This is a guest post from trade lawyers Victor Crochet & Elyse Kneller
The transition to electric vehicles (“EVs”) is at the centre of recent international economic tensions. European manufacturers have long been market leaders in the automotive industry. However, the shift away from combustion engine vehicles may be throwing a spanner in the works. While European Union (“EU”) car makers and governments have taken a long time to start developing an industry around affordable EVs, China, on the other hand, got ahead of the game quite early and has been supporting the development of its EV industry over the last two decades. China’s most recent measure to prop up EV sales is the extension by 4 years of a non-discriminatory purchase tax exemption scheme amounting to around USD 4,000 per vehicle. The EU and its Member States are now grappling with China’s quick rise to becoming the world leader in EV manufacturing as imports of Chinese EVs into the EU increase rapidly.
The growth in Chinese EV exports to the EU has led to rumours that the European Commission could initiate trade defence investigations on imports of EVs originating from China. However, this has yet to materialize and for good reasons. Such a move might lead to retaliation from Beijing which could initiate its own trade defence investigations on imports of commercially important goods originating from the EU in response. It would also certainly mean that exports of Western brands of EVs made in China get caught in the net of the measures.
In this context, it seems that some EU Member States are taking the matter into their own hands. France has announced its intention to revise its current EV subsidy scheme in order to better take into account the carbon footprint of vehicle production. Under the current framework, an Ecological Bonus of up to EUR 7,000 (capped at 27% of the cost of the EV) may be obtained for the purchase of a new EV, provided the EV costs less than 47,000 euros. The revision, which could become applicable by the end of 2023, would introduce additional eligibility criteria requiring the production of the EV to respect strict environmental standards including with regard to the amount of carbon emitted during the production process, with the implicit goal that the Ecological Bonus be reserved solely for vehicles produced in Europe and that imports from Asia be excluded (see for example, the Minister of Economy Bruno Le Maire’s remarks here). While other EU Member States have not yet followed suit in introducing their own de facto discriminatory measures, it appears that some of them, including Germany, are warming up to the idea and might do so in the near future.
Such subsidies seem in line with the reactions the United States of America (“US”) wanted to get out of its partners when enacting the Inflation Reduction Act (“IRA”). However, they still differ from each other. Under the IRA, a tax credit of USD 7,500 can be granted to EVs that undergo their final assembly within North America. From 2024, half of the tax credit (i.e., USD 3,750) is eligible to EVs that are manufactured with at least 40% (80% after 2026) of critical minerals that are extracted or processed in the US or in a country with which the US has a “free trade agreement”. The other half of the tax credit is eligible to EVs with at least 50% (100% as of 2028) of the value of the components used in the battery manufactured in North America. Furthermore, the IRA prohibits access to the tax credits where the battery contains any components or critical minerals sourced or manufactured from “a foreign entity of concern”. This means any foreign entity that is “owned by, controlled by, or subject to the jurisdiction or direction of” North Korea, China, Russia or Iran.
The EU and its Member States’ approach to supporting their EV industry thus differs from that of the US. While they share the same principal goal of developing EV manufacturing domestically, the US’ measure aims to move the entire US EV supply chain away from principally China and Chinese entities. France’s proposed measure is expressly about reducing carbon emissions during the EV production process, but many political statements have hinted that the goal is rather to protect EU companies from import competition and to attract EV manufacturing investment in the EU, even if that investment is made by Chinese entities.
Furthermore, while the US’ IRA appears de jure discriminatory, on the other side of the Atlantic, the EU and its Member States have not yet given up on complying with international trade rules when it comes to competing with China. They argue that France’s proposed EV subsidies would not run afoul of WTO rules. This is however questionable as the proposed subsidies would likely constitute de facto discrimination and might be difficult to justify under the aim of protecting the environment especially considering all the political declarations indicating the protectionist intent of the measure.
In this regard, the EU and its Member States’ seemingly more legal approach might still end up creating quite some diplomatic friction, as was the case with the IRA. Depending on their exact design, EV support measures like the proposed French EV subsidies and potential follow up by other Member States might also lead to uproar, especially if they end up excluding EVs produced by trading partners in East Asia. Indeed, the EU and its Member States’ unwillingness to blatantly disregard international trade rules in the same way the US does might lead them to lack the flexibility to accommodate these countries’ governments, except if they manage to carefully calibrate the measure so as to benefit these allies while also excluding China.
