Europe risks trade war with China by hiking tariffs on its electric cars

London (CNN) 鈥� The European Union has hiked tariffs on , drawing a rebuke from Beijing, which sees the bloc as a vital and growing market for its auto industry.

Additional tariffs of between 17.4% and 38.1% will be applied on top of the existing EU duty of 10%, according to a from the European Commission. That takes the highest overall rate to close to 50%.

The provisional decision follows an into China鈥檚 state support for electric vehicle makers. The European Commission, the EU鈥檚 executive arm, launched the probe in October to establish whether Chinese EV prices are artificially low because of subsidies and so hurt European carmakers.

The Commission said its investigation had provisionally concluded that the EV industry in China 鈥渂enefits from聽unfair subsidization, which is causing a聽threat of economic injury.鈥�

The sharp increase in tariffs highlights the more protective stance on trade with China that Brussels and Washington are adopting. Western officials are concerned that jobs and strategically important industries could be wiped out by . The EU is also probing China鈥檚 support for and .

But the bloc has to strike a balance between protecting its industry and delivering on commitments to green its economy, which include a ban on the sale of new gasoline and diesel cars from 2035.

鈥淭he EU鈥檚 green transition cannot be based on unfair imports at the expense of EU industry,鈥� the Commission said in a statement Wednesday.

It has applied differing levels of new duties to three major EV makers. BYD 鈥� which jostles with Tesla () for position as the world鈥檚 biggest seller of battery EVs 鈥� has the lowest additional duty, at 17.1%.

Geely, which owns Sweden鈥檚 Volvo, has been hit with an extra 20% tariff and SAIC with another 38.1%. As for other EV makers in China, those that cooperated with the EU investigation will see a 21% additional duty, while those that did not will be subject to an extra 38.1% duty.

Tesla, which manufactures many of its cars in China, could receive an 鈥渋ndividually calculated duty rate鈥� at a later stage following a request made by the carmaker, the Commission said.

Trade war brewing?

Europe is the main destination for Chinese EV exports. Last year, the value of EU imports of electric cars from China stood at $11.5 billion, up from just $1.6 billion in 2020, according to Rhodium Group, a think tank.

The new EV tariffs聽are likely to kick off intense negotiations between Beijing and Brussels aimed at averting a damaging trade war. The EU must decide by November whether to adopt the tariffs permanently.

Beijing鈥檚 reaction to the tariffs 鈥渃ould lead to a trade war (with Europe), which would be devastating for a region that is still heavily dependent on Chinese-dominated supply chains in order to achieve its lofty climate goals,鈥� Will Roberts, head of automotive research at聽consultancy Rho聽Motion, said in a statement Friday.

Responding to the EU announcement, China鈥檚 Ministry of Commerce accused the bloc of 鈥渃reating and escalating trade tensions鈥� and said the move would hurt European consumers. It vowed in a statement to take 鈥渁ll necessary measures to firmly defend the legitimate rights and interests of Chinese companies.鈥�

There are also risks for European automakers. Many of them manufacture cars in China and then sell them in Europe, a set-up that will be more costly as a result of the higher tariffs. In addition, Germany鈥檚 carmakers rely heavily on China for sales, and retaliation by Beijing could make life harder for them.

According to Rho Motion, Tesla accounted for more than half of the battery EVs imported by the EU last year, with Volvo and Renault鈥檚 Dacia brand also supplying significant volumes. BYD has only 1.5% of the EU market so far this year but is targeting 5% next year, Roberts at Rho Motion told CNN.

鈥淏eijing is likely to use both carrots and sticks to build opposition to the Commission鈥檚 case, in the hopes that a sufficiently large group of (EU) member states鈥� emerges in order to block permanent duties,鈥� analysts at Rhodium Group said in a recent research paper.

For example, China could raise tariffs on EU vehicle imports to 25%, from their current level of 15%, or target other European exports such as wine and luxury goods, according to Rhodium.

Beijing has already launched an anti-dumping investigation into brandy imported from the EU and could impose tariffs that would hit French cognac makers.

Alternatively, Beijing could pledge investment into EU countries and promise better market access in China for EU firms, the Rhodium analysts wrote.

Germany vs France

EU member states, meanwhile, are divided on the tariffs. While France and Spain are in favor, politicians and auto industry executives in Germany are firmly opposed.

Speaking Saturday, German Chancellor Olaf Scholz said protectionism and isolation 鈥渦ltimately just makes everything more expensive and everyone poorer.鈥� He added: 鈥淲e do not close our markets to foreign companies because we do not want that for our companies either.鈥�

Still, the pressure to protect European automakers grew more urgent last month after Chinese EVs were all but priced out of the United States. President Joe Biden quadrupled import duties on Chinese EVs to 100% as part of a sweeping package of tariffs on goods from China, including semiconductors and batteries.

Given the competing priorities that European officials had to consider, they could not be as heavy-handed in their approach.

In a report in April, Rhodium Group analysts said duties of 40%-50% would probably be necessary 鈥渢o make the European market unattractive for Chinese EV exporters.鈥� For BYD, tariffs would likely have to be even higher to be effective, they added.

Chinese manufacturers should be able to absorb some of the additional tariffs 鈥渋nto their padded profit margins,鈥� commented Roberts of Rho Motion.

China鈥檚 EV makers could also find ways around the tariffs. BYD pledged in December to open a factory in Hungary, an EU member. That would be BYD鈥檚 first plant for passenger cars in Europe.

Olesya Dmitracova and Mark Thompson in London, and Shawn Deng and Alex Stambaugh in Hong Kong contributed reporting. This story has been updated with additional information.

The-CNN-Wire