inside the walls.

The big idea is to use the tariff threat to force Chinese carmakers to come to Europe to form joint ventures and share technology with their EU counterparts, according to conversations with four diplomats and two senior officials.

There are signs the formula is already attractive with EU carmakers. Franco-American-Italian carmaker Stellantis has formed a joint venture with China's Leapmotor to start Europe operations in September. Spain's EBRO-EV has teamed up with Chery — China’s fifth-largest automotive company — to develop EVs in Barcelona.

Many, however, will detect a supreme irony in this switch in tactics from the Europeans. For years, the EU has been at the vanguard of western investors howling in protest at Beijing's demands that foreign investors in China should form joint ventures and share know-how: It’s what the EU used to slam as forced technology transfer.

The world has now changed. The fear is no longer that the Chinese will steal European EV technology in a game of catch-up, but rather that Europe is falling behind. Realizing that its industry needs fresh investment and expertise to compete, the EU is now turning its eyes toward a negotiated solution with Beijing.

European industry insiders say carmakers are keen for such deals, which they argue make the most business sense for a sector that has fallen behind.

“Joint ventures make sense, as a way to make sure that the Chinese don’t only set up final assembly plants in Europe, but also more substantial parts of the supply chain. Of course, it can also be a way to ask the Chinese to share some technology,” said one senior diplomat, who was granted anonymity to discuss the sensitive matter.

The idea is to use the EU’s additional tariffs of up to 38 percent on EVs as an incentive for Chinese carmakers to move production to Europe. While the manufacturers could set up their own factories in the bloc to avoid the duties, joining forces with a local producer would reduce costs and give them quicker access to the single market.

“As China goes global, the rest of the world is discovering that these brands are not inferior,” said Bill Russo, an automotive expert based in Shanghai.

“If we’re finding ourselves at a competitive disadvantage where the power pieces and positions on the chessboard are occupied by Chinese car companies and Chinese battery companies, which it is, then we shouldn’t be fighting it. We should be collaborating with it. Do it in reverse.”

That’s astounding in two ways: First, it shows that the EU is gearing up to play the kind of more muscular, interventionist role in world trade that it used to accuse China of. But, more profoundly, it’s an admission China has not only caught up but already overtaken Europe in some sectors.

“This is a bit humbling for us, but we need to recognize that we are behind on certain technology,” said the first senior diplomat.

A second senior EU diplomat decried “the sheer arrogance” of many EU leaders in the past, “thinking we would always be better technologically and that China would never catch up.”

Falling behind

For decades, Europe clung firm to the conviction that technological superiority would always guarantee it could stay one step ahead of China — even as reality proved that belief wrong.

China caught up with European firms and then started surpassing them in terms of sales and technological prowess on everything from solar panels to consumer drones, and now EVs.

According to the German Chamber of Commerce in China, 69 percent of German automotive companies reckon their Chinese competitors already lead them in innovation or will do so within the next five years.

So, faced with the need to catch up, Europe’s tariff and joint venture plan is “an attempt to give China a taste of its own medicine,” said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy (ECIPE), a think tank.

Beijing seems to have gotten the message and spotted an opportunity to further integrate its supply chains with Europe. In a directive sent to Chinese automotive companies at the start of this year, the Ministry of Commerce said firms should build an industrial supply chain system “jointly built and shared by all parties.”

While Chinese companies have largely relied on acquiring European assets, the missive is an order to “be ready to form joint ventures rather than a 100 percent Chinese investment,” said Fran?ois Godement, director of the European Council on Foreign Relation’s China program.

Europe gives China a taste of its own trade medicine – POLITICO

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