Europe Seeks a Trade Balance With China as EV Tariffs Test Economic Ties

A $350 Billion Gap Puts Electric Cars at the Centre

The European Union recorded a goods trade deficit exceeding $350 billion with China in 2024. By February 4, 2026, the search for a more balanced relationship had drawn electric vehicles, French cognac, European dairy products and the minerals needed by car factories into a connected set of negotiations.

Brussels wants to preserve commercial ties with Beijing while tackling a trade imbalance it considers unsustainable. The relationship involves two economic powers that together account for more than 30 per cent of global gross domestic product, making the consequences of their dispute much wider than the car industry.

Chinese manufacturers have expanded their share of Europe's electric vehicle market from roughly 2 per cent in 2022 to approximately 7 per cent in the first half of last year. That is an increase of five percentage points, with the later share about three and a half times the earlier figure. Zeekr Europe acting CEO Lothar Schupet described a rapid expansion, saying the company had added roughly one new market every two months.

European Commission deputy chief spokesperson Olof Gill said longstanding concerns remained unresolved, including industrial overcapacity and the unfair use of trade instruments. Overcapacity means factories can produce more goods than markets readily absorb, increasing pressure to find buyers abroad.

The EU's response is described as "de-risking": protecting critical supply chains while continuing to do business with the world's second largest economy. French President Emmanuel Macron has called for fewer imports and more Chinese investment in European production. That would shift part of the relationship from buying goods manufactured in China to making them within Europe.

Brussels is pursuing this balance while trade relations with the United States become less predictable under shifting policies. Its challenge is to protect European industrial capacity without disrupting markets, investments and supplies on which European companies already depend.

How the EV Tariffs Took Shape

EU member states voted in October 2024 to impose additional duties on electric vehicles manufactured in China after an extensive investigation into subsidies. The European Commission found state support across China's EV supply chain, including direct grants, preferential financing from institutions owned by the state, subsidised inputs and tax benefits.

The Commission's concern was that these advantages allowed vehicles to compete on terms that European producers could not match. Duties intended to offset subsidies add a charge when a product enters the importing market.

The vote exposed divisions within Europe: ten member states supported the tariffs, five opposed them and eleven abstained. Germany voted against the measures. Its automakers manufacture one third of their vehicles for the Chinese market and have substantial investments in factories and joint ventures there.

France supported the duties. Macron argued that competition backed by the Chinese state risked eliminating European industrial capacity in green technology. The disagreement reflected different commercial interests within the same bloc: protecting European production also carries risks for manufacturers deeply invested in China.

The main stages of the dispute and market shift were:

• In 2022, Chinese manufacturers held roughly 2 per cent of Europe's electric vehicle market.
• In October 2024, EU member states voted for additional tariffs following the subsidy investigation.
• During 2024, Chinese exports of battery electric vehicles to the EU reached approximately 580,000 units.
• In the first half of last year, Chinese manufacturers' European market share reached approximately 7 per cent.
• Following the tariff decision, Brussels and Beijing began exploring minimum import prices as an alternative.

Different Manufacturers Face Different Charges

BYD faced an additional duty of 17 per cent, Geely 18.8 per cent and SAIC 35.3 per cent. Each charge was added to the standard 10 per cent import duty, bringing the combined rates to 27 per cent, 28.8 per cent and 45.3 per cent respectively.

The rates varied according to the manufacturers' cooperation with the investigation. Tesla and other Western manufacturers producing vehicles in China received individually calculated rates. The dispute therefore affects vehicles according to where they are manufactured, including cars sold by companies based outside China.

SAIC, which faced the highest additional rate, argued that it had adequately answered the Commission's inquiries. The company said the information requests imposed an unjustified coordination burden.

The measures marked a historic shift in EU trade policy. They targeted a sector in which the bloc had previously maintained a trade surplus with China but was now facing rapidly eroding market share. For European governments, the argument reaches beyond today's sales to the ability to sustain manufacturing in a growing green technology industry.

Can Minimum Prices Replace Tariffs?

Brussels and Beijing are discussing price undertakings, arrangements in which exporters commit to minimum import prices instead of paying the additional duties. The proposed price floor would be intended to remove the harmful effects of subsidies while keeping the European market open to Chinese vehicles.

