On October 4, the 27 member states of the European Union voted on the European Commission's proposal to impose anti-subsidy duties on Chinese electric vehicles. Ten countries voted in favor, five against, and 12 abstained. Since fewer than 15 countries were against the proposal and did not represent 65% of the EU population, the proposal to slap the anti-subsidy duties was approved. China's Ministry of Commerce and the China Chamber of Commerce to the EU immediately expressed strong opposition, stating that the EU's action directly violates WTO rules. German automotive giants like Volkswagen and Mercedes Benz also clearly opposed the move, arguing that protectionism cannot bring progress to EU’s automotive industry.

According to EU procedures, negotiations with China will continue till the end of October. If an agreement is reached, additional duties can still be avoided. If no agreement is reached, the higher duties will take effect from November 4 for a period of five years. Therefore, October remains a crucial period for intensive negotiations between China and the EU, as well as within the EU itself.

1. Why is opposition weak as proposal violates WTO rules?

(a) Why is the EU's anti-subsidy duty lacking a basis under WTO rules?

After a 13-month investigation, the European Commission concluded that Chinese electric vehicles exported to the EU had received substantial subsidies, harming the interests of the EU automotive industry. The subsidies cited fall into three main categories: First, financial and credit support during the research and development phase of electric vehicles; however, WTO rules do not prohibit this, and the EU itself engages in similar practices. Second, consumer-side support, including price subsidies and usage subsidies (such as charging) for purchasing electric vehicles. This is also not prohibited by WTO rules either, and the EU also has similar measures. For example, from July 2024, Germany allows buyers of newly registered fully electric and similar zero-emission vehicles to claim a 40% tax deduction in the year of purchase, decreasing annually until December 2028. Third, export subsidies. WTO rules prohibit unfair export subsidies. The EU cites export tax rebates and VAT exemptions enjoyed by Chinese electric vehicle companies as export subsidies. However, this is not a violation. According to WTO rules, all export products should receive VAT rebates to ensure fair competition for export products globally.

The EU's determination that Chinese electric vehicles exported to the EU received subsidies is based on its own "Foreign Subsidies Regulation." This law is suspected of being discriminatory because it applies different standards for identifying subsidies for intra-EU and non-EU enterprises. Therefore, it violates the essence of the WTO, which is the unconditional multilateral non-discrimination principle. China has brought this case to the WTO dispute settlement mechanism and insists on using relevant WTO rules as the sole criterion in bilateral negotiations with the EU.

(b) Why is the opposition within the EU so weak?

Looking at the voting results, out of the 27 EU member countries, only five voted against. They are Germany, Hungary, Macedonia, Slovakia, and Slovenia. Except for Germany, none are major importers of Chinese electric vehicles. Although the German government, industry, and automotive giants like Volkswagen and Mercedes Benz strongly oppose the EU's unilateral anti-subsidy tariff, their influence is limited. The combined population of these five countries accounts for 22.65% of the EU's total population. In contrast, the number of supporting votes, both in terms of countries and population, is double that of the opposing votes, with ten countries accounting for 45.99% of the EU's population. The ten countries are France, Italy, the Netherlands, Poland, Denmark, Ireland, Bulgaria, Estonia, Lithuania, and Latvia.

The abstentions came from 12 countries: Belgium, Czech Republic, Greece, Spain, Croatia, Cyprus, Luxembourg, Austria, Portugal, Romania, Sweden, and Finland.

It is noteworthy that the amount of electric vehicles imported from China does not logically correlate with a EU member’s stance towards the proposal. According to China’s customs statistics, France, Italy, the Netherlands, and Poland, which voted in favor, imported very few electric vehicles from China. In the first half of 2024, these four countries imported a total of $522 million, accounting for 6.1% of China's $8.5 billion electric vehicle exports to the EU. Germany, which voted against, imported far more electric vehicles from China than the aforementioned four countries, totaling $1.19 billion, accounting for 14% of China's exports to the EU. The largest importer is Belgium, importing nearly four times as much as Germany, at $4.7 billion, accounting for 55%. However, Belgium abstained. The third-largest importer, Spain, imported electric vehicles from China ($1.06 billion, accounting for 12.5%) comparable to Germany, but also abstained. Logically, if Belgium and Spain believed Chinese electric vehicles were causing a decline in local manufacturers' sales and increasing unemployment, they should have voted in favor. But they did not. Conversely, if they believed importing Chinese electric vehicles benefited their automotive industry and the spread of new energy vehicles, they should have voted against. But they did not do that either.

