The EU’s dedication to advancing environmentally-friendly technologies and mitigating the impact of greenhouse gas emissions is being investigated following the implementation of tariffs on Chinese electric vehicles. This decision raises significant concerns regarding the alignment and stability of the European Union’s environmental and trade policies. This apparent contradiction highlights the complex interplay between economic interests, environmental objectives, and global trade dynamics.

The air quality issue throughout Europe is a mix of positive developments and persistent issues and challenges for the greener future. In recent years, there has been a noticeable decrease in pollution levels in numerous cities, thanks to the implementation of effective policies, local initiatives, and improved air quality management practices. Nevertheless, numerous urban areas continue to grapple with higher pollution levels that surpass the health recommendations set by the World Health Organization.

The ongoing problem of air pollution in EU urban areas has led to a concerning number of premature deaths, estimated to be around 400,000 each year. This highlights the urgent need for effective measures to improve air quality and protect public health. There are ongoing challenges in effectively communicating air quality issues, garnering public and political support for additional measures, and ensuring policy coherence across different administrative levels. Although there have been some positive outcomes from local initiatives such as the promotion of cycling, and introduction of low-emission zones, it is clear that further efforts are required to achieve consistent and comprehensive improvements in air quality throughout Europe.

Role of Vehicles in Europe’s Air Pollution

Air pollution continues to be one of the significant concerns for both public health and the environment in Europe, particularly in urban areas, where transportation plays a major role as a contributor. Despite recent advancements, pollution levels caused by vehicles, such as cars, vans, and trucks, still surpass the recommendations set by the World Health Organization (WHO). This unfortunate reality results in approximately 330,000 premature deaths each year in the EU. The annual health costs attributed to road transport pollution are estimated to be between €67-80 billion, with a significant focus on diesel vehicles.

The EU’s Ambient Air Quality Directive (AAQD) and Euro standards have been subjected to criticism for their perceived inadequacy in addressing these issues. The latest Euro 7 standards, scheduled to take effect in 2028, are widely regarded as ineffective and unlikely to have a substantial impact on emissions reduction. Although there have been some advancements, such as the implementation of zero-emission and low-emission zones in urban areas, there are still areas that need improvements. Implementing effective solutions, such as enhancing fuel quality and adopting cleaner technologies, is of utmost importance in mitigating pollution and safeguarding public health.

EU’s Environmental Policy

The EU’s environmental policy is driven by a commitment to precaution, prevention, rectifying pollution at its source, and holding polluters accountable. Its primary objective is to tackle pressing challenges such as climate change, biodiversity loss, and pollution. The policy is based on Articles 11 and 191-193 of the Treaty on the Functioning of the European Union (TFEU) and covers a range of environmental issues including air and water pollution, waste management, and climate change. In this respect, the notable advancements include the 2019 European Green Deal, which places a strong emphasis on environmental issues and sets the ambitious goal of achieving climate neutrality by 2050. The 8th Environment Action Programme (EAP) sets forth a comprehensive set of goals for the year 2030. These goals encompass a wide range of areas, such as reducing greenhouse gas emissions, building climate resilience, transitioning to a circular economy, eliminating pollution, and safeguarding biodiversity.

Horizontal strategies of the EU have encompassed various aspects such as sustainable development and biodiversity. The 2024 Nature Restoration Law aims to restore land, sea areas, and ecosystems. On an international level, the EU actively participates in global environmental agreements, including the Paris Agreement. The Aarhus Convention guarantees the involvement of the public in making environmental decisions. Implementation requires a coordinated effort at the national, regional, and local levels, with the support of tools such as the Environmental Implementation Review and the European Environment Agency (EEA).

EVs are Better for Environmental Sustainability   

A recent report from the European Environment Agency (EEA) highlighted the environmental benefits of battery electric cars compared to petrol and diesel vehicles. The report, “Electric Vehicles from Life Cycle and Circular Economy Perspectives,” emphasized the overall eco-friendliness of electric vehicles throughout their entire life cycle. Although, the production of EVs may result in higher emissions, but their overall impacts on greenhouse gases and air pollutants is significantly lower throughout their lifespan. At present, electric vehicles produce emissions that are approximately 17-30% lower than those of traditional petrol and diesel vehicles. This percentage could potentially increase to 73% by 2050 as the carbon intensity of the EU’s energy mix continues to decrease.

