Though Chinese cars are still a small share of the total European car market, Chinese and Chinese owned brands grew from 1 percent of the EV market in 2019 to about 15 percent in the first half of 2024.

EU needs EVs to meet ambitious climate targets.

China is producing millions of EVs far cheaper than everyone else.

But the sudden rush of Chinese cars into Europe has instead caused worries. We've heard about this globalization story that we have to integrate. We have to be free trade and so on.

But that was easy to tell when China was not a big player and was not changing the rules of trade.

The European Union has responded by proposing tariffs of up to 36.3 percent. That's on top of the existing 10 percent already levied on all imports. A final decision is expected by October 30th.

Analysts say it is the highest profile EU trade case against China in over a decade.

Chinese EVs have several advantages, but one sticks out, government support. Chinese make no apologies about it.

That's our game. We're state capitalists.

We're going to own this industry.

But problems abound.

There are loopholes.

The risk of retaliation looms.

European countries have reportedly been divided on the issue.

And some of Europe's own automakers, the ones the tariffs are meant to protect, oppose them.

The EU says its tariffs are not meant to block Chinese EVs, but instead level the playing field.

We're dealing with an economy in China where credit money is allocated by the state and not by the market.

And the state picks sectors that they want to promote.

And in that kind of economy, if you do that, you always get over investment, you always get over capacity, you always get over production. And then that overproduction gets dumped on the rest of the world. Chinese manufacturers can make a car for about $5,500, the cheapest a European can do, about $20,000.

That gap is explained by potential subsidies that the Chinese government is giving to its companies.

But also it's explained by higher economies of scale.

It's explained by lower labor costs and by the fact that when it's about electric cars, China, unlike the rest of the world, has already secured the supply chain for the batteries.

The tariffs only apply to fully assembled EVs, not parts like batteries. China controls more than 80 percent of the world's battery manufacturing capacity, and cars made all over the world, including in

Europe, rely on Chinese batteries.

Tariff rates vary based on how much help an automaker receives from the

Chinese government. Here, it is important to note that all this is being done according to rules set out by the World Trade Organization.

Both the EU and China are members.

There are 166 countries total and there are rules.

So if China is subsidizing its auto industry and European countries say that help is giving Chinese companies an unfair advantage, it can impose tariffs to offset it.

But first, it has to prove that China is actually breaking the rules and that that rule breaking is harming European companies.

It's not arbitrary.

It's a calculation of the amount of harm that's been done.

And as near as I can tell, the European Union has followed the rules.

They also vary based on whether a company cooperatively discloses the subsidies it receives to the European Commission.

This is why the tariff on Tesla cars is a lot lower than those placed on its Chinese brand rivals.

It's an American company.

Chinese were a lot more generous to indigenous Chinese companies.

But even they are being tariffed at different rates.

These tariffs could make it more challenging for Europe to meet its ambitious climate policy goals.

By 2030, it needs to reduce emissions by 55 percent below the levels they were at in 1990.

That's just six years away.

A report leaked earlier this year suggests the EU is not on track, to put it mildly. The bloc needs to double the pace of reduction to meet the 2030 target. I don't think the tariffs would be too meaningful or impactful in terms of slowing down EV growth.

But if the tariffs end up being too high and domestic or local European automakers can't offer the more affordable models, then we could see some delay if there's not enough models that are cheap enough or within the price point that consumers want to buy them.

I mean, the administration is wrestling with this dilemma right now.

I mean, it's the same thing with solar panels.

The Chinese have something like 84 percent of the global market in solar panels. If you want the U.S.

to convert to solar energy, the best thing you can do is bring in as many panels as you possibly can and install them everywhere.

And if you say Chinese panels can't come in, which we've done, you really slow down the transition.

The hold up to EV adoption in many markets like the U.S.

and Europe is one, there's not as much public fast charging available, but two, there's not as many low priced EVs in those affordable vehicle segments where the majority of consumers buy vehicles.

And that's exactly what Chinese firms have been able to do, sell cars for as low as about $10,000 in the case of the BYD Seagull.

European manufacturers can't match that.

Neither can American, nor Japanese, nor Korean.

The U.S. has imposed a 100 percent tariff on all Chinese vehicles.

By the way, it did that just unilaterally, not through the WTO process.

But even a 100 percent tariff on a $10,000 car is still far cheaper than the cheapest EV sold in the U.S.

The European car makers, they've learned that they can make more money selling less cars.

Last year, many of them posted records in terms of operating profits.