This raises two questions: First, why does the EU initiate trade restrictions on Chinese electric vehicles without lawsuits initiated by companies? Second, why is there no widespread strong opposition from EU countries, especially businesses, and instead, the support is predominant?

Some articles and comments blame the EU for following the U.S. in suppressing China; blame French protectionism and Spanish indecision. Many reports highlight how the German government, German industry, especially automotive giants like Volkswagen, firmly oppose the EU's tariffs on Chinese electric vehicles. But these do not answer the two questions above.

2. The Root of the Problem: A Shrinking EU Car Market

The fundamental reason for the European Commission's direct imposition of tariffs on Chinese electric vehicles is that the EU car market is rapidly shrinking. Chinese electric vehicles, with their strong competitiveness, are taking an increasingly larger share of this diminishing market, posing a threat to the local automotive industry and employment.

On September 23, 2024, Shanghai-based The Paper reported under the headline "Plummeting Sales, Factory Closures, Layoffs: The Apocalypse of the European Auto Industry" that European car sales had dropped to their lowest level in three years. According to data from the European Automobile Manufacturers Association, in August, EU registrations fell by 18% year-on-year, to about 643,600 vehicles. All mainstream European car manufacturers saw a decline in registrations without exception. New car registrations for Europe's top three automakers—Volkswagen, Stellantis, and Renault—fell by 14.8%, 29.5%, and 13.9% year-on-year, respectively. Sales in key markets such as Germany, France, and Italy fell by double digits, at 27.8%, 24.3%, and 13.4%, respectively.

The pure electric market was hit even harder, with registrations in the European pure electric market plummeting by 44% in August, dropping to about 92,600 vehicles, and market share falling from 21% in 2023 to 14%.

This marks the fourth consecutive month of decline in the European pure electric market. Tesla's sales in Europe fell by 43.2% in August. Additionally, Germany and France experienced steep declines, with drops of 68.8% and 33.1%, respectively. Looking at EU sales in August, the German market saw the largest decline. One reason is that Germany ended its new energy subsidies early.

Carsten Brzeski, Chief Economist at ING, believes that the European automotive industry is "undergoing a structural transformation," and "we can clearly see that the transition to electric vehicles is leading to increasingly fierce global competition." He believes that the European automotive industry is currently facing many issues simultaneously and they are converging.

On September 2, Volkswagen announced plans to close a vehicle plant and an auto parts plant. This marks the first time in Volkswagen's history that it is closing a plant in its home country, sparking discussions about whether Wolfsburg, the city where Volkswagen is headquartered, might become the next Flint, the birthplace of General Motors in the U.S.

According to Bloomberg's business data, one-third of the production capacity in European factories of automotive giants such as BMW, Mercedes Benz, Stellantis, Renault, and Volkswagen is underutilized. In some factories, the actual production of cars is less than half of the nameplate capacity. The Stellantis factory in Mirafiori, Italy, is in particularly bad shape, with production dropping by more than 60% in the first half of 2024. Production of the Fiat 500e electric car has been suspended there since September 13. Meanwhile, the Belgian factory producing the luxury Audi Q8 e-tron also faces the risk of closure.

Jean-Louis Pech, the President of the French Automotive Equipment Industry Association (FIEV), said: "Considering the current situation, the automotive industry will lose half of its jobs again in the next five years, but this does not seem exaggerated, and this situation may happen very quickly."