A tariff collects a charge on imports. A price undertaking instead requires the exporter to sell above an agreed minimum. Both can make imported vehicles more expensive, but the money goes to different places: tariff payments become public revenue, while a higher selling price can increase the exporter's revenue.

The European Commission has published detailed guidelines allowing Chinese producers to submit offers. Those offers can include commitments concerning future investment within the EU. Each submission must be assessed to determine whether it has an effect equivalent to the tariffs and complies with World Trade Organization rules.

EU Trade Commissioner Maros Sefcovic and Chinese Commerce Minister Wang Wentao have held focused discussions on these arrangements. The talks have been described as entering their final stage, although the terms of a durable settlement remain undecided.

Volkswagen has also sought an individual price undertaking for its Cupra Tavascan, which is manufactured in China. Its proposal includes annual import quotas and minimum pricing commitments, separate from the broader negotiations between the EU and China. A quota would limit the number of vehicles imported under the arrangement.

Who Would Pay, and Who Would Keep the Revenue?

Analysts at the Brussels think tank Bruegel have identified several risks in replacing tariffs with minimum prices. European consumers could still pay more for vehicles, while Chinese exporters would retain money that would otherwise have been collected as duties.

Bruegel estimated that switching to price commitments could cost the EU budget approximately €2 billion a year in lost revenue. Those funds could otherwise support research and innovation programmes. The choice therefore concerns public finances as well as the price of a car.

Electric vehicles also present an administrative challenge. Models have complex specifications that evolve rapidly, making it difficult to set and monitor suitable minimum prices. Bruegel's analysts questioned whether the Commission had the specialised expertise required for that task.

Higher margins on exports could also weaken the incentive for Chinese companies to build factories in Europe. If exporting becomes more profitable under a minimum price arrangement, manufacturers may have less commercial reason to move production closer to European customers. That would work against Macron's call for greater Chinese investment in European production.

Cognac, Dairy and Pork Become Bargaining Points

China has responded to the European measures with investigations into subsidies affecting European dairy, pork and brandy products. Temporary tariffs reached up to 42.7 per cent on some dairy items and up to 39 per cent on French cognac.

The measures targeted agricultural sectors in member states that supported the EV duties. French cognac producers complained that they had become collateral damage in a dispute centred on cars. Their experience shows how a trade conflict in one industry can affect businesses selling entirely different products.

Five industry sources said a tentative agreement on minimum import prices for cognac, reached after months of technical negotiations, would be finalised only if the EU made comparable progress on electric vehicle tariffs. Beijing had connected the outcome for cognac producers to the negotiations over Chinese cars.

The proposed cognac arrangement would set minimum prices ranging from 46 yuan per litre for standard varieties to 613 yuan for premium categories. Those levels would be substantially below prices inflated by the current duties, but the agreement depended on Brussels matching Beijing's flexibility on automotive trade.

These negotiations create several linked decisions. European car producers want protection from subsidised competition, agricultural exporters want relief from Chinese measures, and EU negotiators must consider both sets of interests when assessing a settlement.

Rare Earth Controls Put Factories Under Pressure

China's dominance in rare earth elements gives Beijing another powerful bargaining tool. These materials are needed in dozens of vehicle components, including motors, sensors and speakers. Delays in receiving them can interrupt production even when factories have the other parts they need.

Chinese officials indicated a willingness to establish a "green channel" for faster export approvals to European manufacturers. Beijing linked rare earth export licences to progress in the EV tariff dispute, connecting access to essential industrial materials with the treatment of Chinese vehicles.

Industry insiders described the automotive sector as being in "full panic" over the supply crisis. Several European supplier plants had already shut down because of material shortages, and industry associations warned of broader production outages.

The Japanese Chamber of Commerce and Industry in China reported that Beijing had begun approving some export applications. European businesses nevertheless continued to face delays and a lack of transparency in the licensing process.

A German Chamber of Commerce executive described the approval system and the administrative burden facing companies:

huge bureaucratic monster

The executive said announcements alone had been insufficient to calm industry nerves. Manufacturers needed approvals that would allow materials to move and production to continue. For Brussels, the disruption gives practical urgency to its strategy of protecting critical supply chains while maintaining trade with China.

