On 12 June 2024, the European Commission (EC) provisionally concluded that battery electric vehicles (BEV) originating in China benefit from unfair subsidization, causing a threat of economic injury to producers in the European Union (EU). As a consequence, the EC pre-disclosed the level of provisional countervailing duties it would impose on imports of BEVs from China.
This pre-disclosure announcement follows the recent adoption of 100% tariffs on Chinese-made electric vehicles by the United States, further deepening tension and causing shockwaves in and around the global electric vehicle industry.
Legal framework of EU anti-subsidy regulations
The EU’s anti-subsidy rules are based on the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures, setting out the steps members can take against other states if they believe subsidies have harmed competition in trade in goods.
In the EU, Regulation (EU) 2016/1037 (what is known as the Basic Anti-Subsidy Regulation or ASR) provides the legal framework for anti-subsidy investigations and the imposition of countervailing measures. The ASR enables the EC to initiate investigations to examine whether imports from a country are subsidized, whether the subsidized imports cause injury to the EU industry, and whether it is in the interests of the EU to impose measures. Should the EC come to the conclusion that these criteria are met, it can impose countervailing duties to counteract the subsidization.
Context of anti-subsidy investigation into Chinese BEVs
On 4 October 2023, the EC initiated anti-subsidy proceedings into imports of new battery electric vehicles (BEVs) designed for the transport of persons that originate in China on the grounds that imports of BEVs that originate in China are being subsidized and thereby causing injury to the Union industry. The investigation was initiated on the own initiative of the EC, basing its initiation decision inter alia on the sizable increase in Chinese electric vehicle exports to the EU in 2023 (up by 50% from 2022) and with a further increase of 50% predicted in 2024.
The EC has spent approximately the last 8 months investigating the alleged subsidization, including undertaking consultations with the Chinese government, compiling a sample of exporting producers such as BYD, Geely and SAIC, and verifying their statements through verification visits to their headquarters. Further information was gathered from interested parties including other Chinese exporters, EU producers and users.
The EC seemingly confirmed its suspicion by publishing its summary of proposed provisional countervailing duties on 12 June 2024, thus confirming that it intends to impose provisional duties by 4 July 2024 (i.e., 9 months from the initiation of the anti-subsidy proceedings and the latest moment provisional measures can enter into force).
According to the pre-disclosure document, the EC intends to impose a maximum 38.1% duty on the SAIC Group and all other non-cooperating Chinese exporting companies. The BYD and Geely Groups were granted lower individual duties of 17.4% and 20% respectively. All other co-operating Chinese exporting producers will be subject to a 21% duty rate.
Once provisional duties have been imposed, the EC will have a further 4 months to continue its investigation and reach its definitive findings. Thus, within 13 months of the initiation of the investigation, the EC must decide whether to impose definitive countervailing duties.
Reactions to the EU’s provisional duties announcement
The anti-subsidy investigation is taking place against a tense and controversial backdrop in both the European Union (EU) and China. The reactions to the proposed provisional duties are accordingly diverse.
In the EU, German OEMs such as BMW, Volkswagen and Mercedes Benz criticized the decision, stating that trade barriers should be dismantled instead and that import duties do not contribute to successful competition in international markets. This reflects the strategic role of the Chinese market for German producers, who have built up a large presence in China and whose electric vehicles will also be subject to tariffs.
In contrast, the French car lobby group, the PFA, supported the decision, stating that the sector has never been more in need of a level playing field. Italy’s Industry Minister also welcomed the pre-disclosure announcement. These different reactions can probably also be explained by the fact that Germany, with an export share of 40%, has more to lose than other EU member states if the trade conflict escalates.
In China, both private and public stakeholders have voiced their concern and it seems that retaliation is increasingly likely. For example, the Chinese Ministry of Commerce stated that the decision lacks any factual or legal basis and was driven by protectionism and political motivations, impairing the rights of Chinese BEV manufacturers and disrupting the global supply chain of the automotive industry. The Chinese Chamber of Commerce to the EU expressed its “shock, grave disappointment and deep dissatisfaction with this protectionist measure” and denounced the anti-subsidy investigation as a “witch-hunt”. The Chinese Foreign Ministry spokesperson also stated that the investigation is a typical case of protectionism, violating market economy and international trade rules.
