Deal Between Germany, China Could Stop Looming Tit-For-Tat On EV Tariffs

Conversations are moving forward between China and the European Union on a deal that could benefit electric vehicle (EV) companies from both economic powerhouses.

Willingness from both sides to de-escalate a looming tariff war for the car industry can be read as an oasis of mutual trust within the growing trend of protectionism and economic decoupling that has marked relations between China and the West in recent months.

New Tariffs On EVs Threaten Carmakers In China, EU

Germany is fearful of the effects of a recent EU decision to slap an extra tax of up to 38% on some Chinese EV brands, on top of an already-existing tariff of 10%. 

For some Chinese EV makers, like SAIC Motor Corp., this could mean a 48% tax on all units sent to the EU. Geely Automobile Holdings Ltd. GELYF could have its cars face a 30% tax and BYD Company ADR BYDDY, 27%.

According to Bloomberg, Beijing has suggested that Germany could benefit if the EU were to drop the announced raise.

An agreement would primarily benefit luxury German brands like Mercedes Benz Group ADR MBGYY, DR ING H C F PORSCHE ADR DRPRY and Bayerische Motoren Werke ADR BMWYY, whose units are in risk of receiving extra tariffs in China.

If the EU were to move forward with its decision, launching the new tariffs by July, China could retaliate with higher tariffs on EU-made cars.

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In May, Beijing said it could take its 15% tariff on EU-made cars to up to 25% for large-engine vehicles, in a move that is putting pressure on Germany to act. Large-engine vehicles are considered those with 2.5 liter engines and above, a hallmark of German luxury car brands, which enjoy a healthy market in China.

In the U.S., Chinese EVs have had difficulty gaining market share given high tariffs, which are due to climb above 102% for Chinese electric cars this year.

The decision was announced last month by the Biden administration, quadrupling tariffs on China-made EVs and EV components in an effort to protect the domestic car industry and avoid a flood of Chinese cars in U.S. soil. 

U.S. carmakers like Tesla Inc TSLA, Rivian Automotive Inc RIVN, General Motors Co GM and Ford Motor Co F welcomed the decision.

Can Germany Push The EU To A Halt?

During conversations held over the weekend between Robert Habeck, Vice-Chancellor of Germany and his Chinese counterpart Wang Wentao, China proposed lowering existing tariffs of 15% on large-engine cars in exchange for dropping the announced tariff hikes by the EU.

Habeck, who performs as Germany's economy minister, has been on an official visit to the Asian nation.

Yet Germany has to convince the bloc that the planned hike isn't worth pursuing, and pressure by the bloc's largest economy could stir conflict within the bloc. 

The EU's decision came as a way to level the playing field after a probe concluded that Chinese government subsidies left European car companies at a disadvantage.

The new tariffs were described as a legal action stemming from a months-long probe, while any change to that decision would be politically and economically motivated.

Germany has declared itself against the EU tariffs and Chancellor Olaf Scholz said Monday that he expects a negotiation to result favorable before the EU tariffs begin being collected.

For now, the EU's tax is provisional and would be set definitely in November unless changed.

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