Electric vehicles – the new trade war front?

By Contributor / 1 year ago / Features / No Comments

By Jon Lawes, managing director at MHC Mobility Europe

Jon Lawes, managing director at MHC Mobility

Europe is on a mission to be net zero by 2050. That date may still be some time away but a key pillar of this comes much sooner – the Continent’s 2035 ban on new internal combustion engine (ICE) vehicles.

A lot of Europe’s transition hopes ride on the adoption of electric vehicles. There was a 63% increase in European EV registrations so far this year to August, which now make up a 21% market share in Europe, and fleet managers are on the whole committed to decarbonisation targets.

However, there is still a long way to go. At the very moment when the EV transition must seriously up the ante, the spectre of politics and protectionism looms. EVs are fast becoming a new trade war front – and one that could seriously undermine the global transition towards net zero.

Brexit cliff-edge

Firstly, post-Brexit ‘rule of origin’ tariffs could be a hammer blow to Europe’s EV progress. The UK is a huge market for European auto manufacturers and vice versa, but from next year 10% tariffs will be imposed on EVs traded between them unless 45% of components (and 50-60% of battery components) come from home soil.

Carmakers on both sides of the channel have called for the current tariff exemption to be extended, given there is no realistic prospect of meeting the domestic sourcing quotas in the near term. Meanwhile, the European industry body for auto manufacturers has warned the tariffs could diminish European EV production by nearly 500,000 units between now and 2026.

While it remains to be seen if a short-term compromise can be reached, the hope is that tariffs could incentivise battery production within the EU’s borders. Building long-term capacity has merit but there remains a danger that urgent EV adoption needs get hit by shortages and higher prices.

Caught between warring giants

Beyond Brexit, rising political tensions between the US and China risk delivering further setbacks – just as the market for EVs is really beginning to take off. The Inflation Reduction Act, passed by the US Congress last year, provides $369bn (€350.3bn / £303.9bn) in subsidies to manufacturers that produce clean technology in America, including EVs, and their components such as lithium-ion batteries.

As mistrust between the West and China intensifies, a key goal of this is to challenge China’s dominance in critical areas of the EV supply chain, such as battery production. For example, it currently possesses more than 70% of the world’s lithium refining capacity, and the batteries of a single Chinese company, CATL, power one in three EVs worldwide.

The legislation has boosted American EV take-up, but it has also wooed battery investment away from Europe. Meanwhile, China responded by imposing export restrictions on germanium and gallium, two metals critical to the chipmaking process. Renault chairman Jean-Dominique Senard has warned that the restrictions constitute a ‘Chinese storm’ looming over the European vehicle sector.

Geopolitical tug-of-war

Europe is rolling out its own response. The Net Zero Industry Act (NZIA) sets mandatory targets for producing at least 40% of the bloc’s green technology in Europe.

Government incentives for clean technology growth are critical to the transition, but in June France went even further and urged the EU to impose tariffs on Chinese EVs. Now, Brussels has launched an anti-subsidy probe into cheap Chinese EVs in the EU market.

While understandably a matter of concern for European manufacturers, it shouldn’t go overlooked that the growing influx of Chinese EVs has the potential to provide future buyers with a range of competitively priced options. This could help shift EV adoption up a gear.

There are no easy answers, but policymakers must remain alert to how closing the door on China’s EVs could complication ongoing transition efforts.

A new trade war front

Battery EV technology has become a new frontline in geopolitics, and net zero will be the casualty.

It’s too early to say but, even with the best of intentions, the danger is that tariffs and quotas set back EV adoption and make it difficult for Europe’s fleet to meet urgent decarbonisation targets. We welcome policies such as the NZIA and it is encouraging that policymakers are investing in the transition, but this also needs to be balanced with global cooperation. The climate crisis obeys no borders.

World leaders cannot lose sight of the ultimate goal of net zero. It’s time for politicians to put aside old divisions and work together to ensure the green mobility transition stays on track.