Anti-subsidy investigation in Chinese Electric Vehicles: fairness, global competition and geopolitics
By Mark Konstantinidis, King’s College London
Introduction and background
In September 2023, European Commission President Ursula von der Leyen delivered her State of the Union address to the European Parliament. President von der Leyen warned that ‘global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies. This is distorting our market. And as we do not accept this from the inside, we do not accept this from the outside’ (emphasis in original text). She therefore announced that the Commission would be launching an anti-subsidy investigation into electric vehicles (EVs) originating from China.
In October 2023, the European Commission (Commission) issued a notice of initiation of an anti-subsidy proceeding (Notice) under Regulation 2016/1037 (Anti-Subsidy Regulation). The article will set out and examine the Notice and draw broader conclusions about the Commission’s enforcement approach.
The above will be examined in the light of the stated political motivations for initiating the proceeding, as expressed by President von der Leyen. Namely, the Commission was prompted by considerations of fairness: both ‘in the global economy’ –reflecting the geoeconomic competition between the EU and China– and within the EU single market –as the domestic state aid regime must be matched with observance of international rules on subsidies.
Initiation of anti-subsidy proceedings
The Anti-Subsidy Regulation establishes the framework for the Commission’s enforcement of EU anti-subsidy and anti-dumping rules. In brief, such rules aim at preventing or mitigating injury on the Union industry, caused by the importation of subsidised products into the EU single market. The Regulation provides for investigative and countervailing powers, and establishes procedural rules, including guarantees for affected parties.
In principle, under Article 10(1) of the Anti-Subsidy Regulation, anti-subsidy proceedings are initiated following a written complaint by a natural or legal person or association ‘acting on behalf of the Union industry’. Subject to a preliminary examination of the ‘accuracy and adequacy’ of the information provided in the complaint, the Commission can initiate an investigation (Article 10(3)). However, per the Notice, the investigation into EVs originating from China was initiated under Article 10(8). Article 10(8) empowers the Commission ‘in special circumstances’ to initiate an investigation without having received a complaint. As ordinarily required, there needs to be ‘sufficient evidence of the existence of countervailable subsidies, injury and causal link’. That is, while the Regulation exceptionally permits the Commission to launch an investigation on its own initiative, it still requires that it is prima facie founded on ‘sufficient evidence’.
The investigation was launched on the grounds that imports of ‘new battery electric vehicles for the transport of persons originating in the People’s Republic of China are being subsidised and are thereby causing injury to the Union industry’.
The Commission’s reliance on Article 10(8) suggests that it had thus far not received a (credible) complaint of Chinese subsidies benefitting EVs imported in the EU, notwithstanding that these are a matter of ‘publicly available information’, as it noted in section 1 of the Notice. The Commission’s intervention sidesteps the industry’s evident wariness to trigger an investigation. Such wariness inter alia reflects fears that it would prompt retaliatory action from China against European manufacturers, and escalate into a trade war. This is aggravated by the perceived Chinese dominance of the EV supply chain, including resources of lithium and other minerals which are important for the production of EV batteries. The above raises the following paradox: a Commission initiative which seeks to protect the Union industry risks triggering Chinese retaliation which would harm it. Whether or not the risk is worth it, of course, is a political determination. Moreover, the scope of the Commission’s investigation, even covering European-branded EVs originating from China, may have spillover effects for the Union industry.
Subsidisation, threat of injury and causation
In the Notice, the Commission flags the ‘sensitivity’ of the EV sector and ‘its strategic importance to the EU economy in terms of innovation, value added and employment’. This is indicative of the political salience of the investigation and explains the ex officio priority granted to the latter. Interesting, as mentioned earlier, it refers to ‘publicly available information’ which constitute ‘sufficient evidence’ demonstrating that imports of EVs from China benefit from countervailable subsidies within the meaning of Article 4 Anti-Subsidy Regulation. Section 3 of the Notice sets out the various forms of granted subsidies, such as grants, tax exemptions and government provision of goods and services for ‘less than adequate’ remuneration.
Imports of Chinese EVs have increased ‘at a significant rate in both absolute and market share terms’. In the Commission’s view, this trend is likely to continue due to the ‘freely disposable capacity’ in China and the price ‘attractiveness’ of the EU market. The injury thereby caused to the Union industry seems to be owed to the sensitivity of the EV sector, which will require ‘heavy investments’ to meet objectives set by the EU’s environmental and climate transition agenda. It is argued that such investment will not be able to be made where market conditions lead to price depression and ‘pressure on Union sales, market shares and profit margins’. This is said to constitute a threat of injury to the Union industry within the meaning of the Anti-Subsidy Regulation.
Two comments can be made in this regard. First, the above emphasises that the Commission is not agnostic vis-à-vis the origin and qualitative characteristics of investment needed to perform the green transition. It is keen to ensure that the EV infrastructure of the EU is not only serviced by third countries, but rather supported by sustainable domestic production. While this is partly inherent in the Regulation’s emphasis on the ‘Union industry’, it is aggravated by geopolitical circumstances particular in this context. Second, the above suggests that the Commission seeks to prioritise the long-term prospects of the Union EV industry (including producers’ profit margins) over keeping prices low for end-users.
Investigation procedure
The Commission’s investigation will focus on the period from 1 October 2022 to 30 September 2023 for determining whether imports of EVs originating from China have been subsidised and caused injury to the Union industry. This will require an investigation of exporting producers of the relevant EVs in China as well as unrelated importers to the EU. Determination of injury will also require that the Commission investigates Union producers of EVs under Article 11(11) of the Anti-Subsidy Regulation.
If the Commission determines that injury has been caused to the Union industry due to imports of subsidised EVs from China, it must then examine whether the imposition of countervailing duties would not be against the Union interest. Such a determination is to be made in accordance with Article 31 Anti-Subsidy Regulation: it entails an ‘appraisal of all the various interests taken as a whole, including the interests of the domestic industry and users and consumers’. While ‘the need to eliminate the trade-distorting effects of injurious subsidisation and to restore effective competition shall be given special consideration’, Article 31 empowers the Commission to weigh competing interests, some of which may well be non-economic, if not geopolitical. In this regard, the Commission has initiated a far-reaching consultation process, including via questionnaires (section 5.5 of the Notice).
Interested parties, particularly exporting producers or Union producers, importers and suppliers, will also typically be expected to participate in the investigation. The Chinese government has been invited for consultations, as the country of origin of the product under investigation.
Provisional countervailing duties may be imposed normally within 9 months from the date of publication of the Notice. Following the investigation, the Commission can impose definitive duties, to ‘offset any subsidy granted […] for the manufacture, production, export or transport’ of EVs from China ‘whose release for free calculation in the Union causes injury’ (Article 1(1) Anti-Subsidy Regulation). The investigation will have to be concluded within 13 months from publication.
Open (?) strategic autonomy
The anti-subsidy investigation, initiated by the Commission ex officio, marks a milestone for the implementation of the EU’s trade policy, premised on ‘open strategic autonomy’. Indeed, it appears that openness may yield to strategic considerations. The published Notice suggests that the Commission is alarmed about the long-term competitiveness of the Union EV industry, as market dynamics are skewed by heavy Chinese subsidies.
This seems to be a quintessentially (geo)political concern, which is in fact underpinned by a concession that reaching the needed domestic investment levels may well require higher consumer prices. While this is not beyond the scope of the Commission’s powers under the Anti-Subsidy Regulation, the ex officio initiation of an investigation raises the stakes. It is not merely an enforcement action, but may be seen as a strong affirmation of the so-called ‘de-risking’ approach to EU-China economic relations.
