China has threatened to impose its own 25 per cent import duty on large internal combustion-powered vehicles – clearly targeting Germany’s luxury car manufacturers – while already investigating brandy imports (France) and hinting at tariffs on European dairy and other agricultural products, wine and aviation imports.

Just as threatening for Europe and its aggressive “green” policies, would be if China restricted or cut off its access to rare earths, lithium and other key elements of the supply chain for EVs and their arteries.

Chinese vehicles, their batteries and their manufacturing processes are world-leading. China’s long-term strategy of seeking dominance of the EV sector and its supply chain has been realised.

At the core of the dispute and the EU decision has been the rapid penetration of Europe’s EV market by Chinese manufacturers.

From negligible sales three years ago, Chinese companies last year had a market share of about 7 per cent in the world’s second-largest EV market (China’s is the largest) and that share is growing rapidly in a market that because the EU plans to phase out internal combustion engines by 2035, is destined to grow significantly.

China’s EV sector has been built on a decade and a half of state direction and assistance, whether through subsidies, tax concessions, buyer incentives and rebates, government procurement policies, forced technology transfers or other forms of financial assistance.

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While most of those have been phased out, their legacy is the world’s largest and most sophisticated EV production platform, with a substantial supply chain and technology edge over EV manufacturers elsewhere and the world’s biggest domestic market to provide scale benefits.

It’s also left China with more than 200 manufacturers and production capacity that is multiples of domestic demand – and excess capacity that is probably significantly greater than total demand for EVs outside China – leading to discounting and price wars that have left all but a handful of the companies unprofitable.

The bigger Chinese manufacturers have been able to sell their EVs in Europe at significant premium to what they can achieve in their over-supplied domestic market, at prices that can be double what they receive in China but still more than competitive with European manufacturers. Hence the appeal of the EU market.

Their success isn’t just price-driven. Chinese vehicles, their batteries and their manufacturing processes are world-leading. China’s long-term strategy of seeking dominance of the EV sector and its supply chain has been realised.

With it, however, has come a backlash, and claims of unfair competition and tariffs.

The US this year imposed a 100 per cent tariff on Chinese EVs and a 25 per cent tariff on Chinese batteries. Canada has done the same. Brazil lifted its duty on China’s EVs from 10 to 18 per cent this year, with plans to increase it to 35 per cent by 2026. Turkey lifted its tariff rate from 10 per cent to 50 per cent last year.

The Europeans’ approach, perhaps because their trade relationship with China is broad and deep – bilateral trade last year amounted to nearly €740 billion ($A1.2 trillion) – has been more nuanced than that of the US and others.

Where the US simply wants to shut Chinese-built EVs out of its market, the EU wants to offset the advantage that past and continuing state assistance has given Chinese manufacturers over their European counterparts, while still leaving the market open to Chinese EVs and Chinese investment in European plants to meet carbon emissions targets and create green jobs.

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With many of its own car makers operating plants within China and exporting their vehicles to Europe, the EU wants a level playing field for its domestic manufacturers, their 13.8 million employees and the 7 per cent of GDP they generate.

The other reason the EU may have resisted simply slamming the gates shut to Chinese EV imports is the question mark over its trade and other relationships with the US.

Those relationships, strained during the Trump presidency but restored by the Biden administration, would be jeopardised again if Donald Trump returns to the White House and implements trade policies even more aggressive than those he pursued in his first term.

If its exports to the US, its biggest export market, are threatened, the EU may have no option but to seek a stronger trade relationship with China, using the leverage of the tariffs on EVs (and prospective tariffs on other Chinese products) to gain greater access to China’s domestic markets.

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