Chinese Sales Continue as Companies Adjust

Chinese exports of battery electric vehicles to the EU reached approximately 580,000 units in 2024, representing 28 per cent of China's total exports of those vehicles. Europe remained a major destination despite the tariff dispute.

Industry forecasts suggested those volumes could grow by 20 per cent annually over the following three years as manufacturers adapted to the regulatory environment. The projection points to continued expansion rather than a retreat from Europe.

BYD recently overtook Tesla as the leading electric vehicle brand globally. It expanded its European presence to twelve countries and added roughly one new market every two months, matching the expansion pace described by Zeekr's Schupet.

Some Chinese manufacturers are also accelerating plans to produce vehicles inside Europe. BYD intends to begin construction of a manufacturing plant in Hungary later in the year. Local production would allow it to avoid duties on imported vehicles while creating employment in Europe.

Germany's automotive association, VDA, criticised the EU tariffs as a mistake and advocated negotiated solutions. In a statement explaining its position, the association said:

Regardless of current global developments, it must also be discussed here how to reduce obstacles and distortions in international trade, rather than building new hurdles,

The combination of continued exports, proposed price undertakings and factory investment shows how manufacturers are responding through several routes. The EU must assess whether those changes support European production and employment while addressing the subsidy concerns that prompted the duties.

Technology Restrictions Add Another Dispute

New EU cybersecurity proposals threaten to restrict Huawei from critical telecommunications networks. The proposed treatment of suppliers considered a high risk adds another point of friction to an economic relationship already strained by cars, agricultural products and minerals.

Linlin Liang, director at the China Chamber of Commerce to the EU, warned that excluding particular companies without clear evidence could undermine business confidence and fair competition within the bloc. Beijing, meanwhile, has signalled a desire for deeper cooperation with Europe.

Brussels faces overlapping priorities: maintaining commercial engagement, protecting sensitive infrastructure and reducing dependence on supplies that can become subject to export controls. The Huawei issue concerns telecommunications rather than vehicles, but it affects confidence in the wider partnership.

Europe Seeks Industrial Growth Without Severing Ties

Macron's call for fewer imports and more Chinese investment reflects a broader European ambition to make the green economy a source of domestic growth. Former European Central Bank president Mario Draghi set out that objective in a competitiveness report, arguing that the green transition should generate European growth rather than rely mainly on Chinese imports to reduce emissions.

Complete economic decoupling appears unfeasible for most European industries. Manufacturers have investments in China, depend on Chinese market access and need materials processed there. The rare earth disruption illustrates how quickly those dependencies can affect operations.

Recent deals with India and the Mercosur bloc remain years away from full implementation and lack the scale to replace Chinese market access. They offer alternative commercial relationships, but Europe still has to manage its existing ties with Beijing.

Less predictable relations with Washington add to the pressure. Brussels is trying to maintain strategic autonomy, meaning the ability to make its own economic choices, between an assertive China and an unpredictable United States.

Officials on both sides have indicated that trade will dominate the agenda at the July summit marking fifty years of EU-China relations. The negotiations involve more than choosing between tariffs and minimum prices. Brussels must decide whether Chinese investment commitments adequately address the distortions caused by subsidies, while Beijing faces demands to resolve measures affecting European agriculture and industries dependent on minerals.

A lasting agreement would have to connect those decisions in a way that businesses can use: workable prices and import conditions for vehicles, relief for agricultural exporters, dependable supplies for factories and clearer prospects for production within Europe.

The Essentials

• The EU recorded a goods trade deficit exceeding $350 billion with China in 2024.
• Chinese manufacturers' share of Europe's EV market rose from roughly 2 per cent in 2022 to approximately 7 per cent in the first half of last year.
• Additional EV duties are 17 per cent for BYD, 18.8 per cent for Geely and 35.3 per cent for SAIC, on top of the standard 10 per cent import duty.
• Brussels and Beijing are discussing minimum import prices as an alternative, with investment commitments also under consideration.
• Bruegel estimated that replacing duties with price commitments could cost the EU budget approximately €2 billion annually.
• China has connected progress on cognac arrangements and rare earth export approvals to the EV negotiations.
• Rare earth shortages have shut some European supplier plants, while Chinese EV exports to the EU reached about 580,000 units in 2024.
• Europe's stated approach is to protect supply chains and industrial capacity while keeping economic ties with China.