The EVs contribute to the improvement of local air quality by reducing emissions along with minimized release of particulate. In addition, the EVs help to decrease noise pollution, particularly in urban environments. The report highlights the potential for mitigating these impacts by implementing circular economy practices that prioritize the reuse and recycling of batteries.  The EEA highlighted the concerns rising in EU transport sector emissions since 2014. Preliminary data from 2017 reveals a significant 28% increase in emissions compared to 1990 levels. Despite significant increases in registrations of battery electric vehicles and plug-in hybrids in 2017, these types of vehicles still make up a relatively small portion of total new registrations. 

EU’s Protectionism Against Chinese EVs

In a recent statement on 8 May, 2024, Ursula von der Leyen, the President of the European Commission, expressed her concerns regarding the influx of affordable EVs from China into the European market. In response to this, the EU launched an investigation into manufacturing of EVs in China for potential subsidies in 2023. 

A regulation was enacted by the European Parliament on June 8, 2016, with the objective of safeguarding domestic industries within the EU from the impact of subsidized imports originating from non-EU countries. An official notice released on July 3, 2023, stated that Chinese electric vehicles were having a detrimental impact on the electric vehicle industry in the Union. The EU’s approach demonstrates a strong alignment between public and private sectors. European manufacturers and suppliers involved in the complaint were granted complete immunity and anonymity, a privilege that was not extended to Chinese firms. In addition, prominent companies such as Tesla and Volkswagen, who have manufacturing operations in China, are not subject to these tariffs. The EU has expressed concerns regarding the impact of China’s industrial overcapacity on EU-China trade. 

China, on the other hand, has accused the EU of engaging in “foul play.” China has raised objections to these tariffs at the World Trade Organization (WTO). The European market for electric vehicles (EVs) is significant, with projections indicating it will reach a value of USD 145 billion by 2024 and experience a growth rate of 12.5% by 2028. The electric vehicle market has experienced substantial growth, with a notable 25% surge in sales during the first quarter of 2024 in comparison to the corresponding period in 2023. The sales growth in 2022 was also 25%. 

On a global scale, electric vehicles (EVs) are projected to make up 20% of all vehicle sales. China is expected to dominate the market with a 45% share, followed by Europe with 25% and the US with 11%. Chinese manufacturers, including BYD, are strategically investing in European production facilities, such as a new plant in Hungary, in response to EU tariffs and trade restrictions. In addition, they are establishing collaborations with European EV companies to lower expenses and considering the possibility of manufacturing EVs in Europe, which could help minimize the effects of tariffs. In July, there was a significant decline of 45% in Chinese EV exports to the EU, despite the efforts made previously. Overall, the EU’s protective measures against Chinese EVs are motivated by considerations surrounding market competition and trade imbalances. Chinese companies are responding to the changing landscape by expanding their operations in Europe and forging important partnerships. However, the current trade tensions serve as a reminder of the challenges involved in international trade within the fast-paced electric vehicle industry. 

EU’s Concerns and Response 

The European Union’s investigation into Chinese-made electric vehicles (EVs) in 2023 underscores concerns regarding the potential unfair competitive advantage created by Chinese government subsidies. According to the EU, there are claims of significant state support for Chinese EV manufacturers, resulting in reduced production costs and enabling them to offer lower prices compared to their European counterparts. The market distortion has the potential to negatively impact European EV producers, resulting in a decrease in their market share and profitability. This, in turn, could lead to financial losses and put them at a competitive disadvantage. The investigation conducted by the EU seeks to evaluate the potential violation of trade regulations and the negative impact on the European industry caused by these subsidies. In response, the EU has the option to implement tariffs or other trade barriers in order to address these unfair practices and safeguard its domestic market.

