What’s going on here?
On Friday, the European Union (EU) voted to introduce import taxes – a.k.a. “tariffs” – of up to 45% on Chinese-made electric vehicles (EVs).
What does this mean?
The EU thinks China’s racing out in front with an unfair advantage because its EV makers frequently receive government subsidies. So Europe is trying to protect its car manufacturers by leveling the playing field. And, if it plays out, the decision could turn the industry on its head, potentially raising the prices of Chinese EVs. There's also a looming risk that China retaliates, which could further strain trade relations. But Europe did $815 billion worth of trade with China last year, so both sides might prefer to stick rather than twist – and continue to negotiate toward a low or no tariff solution.
Why should I care?
Zooming in: Big dog, small bite.
Chinese EV makers will have to decide whether to absorb the tariffs, which will hit their profits – or raise the prices of their vehicles, which will hit demand and, as a result, sales and profits too. That said, the tariffs probably aren’t as big a deal as the EU might hope: in the first four months of the year, Europe contributed less than 3% of sales for Chinese car manufacturers BYD, Geely, and SAIC, according to investment bank Daiwa Securities.
For you personally: Up, up, and away.
Tariffs typically spark up inflation because companies pass higher costs on to customers. Any increase in inflation could disrupt the European Central Bank’s plans to cut eurozone interest rates. On the one hand, that makes sense since higher rates should help tamp down inflation. But, on the other, the region’s biggest economy (and home to major carmakers Volkswagen, BMW, and Mercedes) is in recessionary territory: Germany is practically crying out for the economic helping hand of a Europe-wide rate cut.