In a move that could have far-reaching implications for the electric vehicle (EV) industry, the European Union (EU) Commission has officially launched an anti-subsidy investigation on October 4th, 2023 (Notice C/2023/00160) into Chinese electric vehicles, potentially risking a trade war with Beijing. This investigation aims to examine the extent to which Chinese EV manufacturers receive subsidies from the Chinese government, potentially distorting competition within the European market. During her State of The Union speech on 13 September 2023, European Commission President Ursula von der Leyen summarized the concern of the EU as follows: ‘global markets are now flooded with cheaper electric cars (…) and their price is kept artificially low by huge (Chinese) state subsidies’.
The anti-subsidy investigation concerns the whole supply chain of electric vehicle manufacturing from China, thereby also including EVs and EV parts of foreign brands manufactured in China.
There is also a significant risk that parallel to the trade focused anti-subsidy investigation, the EU may launch a competition law focused investigation under the new Foreign Subsidies Regulation (FSR) that entered into force on 12 July 2023 into Chinese EV manufacturing companies already present in Europe. For this competition related inquiry, the FSR, Chinese subsidies for EV manufacturers are the leading candidate for enforcement due to the strategic importance of automotive production in the EU, the industry's quick shift to EVs, and the recent success of Chinese EV manufacturers in the EU. For Chinese manufacturers, whose involvement in M&A deals or European tenders is subject to an FSR notification obligation, compliance with the FSR will also be crucial.
Regarding the anti-subsidy investigation
Such investigations happen when a foreign country is suspected of subsidizing products in a way that harms European industry, as the EU Commission believes to be the case having gathered sufficient evidence to launch the investigation. The product in question is defined by the Notice as ‘new battery electric vehicles (‘BEVs’), principally designed for the transport of nine or less persons, including the driver, propelled solely by one or more electric motors. Motorcycles are excluded from the present investigation.’
According to the Notice, the subsidy practices consist - among others - of (1) direct transfer of funds and potential direct transfers of funds or liabilities, (2) government revenue forgone or not collected, and (3) government provision of goods or services for less than adequate remuneration.
In particular, the Commission has found evidence, among others, of various grants, provision of loans, export credits and credit lines provided by State-owned banks or bonds underwritten by State-owned banks and other financial institutions at preferential terms, provision of preferential export insurance; income tax reductions and exemptions, dividend tax exemption, import and export tax rebates; VAT exemptions and rebates; and government provision of goods (such as raw and input materials as well as components) and services for less than adequate remuneration.
The above schemes appear to be subsidies since they involve a financial contribution by the Government of the People’s Republic of China or other regional governments (including public bodies), or by private bodies directed or entrusted by the Government of the People’s Republic of China, and which confer a benefit to the recipients. They appear to be specific and, thus, countervailable, among others, since they are limited to certain sectors, products and/or regions.
The scope of the investigation will be for the Commission to assess whether:
- imports from the People’s Republic of China benefit from countervailable subsidies, including those identified before the case is initiated or discovered in the course of the investigation;
- the EU industry suffers material injury;
- there is a causal link between the injury and the subsidized imports; and
- putting measures in place is in the interest of the European Union.
The investigation of subsidisation and injury will cover the period from 1 October 2022 to 30 September 2023 and the examination of trends relevant for the assessment of injury will cover the period from 1 January 2020 to the end of the investigation period.
According to the Notice, the Commission may use a sampling method from the manufacturers that are considered ‘exporting producers’, as well as unrelated importers. Exporting producers are defined as ‘any company in the country concerned which produces and exports the product under investigation to the Union market, either directly or via a third party, including any of its related companies involved in the production, domestic sales or exports of the product under investigation’.
In order to enable the Commission to decide whether sampling is necessary, and if so, to select a sample, all exporting producers or their representatives, as well as unrelated importers are requested to provide the Commission with information on their companies within 7 days of the date of publication of the Notice.
Once the Commission has received the necessary information to select a sample of exporting producers and unrelated importers, it will inform the parties concerned of its decision whether they are included in the sample. The sampled exporting producers and unrelated importers will have to submit a completed questionnaire within 30 days from the date of notification of the decision of their inclusion in the sample.
In order to establish whether the Union industry is injured, Union producers of electric vehicles are also requested to participate in the Commission investigation.
If the investigation reveals that Chinese EV manufacturers are indeed benefiting from substantial subsidies that distort competition, the EU may decide to impose tariffs or trade restrictions on Chinese electric vehicles. This would make Chinese EV-s less competitive in the European market, allowing European manufacturers to compete on a more level playing field. Experts agree that import tariffs may near or even match the 27,5% import tariff imposed by the United States on Chinese EV-s.
Experts also agree that a trade war with China could cause serious damage to the EU. As of today, however, reactions from Chinese officials seem to emphasize the importance of dialogue and cooperation instead of retaliation.