EU First Exception from Electric Vehicle Tariffs—VW Guarantees Minimum Prices

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The EU Commission exempts the Cupra Tavascan from additional customs duties. In return, VW promises minimum prices and caps sales. Chinese OEMs are already considering whether to submit similar applications.

At least VW no longer has to pay additional EU tariffs on its e-car produced in China. The "Cupra Tavascan" SUV, which Volkswagen produces in a joint venture with its Chinese partner JAC, has been exempted from the tariffs. In return, the company had to accept a minimum price and quotas.

The agreement announced by the EU Commission with Volkswagen Anhui is the first of its kind. It could now offer a way for Chinese electric vehicle manufacturers to avoid the high import tariffs from Brussels. Several Chinese OEMs are already considering submitting a similar application to the EU, according to Chinese media reports citing the Chinese Chamber of Commerce in Brussels.

VW Compromise with Minimum Price and Quantity Limitation

As part of the agreement, Volkswagen (Anhui) Automotive Co., Ltd., which is three-quarters owned by the Wolfsburg-based company, has committed to minimum prices when importing the SUV produced in China into EU countries. The prices have not been disclosed.

A maximum quantity for these electric vehicle imports now also applies, reported the Chinese business magazine Caixin—the specific quantity has not been disclosed. In addition to these two commitments, the Spain-based VW subsidiary Seat had to promise to invest in electric drive projects within the EU. For the Cupra Tavascan, tariffs of 20.7 percent were applied in addition to the already applicable ten percent on imports from China.

Western Manufacturers Also Affected by Additional Tariffs

On October 4, 2023, the EU Commission began an investigation into manufacturers of electric vehicles in China. Last October, it imposed partially drastic additional tariffs on electric cars from China. This affected not only the electric vehicles of Chinese manufacturers but also those from VW and Tesla, keeping them expensive for European car buyers.

The EU Commission states that it aims to protect the domestic market against unfair practices in China. Beijing, on the other hand, accuses the EU Commission of protectionism. Chinese commentators noted that German manufacturers alone have sold more than 60 million cars in the People's Republic, while the "flood" of Chinese cars exported to Europe amounts to only several hundred thousand units so far.

German manufacturers protested against the EU tariffs on electric vehicles produced in China before they were imposed. The OEMs still generate significant profits in China, although these have recently decreased.

In particular, France, whose automotive industry has virtually nothing left to defend in China, advocated for the electric vehicle tariffs in Brussels. The EU Commission then came to the same conclusion as the U.S. government in Washington, believing that it was wise to shield the domestic market and followed the pressure from Paris.

For VW, the new price commitment is unfavorable, but it is better compared to the EU import tariffs. While the cars are artificially inflated in price in the EU market, limiting their sale, the profits made through higher prices remain within the company, rather than being transferred to the EU like the additional tariffs.

Electric Vehicle Tariffs Drive Import of Hybrids

However, a look at the latest statistics raises increasing doubts about the purpose and effectiveness of these EU tariffs on electric vehicles. Exports of electric vehicles and hybrids, categorized in China under the collective term "New Energy Vehicles" (NEV), have more than doubled in January compared to the previous year.

Chinese manufacturers were able to export significantly more cars to the EU but shifted their efforts more towards plug-in hybrids, which are not subject to the EU tariffs. As a result, the EU tariffs have contributed to an increase in the share of hybrids in total registrations in the EU compared to the share of electric vehicles. Additionally, exports of Chinese NEVs to other markets, such as Brazil and Southeast Asia, have also been growing rapidly, allowing them to take market shares from German automakers.

The more artificial trade barriers the EU imposes against China, the less European manufacturers are compelled to compete with Chinese rivals in terms of quality and price, analysts say. While this may temporarily slow the triumph of Chinese brands in the European market, it does little to help in the global market that is essential for German OEMs.