Most Favoured Nation: Anti-Subsidy Probe
Cheap electric vehicles, we barely knew ye.
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Earlier this week, in response to lots of [French] people being spooked by versions of the chart above and a lingering suspicion that the EU lost its solar industry due to being too naive about trade with China, European Commission President Ursula von der Leyen announced the EU will open an anti-subsidy investigation into electric vehicles imported from China. This was not entirely unexpected – indeed, this newsletter flagged the possibility earlier in the summer – but still, big news!
I have some thoughts, in no particular order:
‘Anti-subsidy’, not ‘anti-dumping’!
Some of the media reporting on the investigation has used the words ‘anti-subsidy’ and ‘anti-dumping’ interchangeably. Don’t! They are different things.
While DG Trade carries out both types of investigations, an anti-dumping investigation examines whether a foreign company is selling stuff into the EU at a price lower than what they charge in their home country. If the investigation finds that the company is indeed doing this, and that it is harming domestic industry, the EU may impose anti-dumping duties to push the price up to what it should be. Importantly, anti-dumping duties tend to be imposed at the company level.
An anti-subsidy investigation, however, examines whether a foreign government is unfairly subsidising its exporters, leading to harm to domestic industry. If evidence is found, the EU can impose a countervailing duty to offset the benefits derived from the subsidy. Unlike anti-dumping duties, countervailing duties are imposed at the country level.
Anyhow, the EU has announced an anti-subsidy investigation, not an anti-dumping investigation. This does not mean the EU won’t announce an anti-dumping investigation as well in future, but it hasn’t yet — I imagine because there is not enough evidence of dumping to point to.
Politics/Timing is everything.
The European Parliament elections are in June next year. The second half of the year will also see a newly formulated European Commission with a new mandate. Von der Leyen would like to be re-elected as president of the European Commission. To be re-elected, she needs to retain the support of key member-states. France is a very important member state. France really wanted the European Commission to open an ant-subsidy investigation into imported Chinese EVs. So, despite internal opposition from Germany and DG Trade, here we are.
From the point of initiation (which doesn’t seem to have actually happened yet, from a legal perspective), DG trade has 13 months to investigate and impose definitive countervailing tariffs.1 Within this time period, DG Trade will make a provisional finding and could impose provisional countervailing duties, in practice, probably around the 9-month mark. 9 months from now is around the time of the European Parliament elections, which is arguably — politically — not a bad time to announce some provisional tariffs.
The timeline also provides for a bit of a failsafe — if, in the end, the EU decides it is politically not a good idea to start an EV trade war with China, it can make this decision **after** the elections and the beginning of the new Commission mandate (having reaped the political benefits of making the threat). And for the decision on definitive tariffs, while the Commission is the main decision maker, member states are technically able to block if there is a QMV majority against it. All of this is to say that there will be a fair bit of lobbying action in all directions over the next 13 months.
This investigation will be hard
The general process for this sort of investigation is for DG Trade, in the first instance, to send a load of questionnaires to potentially affected companies as well as the Chinese government. The following response from China’s DG for European Affairs suggests China will not be particularly helpful:
Beyond the problems relating to information gathering, it’s also just not going to be that easy to demonstrate that:
a) the Chinese subsidy exists, given that Chinese subsidies are often not direct and could take the form of, for example below market rate loans from state-backed financial institutions; and
b) there is evidence the subsidies are causing damage to EU-based competitors, given hardly any Chinese-brand cars are actually sold into the EU right now. There’s some debate around the exact numbers — the Commission is saying about 8% of cars sold in the EU are from China, but ECIPE’s Hosuk Lee-Makiyama, who is usually right, makes the point it’s actually much lower and that only about 2500 cars registered in the EU last year (0.2% of total) are made by Chinese companies (rather than made in China by non-Chinese firms).
Like, I’m sure DG Trade will manage to do find some evidence of both if it decides it has to, but it might take a bit of time.
I previously looked for examples of similar cases. Here are a couple I found:
In 2011, China imposed duties on American-made cars and SUVs, claiming it was a legitimate response to American dumping and subsidies [Note: sounds familiar!]. The anti-dumping duties ranged from 2 – 21.5 per cent; the countervailing (anti-subsidy) duties from 6.2 – 12.9 per cent. These duties were challenged by the US at the WTO in 2012, and in 2014, a dispute settlement panel sided with the US.
In 2013, Russia slapped anti-dumping duties on vans imported from Italy and Germany, ranging from 23 to nearly 30 per cent. The EU challenged these duties on procedural grounds [subtext: lots of the Russia evidence was pretty iffy], and the Apelette Body eventually sided with the EU.
Proliferation risk?
Now that the EU has fired the starting gun, will other countries do the same?
Maybe.
Take the UK, for example. There is a risk that if the EU does impose duties on imported Chinese EVs, the Chinese EVs that would have otherwise been exported to the EU will be exported to the UK instead. The question is whether anyone in the UK would care? UK consumers buy cars from all over the world and aren’t particularly loyal to home brands. Cheap EV cars means the government hits its net-zero targets faster. For an investigation to begin, a UK firm would need to submit an evidenced complaint to the UK Trade Remedies Authority … and it’s not clear to me who would do it. (Although saying that, there is some read across to the ZEV mandate, which I’m not entirely across, which could feed into some of the decisions made here.)
Risk tolerance
As mentioned above, not everyone in the EU wanted to open this investigation. There is a “people in glass houses” issue, in that absolutely every country that can is subsidising their EV industry at the moment. Is it really in anyone’s interest to open up this can of particular worms? Who can say? And if the investigation looks like it will lead to tariffs, the risk of Chinese retaliation rises fairly significantly. European companies with operations in China will be particularly exposed, dreading the drop-in health inspection that leads to production being halted for a week, etc. This concern will inevitably feed through into pressure on the member state governments, as well as the Commission.
That’ll do for now, but I’m sure I will be writing quite a bit more about this.
Best wishes,
Sam
Note: Anti-dumping investigations have a 14-month timelimit. I have no idea why they are different.
That VdL chose to launch the investigation “ex officio”, without any complaints being lodged by the European industry - even the French one - suggests it could be quite hard for the Commission to come up with evidence to support its case. What’s the betting that VdL brought it in an effort to win French support for her next job move, knowing that it was most unlikely to go anywhere and could be shelved once her future employment was secured?
As for whether the "non-Chinese" companies have lower rates of subsidization, that is not certain. In other China cases, the big money is often in input pricing (eg purchases of steel from an SOE) and financing (borrowing from state-owned commercial banks). Do the "non-Chinese" companies do less of that? Not so sure. And remember that, except for Tesla (which negotiated an exception) foreign auto producers have been required to enter into JVs with Chinese companies (hence the quotes). In other cases - Volvo, for example) the foreign company was bought outright by a Chinese company (Geely).