Chinese exporters also criticized the EC’s decision. NIO, for example, said that the decision hinders rather than promotes global environmental protection, emission reduction, and sustainable development.
There is a real threat of a spiral of trade-related measures and countermeasures, e.g., in relation to luxury cars in China. There are already indications that China will respond by investigating the EU’s agriculture and aviation sectors: an anti-dumping probe into imported pork and its by-products from the EU had already been initiated by China on 17 June 2024.
With regard to the consequences for the EU of a possible escalation, it should also be taken into account that imports of electric cars or solar panels from China can also have a dampening effect on inflation and further advance the energy transition in Europe.
Next steps in the anti-subsidy investigation
Once provisional duties enter into force, imports of BEVs from China will be subject to duties ranging from 20% to 38.1%, although the provisional duties would be introduced from 4 July 2024 by way of guarantee and only collected if and when definitive duties are imposed.
In the meantime, the EC will continue its investigation, taking into account the comments received by interested parties. The EC has reached out to the Chinese authorities to discuss these findings and explore possible ways to resolve the conflict.
One possible resolution could involve so-called voluntary undertakings, where either China agrees to eliminate or limit the subsidy, or take other measures concerning its effects, or any exporter undertakes either to revise its prices or to cease exports to the EU as long as its exports benefit from countervailable subsidies. In such a case, provisional or definitive duties imposed by the EC would not apply to the imports of the product concerned that is manufactured by the relevant companies proposing such undertakings.
If no resolution is found and the EC, within 13 months of the initiation of the investigation, comes to the final conclusion that imports of BEVs benefit from countervailable subsidies, there is injury caused thereby, and the Union interest calls for intervention, it will decide to impose so-called definitive countervailing duties. The countervailing duties would need to enter into force by 2 November 2024 at the latest, and would be in force for a period of five years.
Once the definitive measures enter into force, the possibility to request a review of the measures can occur one year at the earliest after their imposition. This so-called interim review can be initiated when the request contains sufficient evidence that the continued imposition of the measure is no longer necessary to offset the countervailable subsidy and/or that the injury would be unlikely to continue or recur if the measure were removed or varied, or that the existing measure is not, or is no longer, sufficient to counteract the countervailable subsidy which is causing injury.
Some commentators believe that Chinese BEVs will remain competitive in any case, even with definitive tariffs. The EC estimates that prices of Chinese BEVs are typically 20% lower than prices of similar products manufactured in the EU. With additional tariffs, Chinese BEVs would thus be at similar prices, but with more attractive designs and vehicle technology. Additionally, the tariffs will apply not only to Chinese carmakers including BYD and Geely, but also to global and EU carmakers such as Tesla and BMW, which export BEVs from China to the EU.
Potential repercussions and escalation in trade conflicts
As already mentioned, Chinese BEV producers have criticized the EC’s anti-subsidy investigation and approach. Many have nonetheless also commented that they will continue to serve consumers in the EU and explore new opportunities in line with their plans to expand operations by setting up factories in the EU. For example, Chery Auto announced on 16 April 2024 that it had signed a joint venture agreement with Spain’s EV Motors to open its first European manufacturing site in Catalonia. Similarly, BYD announced in late 2023 that it is establishing a vehicle production base in Hungary. SAIC already has a European parts center and plans to open a second facility in France to meet the country’s growing demand for its vehicles. In 2022, a Polish state-led venture to produce the country’s first electric car, known as Izera, signed a license agreement with Geely to build the country’s first EV plant.
BEVs manufactured in the EU by Chinese manufactures would not be subject to countervailing duties imposed on imports of BEVs. However, BEV manufacturers should take note of the ASR’s anti-circumvention rules, whereby countervailing duties may be extended in cases where the EC finds evidence of circumvention of countervailing duties. Anti-circumvention primarily targets practices or processes aiming at undermining the duties. These may include actions such as slightly modifying the product concerned to make it fall under customs codes not normally subject to the measures, consigning the product via third countries not subject to measures, and the reorganization by exporters or producers of their patterns and channels of sales in the country subject to measures in order to eventually have their products exported to the EU through producers benefiting from an individual duty rate lower than that applicable to the products of the manufacturers. However, in addition, the anti-circumvention rules under the ASR also cover assembly operations in the EU or a third country, which have started or substantially increased since or just prior to the initiation of the anti-subsidy investigation, if the parts concerned are from the country subject to measures and where the parts meet certain value thresholds in relation to the assembled product.
