15th September 2023 – (Brussels) European Commission President Ursula von der Leyen announced this week that the EU has launched an investigation into whether Chinese electric vehicle (EV) manufacturers are benefiting from unfair state subsidies. She claimed the probe is necessary because “global markets are now flooded with cheaper electric cars, and their price is kept artificially low by huge state subsidies.”

While the rhetoric may play well politically in Europe, the reality is this probe flies in the face of the EU’s long-held position as a champion of free trade and open markets. It reeks of protectionism and could backfire economically for Europe.

On the surface, the rapid growth of Chinese EV exports to Europe may appear alarming. Chinese EVs now account for around 8% of total European EV sales, double their share from a year earlier. Some projections estimate this could hit 15% by 2025 if current trends continue.

However, these figures alone do not justify punitive tariffs or import restrictions against Chinese manufacturers. All evidence suggests the rise of China’s EV industry has been driven predominantly by technological innovation and economies of scale, not unfair government subsidies.

Take batteries, the most expensive component of an EV. China’s Contemporary Amperex Technology (CATL) has become the global leader in lithium-ion battery production through heavy R&D investment. CATL batteries now have energy densities comparable to cutting-edge Japanese and Korean cells but at a substantially lower cost. This cost advantage stems from China’s end-to-end control of the battery supply chain, not subsidies. CATL also supplies batteries to European automakers, benefiting companies like BMW and Volvo.

In software, Chinese firms like Huawei, Baidu and Alibaba are pouring resources into next-generation vehicle operating systems. The capabilities being developed, from over-the-air updates to self-driving algorithms, are on par with Tesla’s software. This gives Chinese brands a leg up in the coming software-defined auto era.

Hardware innovation is also apparent. NIO has pioneered battery swapping stations that can replace an EV battery in under 5 minutes, solving range anxiety and downtime issues. BYD leverages vertical integration to control costs across its EV manufacturing process.

Clearly, technology and supply chain integration, not subsidies, have enabled the rise of Chinese EVs. Europe should not punish China for its companies’ drive to innovate and better meet customer needs.

No doubt, the Chinese government does provide some subsidies to EV manufacturers. But these are dwarfed by the scale of private investment pouring into the industry, now totalling over $100 billion. Local subsidies are also available in Europe and elsewhere to spur EV adoption. Singling out China appears more like protectionism than pursuing “fair competition.”

From a broader perspective, this anti-subsidy probe could damage EU-China ties at a time when more bilateral cooperation is needed, not less. Supply chain interdependency in EVs is already high, with many European firms reliant on Chinese battery and chip supplies. Erecting new trade barriers risks disrupting these links.

The probe also undercuts Europe’s longstanding commitment to open markets and leadership in global trade liberalization. Since the EU’s founding, it has prided itself on resisting protectionism, especially during periods of economic uncertainty. This investigation seems to abandon that tradition to score political points.

Some may argue this is a necessary step to protect European firms and jobs from Chinese competition. But in the long run, isolating themselves from China will only reduce the competitiveness of European companies. Innovation, not protectionism, is the only sustainable path to success in emerging high-tech industries like EVs.

Europe would be wise to engage constructively with China to address any trade-related concerns. Unproductive confrontation will only harm the continent’s future economic prospects and relationships with its second-largest trading partner. Hopefully, wiser heads in Brussels will prevail and redirect the EU toward cooperation with China rather than conflict.