The EU's tariff whack-a-mole

THE EUROPEAN Union's trade defence against Chinese cars has become a game of regulatory whack-a-mole. It slapped tariffs on battery electric vehicles in late 2024. Chinese manufacturers shifted to plug-in hybrids, which the duties did not cover. Now it is preparing to do the same thing all over again.

On August 21st Sebastian Lechner, the CDU state chairman of Lower Saxony, wrote to the European Commission and the German federal government calling for the swift imposition of import tariffs on Chinese hybrid cars. The timing is hardly coincidental: Lower Saxony is home to Volkswagen's headquarters in Wolfsburg. And Mr Lechner is not alone in his demand. Oliver Blume, VW's chief executive, has already made the same case to Brussels. Together they represent a European auto industry that would rather beg for protection than explain to its customers why its products are losing on price.

The numbers tell a dispiriting story. The EU's countervailing duties on Chinese battery electric vehicles, which range from 17% to 35.3% on top of the standard 10% import tariff, were meant to level the playing field. A study by the Kiel Institute predicted they would cut Chinese car exports by a quarter. Instead, car exports from China to Europe rose by 26% in the 12 months to November 2025, reaching nearly 1.2 million vehicles. The tariffs did not stop the flood. They merely redirected it.

Chinese brands responded with the sort of agility that their European rivals have long since forgotten. ByD, which received the lightest BEV tariff at 17%, has shifted roughly 70% of its European sales mix towards plug-in hybrids. In May 2026 it became Germany's best-selling PHEV brand. Chinese plug-in hybrid sales in Europe jumped more than 300% year over year in March, reaching a record 20% of the PHEV market, up from just 2% in early 2024. By the second quarter of this year, Chinese brands accounted for 47.2% of newly registered PHEVs in the EU. For battery electrics the figure was 24.5%. The side door is wide open.

To be sure, the argument for tariffs has substance. An OECD study published in June found that approximately 60% of the market share gains by Chinese firms abroad over the past two decades can be attributed to subsidies, which it described as a distortion of competition. Chinese companies receive three to eight times more state support than their OECD peers. The subsidies are real, and they do skew prices.

Yet tariffs are a blunt and ultimately ineffective answer to that problem. They have not reduced the volume of Chinese cars entering Europe. They have not made European carmakers more competitive: Chinese BEVs remain 21% cheaper than those from European manufacturers even after duties are applied. And they have not prompted the structural adjustment that European industry desperately needs. What they have done is buy a little time, and then force Brussels to invent a new tariff for the next vehicle type that Chinese firms shift into.

The deeper issue is not that Chinese cars are unfairly cheap. It is that European cars are too expensive. Battery cell production costs are around 30% lower in China. The International Energy Agency estimates that total BEV production costs are nearly $10,000 lower in China than in Germany. No amount of tariff engineering will close that gap without raising prices for European consumers. And the gap itself is not solely the product of subsidies; it reflects scale, supply-chain integration, ruthless competition among domestic rivals, and a state willing to tolerate losses in pursuit of industrial dominance. Some of that is distortion. Much of it is simply how the game is being played.

The European Commission appears to have learned only one of the lessons this situation forces on it. Handelsblatt reported on June 19th that the Commission plans to impose countervailing duties on Chinese plug-in hybrids with an anti-subsidy investigation already under way. Duties are expected in the coming weeks, once a majority of EU member states approve them. This time, however, the German federal government does not oppose the move, in marked contrast to its resistance when BEV tariffs were first proposed.

The political convergence is telling. The German government originally feared that BEV tariffs would trigger Chinese retaliation against its export-dependent auto industry. That caution is understandable: EU exports to China have fallen 3% per year since 2021, compared to a 12% annual rise in US-bound exports. But the calculus has shifted. The PHEV flood is now pressing so hard on European manufacturers that even Germany's pro-trade instincts have been overridden by industrial panic.

What the EU should do next is less obvious. The Commission has floated three avenues: negotiating price floors or quotas with Beijing, using state-aid rules to mandate local content or joint ventures, and imposing security-based restrictions on Chinese EVs on data-privacy grounds. All three are problematic. Price negotiations have been unfruitful for more than a year. Mandating local production invites Chinese firms to build factories in Europe and then compete there on the same cost advantage — ByD's chief executive, Wang Chuanfu, has already said his company intends to manufacture in Europe and is indifferent to tariff levels. And data-security restrictions on cars are a thin disguise for protectionism that would strain the EU's own professed commitment to open markets.

A better approach would pair narrow, targeted tariffs with a serious industrial strategy. The Commission's proposed Industrial Accelerator Act, unveiled in March, attempts the latter by tying public procurement, subsidies and corporate fleet incentives to European-made content. But it is likely to take effect only in mid-2027 or 2028, leaving 18 to 24 months of unconstrained access for Chinese exporters. Worse, it aims to cover only about 70% of the market, leaving the rest fully exposed.

That is still a start. The aim should be to use the tariff window not as a permanent wall but as breathing space for European manufacturers to cut costs, streamline supply chains and accelerate electrification. Volkswagen's plan to open a new plant in China while closing a German factory for the first time in its 88-year history suggests that even its leadership recognises the problem is not tariffs but competitiveness.

Tariffs promise dignity to workers and deliver invoices to consumers. Their political appeal is obvious: they make protection visible and costs diffuse. The trouble is that they rarely rebuild the industries they claim to save. They more often create a constituency for permanent inefficiency — and an invitation for the next wave of circumvention. The EU should impose its PHEV tariffs if it must. But it should treat them as a pause button, not a strategy.