Europe’s trade dilemma: Should the EU protect its market from China or attract more investment?

This article was originally published in English

In the conclusions of last summer’s European summit, EU leaders described China as a partner, competitor and systemic rival. The ambiguity of that description was also reflected in the European Commission’s decision last Friday to impose heavy tariffs of up to 35.3% on electric vehicles manufactured in China, with the intervention of the EU Executive to overcome the ambivalence and opposition of the Member States.

The decision reflects the delicate tightrope on which the EU walks to balance the instinct of some Member States to protect your trade from Chinese marketssubsidized and effective, with that of others, more interested in safeguarding Chinese foreign investment and attracting more.

In the Trade Defense Instruments Committee, the group bringing together experts from the Member States who voted on the Commission’s proposal, Germany, supported by Hungary, Malta, Slovenia and Slovakia, tried to prevent the imposition of tariffs.

The rest of the countries were widely divided with 12 abstentions: Austria, Belgium, Croatia, Czech Republic, Cyprus, Finland, Greece, Luxembourg, Portugal, Romania, Spain and Sweden. For their part, ten countries voted in favor of the Commission’s proposal: Bulgaria, Denmark, Estonia, France, Ireland, Italy, Latvia, Lithuania, the Netherlands and Poland.

Invest instead of selling?

According to Victor Crochet, lawyer at Van Bael & Bellis, “the reason for the Commission’s decision is that the Chinese, instead of exporting their products to Europe, invest in Europe“But governments are distrustful and worried about the possibility that defending themselves against cheaper Chinese imports will have repercussions on the investments established in the bloc by the Asian giant.

According to Commission data, Chinese foreign direct investment in the EU amounted to €4.7 billion in 2023, 10% less than in 2022. The main sectors targeted by China were automotivebiotechnology, healthcare and pharmaceuticals.

Without a doubt, the voting pattern reflects the variety of different relationships and attitudes towards economic relations with China within the EU Member States. And what is unusual in such a controversial trade measure: it was adopted despite opposition from Germany, main manufacturing power and European economy.

Since the Commission began its investigation into China’s electric vehicle sector, Berlin has been a lone player, eager to defend its access to the Chinese market so that its industries, including the automobile industry, supply the Chinese market.

This access has become a key element for Germany, which faces the difficult market conditionssuch as the slowdown in demand in China due to the economic recession, and also in the European market for electric vehicles produced by its automakers in China.

“Germany defends the interests of its car companies, like Volkswagen,” said Alicia García Herrero, an analyst at the Bruegel think tank in Brussels, after Friday’s vote: “While Volkswagen is laying off people in Europe, because it no longer exports from Europe, Germany voted against EU tariffs. “(Their decision) favors German cars produced in the Chinese market, by Chinese workers.”

Some Member States want to accept Chinese generosity, such as Hungary, which voted against the tariffs and has become a preferred destination for Chinasince the decision of the giant electric vehicle manufacturer BYD to open a factory there in December last year.

Spain, whose President of the Government, Pedro Sánchez, visited China at the beginning of September, abstained. In April, the Chinese company Chery Auto signed an agreement with EV Motors to produce cars in Spain. The Chinese electric car company Nio has shown some interest in the loss-making Audi factory in Brussels (Belgium), another country that abstained.

Other member states, such as France and Italy, have more strongly supported the tariffs. They both have powerful automotive sectorswhich sell less in China, and are willing to defend their national markets.

According to García Herrero, the tariffs imposed by the EU on electric vehicles are still inferior to their equivalents in Brazil, Canada, India, Türkiye and the United States. “55% of Chinese electric vehicles go to Europe, where else could they go?” he asked. “Tariffs could be higher; we are not at war with China,” added an EU diplomat.

Protect your own interests

The move to impose tariffs also shows that the EU moves away from a clear ideological position of open market. It also cements the implementation of a more protectionist agenda with respect to China that began when it adopted a Foreign Subsidies Regulation in 2019 that came into force in 2023.

According to Crochet, “in Chinese eyes, it is an anti-Chinese defensive tool.” The Asian giant has already retaliated, turning to the World Trade Organization (WTO) for the imposition of provisional tariffs by the EU.

He has also threatened to impose tariffs on cognac, the luxury French brandy, as well as to European pork and dairy products.

“For France and Italy, their automobile industry comes first. On France’s part, it is consistent with its economic policy of recent years, which aims to put more emphasis on industries than in agriculture and the luxury sector,” Crochet added.

The imposition of tariffs sent a clear and unified message from the EU, but the patchwork of different opinions among member states suggests that the trade relationship will remain ambiguous and unsystematic.