The EU's Price Undertakings for Chinese EVs Can Bring more Risks than Solutions  

As the European Union addresses the influx of Chinese battery electric vehicles (BEVs), the European Commission has recently issued guidance on price undertakings to offer an alternative to the tariffs on BEVs, which were introduced less than 14 months ago, following an anti-subsidy investigation launched in the absence of a complaint by industry, a first of its kind.  

The new framework, announced by the EU Commission on January 12, allows Chinese exporters to propose minimum prices up to a specified amount to avoid the tariffs. The conditions are not fully clear, but they seem to include potential investment in the EU. 

While presented as a WTO-compliant option, this mechanism raises several concerns, including potential disadvantages for EU consumers to whom the burden will be transferred (with higher prices), a budgetary shortfall for the EU and administrative and reputational problems.  

In addition, one of the apparent objectives of this switch, namely attracting Chinese investment into Europe to produce cars and, potentially, tech transfer so that the European auto ecosystem can catch up, is highly unlikely to be reached. 

The most significant unintended consequence is that it harms the EU's credibility as a global trade actor at a time when important trade deals are on the table, particularly with India. 

Fundamentally, the price undertaking system shifts potential gains to foreign producers rather than benefiting the EU, which negates the typical objectives of trade protection measures. Under tariffs, revenues accrue to the importing party, supporting domestic initiatives. 

In contrast, undertakings permit (even require) Chinese exporters to maintain prices above a set threshold, allowing them to retain the additional margins. This results in higher costs for European consumers while enabling Chinese firms to bolster their financial positions. 

The Commission's 2024 findings pointed to significant Chinese subsidies distorting competition, yet price undertakings would inadvertently reinforce the advantages of Chinese producers, providing more funds for reinvestment in innovation and market expansion.  

The model-specific methodology outlined by the Commission presents notable administrative challenges. 

Undertakings must specify minimum import prices tailored to individual models, accounting for variations in battery size, range, and other features. However, BEV technology advances rapidly, with frequent updates to specifications. This raises questions about the Commission's capacity to oversee such detailed pricing adjustments. 

For instance, determining whether an enhanced battery capacity justifies a price increase of several hundred or thousand euros requires specialized expertise that may not be readily available among officials. The process could lead to ongoing verifications, disputes, and compliance efforts at customs points, potentially complicating trade flows. In a sector vital to Europe's green objectives, prioritizing streamlined policies over intricate oversight is clearly a better option. 

On the fiscal side, the implications are significant. Choosing undertakings over tariffs could mean forgoing approximately €2 billion in annual tax revenue. 

To have a sense of dimension, these tariffs alone exceed the budget allocated to the European Innovation Council (EIC), which funds advanced research and innovative projects, including for electric cars. 

The funds collected via duties could thus significantly enhance EU R&D and efforts to strengthen domestic EV ecosystems. Without them, the EU faces added pressure on its finances, particularly amid ongoing economic recovery and external uncertainties.  

Geopolitical implications

Diplomatically, the advantages appear limited. The Commission positions these undertakings as a means to foster dialogue, involving China's Ministry of Commerce in crafting WTO-aligned solutions. 

However, if the EU's subsidy assessments are robust, the original tariffs should hold up against any WTO scrutiny from Beijing. Pre-emptively offering alternatives might not yield substantial concessions, given China's track record in protracted trade negotiations. 

The move towards price undertakings might also have been motivated by China's retaliatory measures: the anti-dumping investigations into EU dairy, cognac, and pork products, launched in response to the EV tariffs, appear to have pressured Brussels —through the most affected Member States — into exploring compromises. 

But if these Chinese investigations will lead to nothing that can withstand a WTO challenge, if we can be confident that there are no subsidies in the EU. 

Moreover, it does not make sense that the EU should go for price undertakings that strengthen Chinese producers in a strategic high-tech sector because of a threat to its agricultural exports. Finally, the EU's shift to undertakings does not guarantee reciprocity. 

Notably, China has not signalled any intention to lift its countervailing duties on these European exports, even as the EU considers easing its own tariffs. The EU risks conceding ground without equivalent gains. 

Additionally, the guidance's focus on encouraging "future investments in the EU" introduces further complexities. Securing meaningful FDI and technology transfer through these agreements is challenging. 

Chinese companies, guided by national strategies, tend to safeguard core technologies, as seen in prior sectors like renewables. Even with commitments to establish operations in the EU—such as facilities in member states— and it is even harder to see how enforceable technology-transfer commitments could be made compatible with WTO disciplines.

Beyond these immediate issues, the price undertakings risk eroding the EU's image as a credible rule-setter and negotiator on the global stage. 

As the bloc finalizes trade deals with partners like India, which emphasize fair competition and sustainable standards, any perceived softening in the face of Chinese pressure could undermine Brussels' bargaining power.

If the EU appears willing to dilute its trade defence measures through bureaucratic workarounds, it may signal to other nations that retaliation tactics can bend European resolve. 

This is particularly concerning in an era of geopolitical fragmentation, where the EU aims to project unity and strength in enforcing rules-based trade. 

Weakening its stance here could complicate ongoing negotiations, from critical minerals agreements to digital trade pacts, by inviting skepticism about the bloc's commitment to protecting its market from unfair practices. 

In summary, while the Commission's price undertaking guidance seeks to provide a flexible response to Chinese EV imports, the drawbacks outweigh the potential gains by a wide margin.  

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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