Post-war history has repeatedly shown that when strong competitors from outside the region quickly occupy a relatively saturated market, the host often takes drastic restrictive measures. In the 1970s, "Made in Japan" swept the European market, and European countries exclaimed that with Japanese competition, most of Europe's industry would perish, leading to various restrictions on Japanese manufacturing. In the early 1980s, Japanese cars swept the United States, and the Reagan administration exerted strong pressure, forcing Japan to implement a "voluntary restraint" on car exports to the U.S., limiting it to no more than 2.35 million annually. Subsequently, Japanese semiconductor chips also swept the U.S., and the U.S. again forced Japan to sign a daily semiconductor agreement and imposed a 100% tariff on some Japanese memory chips. At the beginning of this century, the Elche shoe city in Spain experienced an incident of burning Chinese shoe stores. Although Chinese shoe merchants were operating legally, and the perpetrators were brought to justice, it was an undeniable fact that the Spanish shoe center could not compete with China. Therefore, it is expected that the EU would take strong measures against Chinese electric vehicles.

3. Solution: Jointly Expand the New Energy Vehicle Market

In summary, we should address and resolve the trade dispute over Chinese electric vehicles that may lead to anti-subsidy tariffs in Europe from two dimensions.

(1) Negotiation and Consultation

It is necessary to uphold the principles of maintaining WTO rules and the legitimate interests of Chinese enterprises, while also considering the legitimate concerns of the European side to reach a mutually acceptable arrangement with flexibility.

1. Strictly follow the relevant WTO rules to thoroughly examine whether the EU's anti-subsidy tariff is justified. This involves two approaches: bilateral consultations and handling under the WTO dispute settlement multilateral framework. The window for bilateral consultations is less than a month. However, there is no time limit for dispute resolution under the WTO multilateral framework. If both parties can reach an agreement through consultations, the matter is concluded. If no agreement is reached, an expert panel is established to provide recommendations. Although the appellate body is currently inactive, a multilateral interim arbitration mechanism can be initiated. Since both China and the EU are members of this mechanism, the arbitration results are binding for both parties. China should have full confidence in this.

2. Fully consider the actual interests and reasonable concerns of both parties, and reach a mutually beneficial arrangement to replace the tariffs. Both parties can establish annual import quotas and minimum price regulations for Chinese electric vehicles entering the EU. This is what China has been striving to achieve over the past month. If successful, it would not only resolve the China-EU electric vehicle trade dispute but also serve as a significant example for maintaining China-EU trade relations and opposing unilateral restrictions.

(II) Win-win cooperation to expand the electric vehicle market

Germany, France, and Italy are all established automotive powerhouses. This electric vehicle trade dispute not only highlights the significant competitive advantage of Chinese electric vehicles but also exposes the slowness in the transformation of the European automotive industry. There are three main shortcomings: First, the maturity of pure electric vehicle technology is insufficient. The strength of European automotive technology lies in traditional fuel vehicles, followed by hybrid vehicles, with pure electric vehicle technology lagging slightly. Second, the market scale is inadequate. As of August 2024, pure electric vehicles accounted for only 12.2% of the EU automotive market, or approximately 1 million units, far below China's 7.03 million units. The insufficient market scale hinders cost reduction and technological upgrades. Third, the infrastructure is lacking, with the scale of charging stations far behind China. Therefore, to reverse the decline, the European automotive industry, especially the new energy vehicle industry, needs large-scale cooperation with China. Conversely, for the Chinese electric vehicle industry to consolidate its European market and explore other markets, close cooperation with the European automotive industry is also necessary.

The most direct approach is mutual direct investment to expand the market, replacing anti-subsidy tariffs and trade frictions. Companies like CATL have already invested $17.5 billion in battery factories in the EU, expected to meet 20% of Europe's demand by 2030. Chery is building an electric vehicle assembly plant in Hungary. However, mutual investment in electric vehicle R&D centers and production bases with European automotive giants is also needed, in Europe for Europe; in China for China; forming a complete supply chain to jointly increase sales. At the same time, jointly investing in third-country markets, particularly in Asia and Africa, to develop new markets. This will expand the European, Chinese, and even global new energy vehicle market, achieving win-win and multi-win outcomes.

4. Strategic Insight One: European Industry is Lagging Behind

From a broader perspective, the EU-China electric vehicle tariff case serves as a mirror, reflecting that European industry is relatively lagging in the wave of the Fourth Industrial Revolution.