This strategy of increasing prices and producing less cars is good as long as you don't have a more competitive rival such as China.

At the proposed rates, they might not do much to stem the tide of Chinese imports. One analysis showed that tariffs would have to be at least in the 40 to 50 percent range, depending on the company.

The analysts said these rates would be unlikely and the EU would have to use nontraditional methods like tightening labor rights or cybersecurity requirements. The economic effects of tariffs are disputed.

Many economists argue they raise prices and reduce choice.

Trump has said repeatedly, you know, we're going to put tariffs on the foreign country. The Americans don't pay the tariffs, the foreigners pay the tariff. That's for the most part wrong.

There's a mountain of data to demonstrate that it's wrong.

Others say these tariffs will have a negligible effect on EV prices over the long term. There are also loopholes.

To try to get around U.S.

rules, Chinese automakers such as BYD are reportedly striking deals to build factories in Mexico, though there is uncertainty around the exact timing.

This whole, it's a constant cat and mouse game.

You know, you cut them off, they'll go somewhere else and make the product and ship it in from there. You cut them off, they'll move to a third country. So why is the EU doing this?

Simply, it considers the European automotive industry crucial to its future. It employs millions of people and is responsible for nearly one out of every 10 manufacturing jobs.

Tariffs are a giant timeout that is just designed for one purpose in mind, buy some time while we regroup and confront this massive automotive manufacturing machine that China presents us with.

Over the last few decades, countries have leveled a lot of accusations against China, intellectual property theft, bullying trade partners and so on. Even this sudden surge of vehicle exports fits a pattern.

This goes back 30, 40 years.

And when their economy gets into trouble, as it is right now, they always do the same thing. They try to export their way out of it.

The EU is pretty much the last among major developed markets in the world to enact new tariffs against Chinese EVs.

This makes it harder for the Chinese to redirect exports to other countries. You can squeeze them out of the United States and all that production will just go somewhere else.

And it won't change the policy.

What you got to do is get everybody together and all squeeze at once, make the Chinese eat the surplus.

China already makes one out of every three vehicles sold in the world.

It has the capacity to make about half.

Industry after industry, they flood the zone.

They introduce massive capacity in a given industry.

And when I first went to China in the 1980s, it was buttons.

They got really good at manufacturing buttons, better than everyone else the world. And they soon had a monopoly.

Today, it's solar panels.

In the United States, various trade groups have already labeled Chinese automakers an existential threat.

It's another proof that the European industry is not competitive yet.

In a vote in Brussels in July, 12 EU member countries reportedly voted in favor of the tariffs, four against, 11 abstained.

Votes in favor reportedly included France, Italy and Spain, and abstentions included Germany, Finland and Sweden.

The European Commission neither confirmed nor commented to CNBC, saying the vote was confidential.

They would be the beneficiaries of the tariffs, but they're worried that they have a large investment in China and tariffs put that investment at risk. So each company is going to decide which side of that line it's going to fall on. I mean, I don't envy them.

They're in a difficult situation.

German carmakers have substantial businesses in China.

It is Germany's third largest auto export market after the U.S.

and U.K. The European country has a trade surplus with China in cars and in parts. On the other side, the French and Italian manufacturers are not exposed to China at all because they are more worried about their position in Europe, which is probably the most exposed to this increasing flow of

Chinese competitive cars.

And though the Chinese market has become a lot tougher for foreign companies, it is still a highly desirable place to build cars for export.

Again, China is a huge battery producer and is responsible for much of the rest of the EV supply chain.

If an alien were to come down to Earth today and say, I'm going to build a great car company to rival Tesla, where should I put it?

There's no question what the answer would be.

That alien would put their business in China because it offers the highest quality at the lowest cost with advanced technologies.

And not only are the Chinese companies doing this, but global auto manufacturers are basing themselves there, too.

The other fear, retaliation.

China has already filed a complaint with the WTO over the US EV tax credits, and it has appealed the EU decision.

My observation has been the Chinese always retaliate.

Since at least May, the Chinese government has been proposing to raise an import tariff on gas burning cars with larger engines.

VDA, a German automotive trade association, says this would hit German carmakers especially hard.

About a third of the roughly 200,000 cars German factories sent to China in 2023 had larger engines.

Another 48,000 came from German-owned factories in Slovakia, Austria and

Italy. The more likely thing with Volkswagen or Daimler-Benz is, you know, a wave of inspectors suddenly hit their plants in China and discover 37 safety violations and shut the plant down.

Transcribed by https://otter.ai