On July 3, 2023, the European Commission implemented provisional countervailing duties on Chinese battery electric vehicles (EVs) in response to concerns regarding unfair competitive practices. The duties for BYD, Geely, and SAIC were determined to be 17.4%, 20%, and 38.1% respectively. These rates were established after conducting tests on electric vehicle samples and evaluating the subsidies provided. Companies that have not undergone testing are subject to a 20% duty, whereas those that have refused to cooperate are subjected to the highest rate. The EU’s action is intended to address the perceived imbalance caused by Chinese government subsidies, a matter that China disagrees with. The responsibilities will be applicable to electric vehicles that have been registered starting from March 7, 2023. 

Paradoxes of EU’s Environmental Policy

The EU’s tariff regime on Chinese EVs brings attention to certain contradictions within its environmental protection policies. Although the tariffs have been implemented to protect European manufacturers from unfair competition resulting from Chinese subsidies, there is a potential conflict with the EU’s environmental protection goals. The imposition of tariffs on electric vehicles could potentially impede their widespread adoption and hinder the overall progress in reducing emissions.

This short-term protection of domestic industries could potentially hinder the long-term shift towards cleaner technologies. In addition, it is important to consider the broader impacts of making EVs more affordable, as this can greatly contribute to global climate efforts. The tariffs fail to adequately acknowledge the environmental consequences of EV production materials or take into account the wider advantages of higher EV adoption, which could undermine the EU’s overarching environmental sustainability goals.

To read the analysis as it was published on the Eurasia Review webpage, click here.

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How significant is investment from Chinese electric vehicle makers in Mexico? How likely is Mexico to ramp-up incentives for Chinese automakers to invest in Mexico? How can Mexico continue to attract foreign investment from China while maintaining good relations with the United States?

Larry B. Pascal and Carlos Alva, members of the International Practice Group at Haynes and Boone:

“In recent years, the importation of Chinese vehicles to Mexico has increased considerably, primarily due to their competitive prices. For example, according to the Mexican Association of Automotive Distributors, in 2023, up to approximately 20 percent of the total new vehicles sold in Mexico were vehicles fabricated and imported from China. However, no Chinese automaker to date has opened a plant in Mexico, although Chinese automakers are reportedly scouting for manufacturing sites in Mexico. Although the increase in the popularity of Chinese vehicles in Mexico is evident, it is unclear if Mexico would grant incentives to Chinese manufacturers to establish automobile production plants in Mexico in the face of opposition from the United States, its largest trading partner. Putting aside incentives, in theory, a Chinese automaker could open a plant in Mexico without the intent to qualify for national origin treatment under the USMCA (and by implication without an immediate intent to export to the United States) and instead focus on the domestic Mexican market or those other foreign markets for which Mexico has a free trade agreement. The USMCA has stricter rules of origin than earlier free trade agreements that Mexico has with other trading partners. Mexico could also later negotiate with the United States and Canada a side agreement on the automotive sector addressing the treatment of electric vehicles, which could threaten manufacturing jobs in North America but could advance the public policy goals of reducing carbon emissions and furthering the energy transition.”

José Carlos Espinosa, head of sales at LGS International:

“Investment from Chinese electric vehicle makers in Mexico has been growing in recent years, driven by factors such as Mexico’s strategic location for export to North American markets, its skilled labor force and its existing automotive manufacturing infrastructure. However, the exact significance of this investment can vary depending on specific companies and projects. The pressure from the United States on Mexico to limit incentives to Chinese automakers reflects broader concerns about trade imbalances, intellectual property rights and competition in the automotive sector. Mexico, being a key trading partner of the United States and a participant in the USMCA, may be inclined to consider U.S. interests in its economic policies. Whether Mexico will ramp up incentives for Chinese automakers depends on a variety of factors, including diplomatic relations between Mexico, China and the United States, as well as Mexico’s own economic priorities and trade policies. If Mexico perceives that maintaining good relations with the United States is paramount, it may adjust its incentives and policies accordingly. To continue attracting foreign investment from China while maintaining good relations with the United States, Mexico could pursue several strategies: diplomatic engagement, open communication, diversification of investments, transparency and fair trade practices, emphasis on shared goals, and investment incentives based on criteria. Overall, navigating the complex dynamics between China, Mexico and the United States requires a nuanced approach that balances economic interests, diplomatic relations and strategic considerations. By adopting a proactive and pragmatic approach, Mexico can continue to attract foreign investment while maintaining good relations with its key trading partners.”