Europe was once the birthplace of the First and Second World Industrial Revolutions and had long been at the forefront globally. However, entering the 21st century, especially in the past decade with the rapid development of big data, artificial intelligence, semiconductors, and the network economy, Europe's industrial technological innovation and AI transformation have been relatively slow, widening the gap with the United States and facing significant challenges from the rising China.

(1) The Economic and Technological Gap Between Europe, the US, and China is Widening

After the outbreak of the pandemic in 2020, by 2025, the cumulative GDP growth of the U.S. is expected to be 12.0%, while the EU's growth is projected at 4.8%, less than half of the U.S. In 2010, the EU and the U.S. had comparable economic scales, but by 2023, the EU's economy is only about 80% of the U.S. See the table below:

Source: International Monetary Fund, www.imf.org/WEO, World Bank, www.worldbank.org, and calculations

The latest statistics from the Hurun Research Institute on the number of global unicorn companies in 2024 show that the top ten are almost in China and the U.S., with four each, and none from Europe.

The combined total for Britain, France, and Germany is 116, which is 16.5% of the U.S.; their combined population is 221 million, which is two-thirds of the U.S. In 2024, Britain and France each added only four and three companies, respectively, while Germany added none. Meanwhile, the U.S. added 37 companies, and China added 24.

In the 2024 top 10 supercomputing companies, U.S. companies occupy the top three spots, Europe ranks 5th to 8th, and Britain, France, and Germany did not make the list.

At the Berlin Global Dialogue Conference on Tuesday, French President Emmanuel Macron warned in his speech that the EU is currently in a very dangerous situation. If it does not deepen the single market and resolve fragmentation issues, it may face disaster. He said: "Our previous model no longer works—we are over-regulated and under-invested. In the next two to three years, if we continue with the traditional agenda, we will have to exit the market."  "The EU may perish," he warned.

According to reports from Reuters and Hong Kong-based South China Morning Post on September 9, former President of the European Central Bank Mario Draghi released a detailed report of nearly 400 pages analyzing the European economy, also known as the "Draghi Report." The report points out that if the EU wants to keep pace economically with China and the U.S., it must have more coordinated industrial policies, faster decision-making, and larger-scale investments. However, he also admitted, "The current situation is indeed worrying."

Draghi stated in the report that in order to compete with the U.S. and China, the EU needs to invest 750 to 800 billion euros annually, accounting for as much as 5% of GDP. This is even significantly higher than the Marshall Plan for rebuilding Europe after World War II, which accounted for 1% to 2% of the EU's GDP. The EU must take action in multiple areas.

"Either 'do it' or slowly accept painful torment," Draghi warned, emphasizing that such a level of funding is essential if Europe wants to close the innovation gap with the U.S. and China, especially in high-tech fields.

(II) Where are the problems in EU industry?

1. Insufficient investment in innovation

The compound annual growth rate of the US investment in next-generation information and communication technology from 2000 to 2020 was 7.2%. From 2009 to 2018, the total investment accounted for half of the world's total. In 2021, the investment amounted to US$50.2 billion, with an R&D intensity of 20%. Due to the rapid updates in next-generation information and communication technology, the US's continuous high-intensity investment is considered the main reason for its GDP growth rate surpassing that of Europe and Japan over the past 20 years.

The aforementioned Draghi report indicates that the EU's investment gap is 750 to 800 billion euros annually, accounting for as much as 5% of GDP.

2. Market size is not large enough

The U.S.'s ultra-high-intensity of R&D funding for next-generation information and communication technology comes from its massive domestic single market and huge global sales revenue, especially from the Chinese market, as well as a highly mature venture capital market. In contrast, Europe lacks a large single national market domestically. Even with a unified EU market, annual car sales are only about 12 million, lower than the U.S.'s approximately 17 million, and much lower than China's approximately 30 million. Global sales lag behind the U.S., with insufficient sales revenue from the Chinese market. The scale of venture capital is far inferior to that of the US.