For Chinese BEV manufacturers, this means that, although establishing new plants in the EU and/or in third countries can clearly be beneficial with a view to ensuring a continued service for users in the EU, they would need to ascertain that their plants are not considered to provide assembly operations that meet circumvention criteria.
Foreign Subsidies Regulation as an additional regulatory hurdle for Chinese companies
Finally, when considering whether to establish operations within the EU, economic operators should take note of the Foreign Subsidies Regulation, Regulation (EU) 2022/2560 (FSR) which increases complexity and regulatory hurdles for Chinese businesses in the EU. The FSR is part of the subsidy control toolkit of the EU, in parallel to the ASR and EU state aid rules. These lay down the general incompatibility of state aid granted by Member States of the EU that distort competition by favoring certain undertakings or the production of certain goods. The ASR and FSR thus both address foreign subsidies, whilst state aid rules address subsidies by EU Member States.
The FSR, which started to apply on 12 July 2023, enables the EC to address distortions caused by foreign subsidies granted to undertakings active in the EU. In particular, the FSR lays down the compulsory notification of concentrations involving financial contributions by a non-EU government, where the acquired company, one of the merging parties or the joint venture generates EU sales of at least €500 million and the parties were granted foreign financial contributions of more than €50 million in the last three years. The EC has wide investigatory powers under the FSR and, specifically with regard to Chinese companies, it has made use of them.
Just recently, the EC flexed its muscles under the new FSR regime by carrying out its first-ever dawn raid under the FSR on the Dutch and Polish offices of Nuctech, a Chinese company that manufactures and sells security equipment. It said it would open an in-depth investigation if it were to find “sufficient indications of the existence of distortive foreign subsidies” from the information it gathered from its unannounced inspections.
Although the EC has emphasized that the FSR is country-neutral, it is difficult to overlook that the establishment of the FSR is to a certain extent based on EU Member States’ concerns in relation to what is perceived as unfair competition from state-subsidized Chinese companies. Accordingly, to date the EC has initiated a number of in-depth FSR investigations, most of which have involved Chinese companies. In these investigations, the Commission has been particularly tough, with extensive information requirements and extremely tight deadlines that were almost impossible for Chinese companies to fulfil. Three of these investigations against Chinese companies related to concerns over the potential distortion of competition as a result of a bidder having obtained an advantage over other bidders in a procurement process as a result of foreign subsidies.
The EC’s recent FSR enforcement actions have prompted understandable concerns among Chinese businesses. The China Chamber of Commerce to the EU (CCCEU) condemned the dawn raids, stating they “undermine the business environment for foreign companies within the EU in the disguise of foreign subsidies”. The organization requested the EU authorities to “effectively safeguard the legitimate rights and interests of foreign enterprises in the EU”. However, the EC is only now starting to clarify the concept of “distortion of competition”, a significant period of time after the FSR entered into force. Chinese companies, particularly in technology sectors, the automotive industry and in the field of renewable energies, should not underestimate the complexity of such an assessment of their potentially distortive “financial contributions” and should proactively analyze their “foreign subsidies” together with experienced competition law specialists at an early stage.
The Future of EU-China Trade Relations in the BEV Sector
The anti-subsidy investigation may mark a change in the EU’s trade policy, because although the EU often uses trade defense instruments against China, it had not done so for such an important industry in such a tense and mediatized environment. However, on the other hand, the pre-disclosed provisional measures are actually lower than previously expected, with the media reporting 50% tariffs in the lead up to announcement.
It therefore remains to be seen what impact tariffs will have on trade flows and sales of BEVs between China and the EU, and if and how the Chinese government will react.
Editor’s note:
The following Ashurst lawyers also contributed to this article: Rafael Baena, Partner, Madrid, and Donald Slater, Partner, Brussels.
Author
Claus Zimmermann
Ashurst, Brussels
Head of International Trade, Partner
Author
Dr. Michael Holzhäuser
Ashurst, Frankfurt/Main
Head of Competition and Automotive Germany, Partner