Margaret Myers, director of the Asia & Latin America Program at the Inter-American Dialogue:

“The nearshoring trend has been largely China-led, as it turns out, as Chinese companies seek access to Mexico’s well-established industrial base in pursuit of supply chain diversification and access to the North American market. But investment in Mexico has been on the rise since around 2015, consistent with an intensive Chinese focus on investment and trade in sectors that China’s leadership has deemed fundamental to China’s own economic upgrading. Electric vehicles are an important part of this story, certainly, but so are many other forms of high-end manufacturing and related trade and investment. In general, Chinese automakers and other companies are looking for opportunities wherever they can find them, aiming to offload excess capacity and, simultaneously, establish dominant market positions. Chinese automakers and parts manufacturers in Mexico are interested in leveraging the USMCA, in many cases, but are also interested in Mexico’s market. Indeed, BYD aims to produce primarily for the Mexican market, according to its spokespeople. And it is well-positioned to do so, having benefited over the years from Chinese industrial policy, including Beijing’s new emphasis on ‘high quality productive forces,’ with a focus on EVs, renewable energy and other frontier industry competitiveness. For the United States, the problem is bigger than Chinese efforts to take advantage of USMCA provisions. Whether Mexico provides incentives for Chinese companies or not, Chinese companies are well-positioned to carve out increasingly dominant positions in all sorts of high-end industries. Mexico is an important destination for many, as is much of the rest of the Latin American region.” 

Lucinda Vargas, associate director of the Center for Border Economic Development at New Mexico State University:

“Mexico is currently under a tidal wave of Chinese direct investment. The Chinese presence in the country spans infrastructure projects, mega-size industrial parks and manufacturing plants in various industries, principally automotive. It has no presence yet in electric vehicle production. China’s BYD, which has surpassed Tesla as the world’s top-selling electric carmaker, has set its sights on Mexico with a stated purpose of servicing the Mexican market. Could its Mexican production platform eventually contemplate generating an electric vehicle for the U.S. market under the USMCA? Yes, but the rules may change. USMCA rules stipulate a 75 percent North American content on automotive products for duty-free U.S. entry. In the USMCA’s review in 2026, stricter rules could be entertained to stipulate that of the remaining 25 percent of content in an automotive product, zero percent can be associated with a ‘foreign entity of concern,’ that is, China as labeled by the U.S. government. Even if Mexican federal authorities have become cautious about stimulating Chinese investment to assuage U.S. concerns, individual states in Mexico seem eager to be the beneficiaries of such investment with incentives in hand. Yet, Mexico does not need to court China with incentives. Its key draw for Chinese investors, indeed for investors from any country, is its next-door proximity to the United States, combined with its USMCA partner status, two anchors that enable tapping one of the world’s largest markets. No one can strip the first, but the United States may force Mexico’s hand on the second: choose between it and China to continue in the USMCA partnership.”

Diana Avalos Morales, executive director of the Mexican Association for Electric Vehicle Promotion:

“Investments from Chinese electric vehicle makers in Mexico have been significant, with more than 15 companies present in the market. Some of them have announced their intention of establishing production facilities in the country. However, Mexico is likely to be careful of ramping up incentives for Chinese automakers, balancing its economic interests with its relationship with the United States. To continue attracting investment from China while maintaining a fair trade relationship within the USMCA, Mexico should pursue a transparent regulatory framework to ensure unfair practices are avoided. This approach could mitigate concerns about tariff evasions while fostering economic partnerships that are beneficial for all countries involved. Mexico is keen on further developing its national supply chain to transform the country from a very vehicle assembly-oriented manpower to a country that supplies complete products to the market. The country should invest enough in science and technology to deliver the goal of having automotive national brands competing in the international markets. Regarding incentives facilitated by the Mexican government for EV imports, we understand these benefit all brands from all countries, so we can’t identify any that only target Chinese companies.”

To read the full Featured Q&A as it was published in the Energy Advisor, a weekly publication of The Dialogue, click here.

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