3. Transition from the Third Industrial Revolution to the Fourth Industrial Revolution is not fast enough

Take Germany, the EU's leading industrial power, as an example. German economist Daniel Stelter emphasized in an interview with Germany's Focus magazine that Germany has not made efforts to achieve industrial diversification in recent decades, nor has it paid attention to the development of new industries. The German economy is still dominated by industries from the old era: automobile manufacturing, mechanical engineering, and the chemical industry. "We live in old industries, and we have been in a global leading position in these industrial fields for over 100 years and have defended it to this day, which is certainly a good thing—but it also shows that Germany has not kept up with the new wave of development."

(2) The Future of Europe Lies in Asia, Particularly in China

In 2023, Asia's GDP reached $44.8 trillion, accounting for 42.4% of the world, far surpassing North America or Europe. The economic scale of China alone is equivalent to that of the 27 EU countries combined. The Chinese market is extremely large, with tremendous growth potential, and has significant investment capacity. It has its own characteristics in basic research and application in artificial intelligence, big data, the internet, and new energy, which precisely compensates for the EU's shortcomings. Therefore, China is undoubtedly an extremely important partner for the future development of EU industry. In fact, Germany's investment in China has grown rapidly in recent years, reaching 11.9 billion euros in 2023, the highest since 2014, and 7.3 billion euros in the first half of 2024.

5. Strategic Insight Two: China-Europe Cooperation to Strengthen Future Industry

The future of European industry lies to a considerable extent in Asia, in China. Conversely, the role of Europe in the future of Chinese industry cannot be underestimated.

Europe is the birthplace of the world industrial revolution and has been an extremely important source of advanced technology, investment, and a major market for imports and exports since China's reform and opening up. Europe's advanced metallurgy, petrochemicals, aerospace, nuclear energy, electronics, automotive, machinery manufacturing, instrumentation, pharmaceuticals, and agriculture technologies and industries have played an extremely important role in China's rapid economic development since reform and opening up.

According to the timetable set by the 20th National Congress of the Communist Party of China for achieving the second centenary goal in two steps, China will basically achieve socialist modernization by 2035, with per capita GDP reaching the level of moderately developed countries. In 2023, Slovakia, the developed country with the lowest per capita GDP, reached $25,700, which is twice that of China. Therefore, by 2035, China's per capita GDP needs to at least double from the 2023 level. Since China's industrial added value already accounts for 30% of the world's share, there is little room for horizontal expansion, and the focus must be on developing new quality productivity and significantly improving productivity. To this end, it is necessary to fully absorb all advanced technologies in the world and integrate into the global advanced technology industry chain and supply chain. Therefore, there is a huge space for cooperation between China and Europe in the fourth industrial revolution.

(1) China-Europe Cooperation: Conduct Strategic Research on Future Industrial Cooperation to identify key cooperative industries, fields, respective advantages, and complementary approaches.

(2) Significantly Increase Joint R&D and Innovation Cooperation Parks. Establish dozens of large joint technology innovation parks in EU countries and China to encourage enterprise innovation and incubate a large number of unicorn companies. These unicorns will be joint ventures. In the EU, they will be EU country enterprises with Chinese investment, or wholly owned; in China, they will be Chinese enterprises with EU investment or wholly owned.

(3) Restart and Expedite the Approval Process for the China-EU Investment Agreement (CAI). Encourage large-scale mutual investment between Chinese and European enterprises in artificial intelligence, big data, semiconductor chips, intelligent manufacturing, new energy vehicles, green economy, biotechnology, etc. In the next decade, China's direct investment in Europe is expected to reach $500 billion, or even more. This mutual investment will be part of a complete global industrial and supply chain, jointly committed to improving their respective industrial technology levels and capabilities, and contributing to the integrity of the global supply chain.

(4) Cooperate to Invest in the Global South to accelerate industrial development in the Global South while expanding the global capacity and competitiveness of Chinese and European enterprises.

(5) Based on significantly enhanced industrial cooperation, maintain a reciprocal trade and investment relationship between China and Europe based on WTO multilateral trade rules. For any trade disputes that arise, strictly adhere to WTO-related rules, resolve through consultation, avoid unilateral restrictions, and never engage in trade wars.

It is believed that through joint efforts by China and Europe, China's new quality productivity will see significant development, and European industry will regain vitality. The win-win situation between China and Europe will make a positive contribution to the sustainable development of the world economy and globalization.