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Within weeks, virtually all of Britain’s staunch allies will impose heavy trade tariffs on Chinese electric vehicles (EVs).
The import duties imposed by the United States, Canada and the European Union – in some cases reaching 100% – are intended to prevent China from flooding Western markets with ultra-cheap cars that undercut domestic manufacturers.
US President Joe Biden was the first to leave the traps in May, followed by the EU in July. Canada is preparing to impose its own tariffs from October.
They have all raised concerns about unfair subsidies Beijing has reportedly provided to China’s EV industry, while President Biden has warned that the cars – which he likened to “smartphones on wheels” – could be used to spy on citizens and infrastructure.
Britain has been conspicuously absent from the crackdown. Both the Conservative and new Labour governments have refused to follow much of the rest of the West in cracking down on Chinese EVs.
The decision has prompted warnings that the UK has made itself a prime target for “dumping” by manufacturers as cutthroat competition at home drives Chinese brands to seek more profitable sales abroad.
Despite this, Jonathan Reynolds, the Minister for Economic Affairs, and Rachel Reeves, the Chancellor, have adopted a softening tone. Why?
According to Whitehall and industry sources, the answer comes down to two key factors: defending Britain’s car exports to China and the need for the government to meet its own electric car sales targets.
First, despite broader concerns about unfair competition, many British carmakers are more concerned about the luxury vehicles they sell to China than about domestic sales.
A growing base of affluent and middle-class customers in the country account for 20% of Jaguar Land Rover’s annual sales, while Aston Martin, Bentley, Lotus and McLaren also sell large numbers of supercars and luxury vehicles there.
JLR and Aston – along with others – are believed to have lobbied the UK government over the point, amid concerns that any move to hit Chinese cars with tariffs would be swiftly punished by Beijing.
Reynolds told The Telegraph in July: “I’m very conscious that the whole structure of British car manufacturing is export-oriented: we export 80% of what we produce.”
By staying out of the picture, the industry hopes Britain will avoid hostile measures.
In response to EU tariffs on Chinese manufacturers SAIC, Geely and BYD, Beijing has threatened to raise import duties on European cars with large engines and other continental specialties such as cheese, pork and brandy.
The looming trade war is already causing concern among EU member states as they wonder what the consequences of Beijing’s retaliatory measures will be.
Germany – home to the bloc’s biggest carmakers – has called for a rethink, while Spanish Prime Minister Pedro Sanchez said on Wednesday: “I have to be blunt and honest with you that we have to rethink this.” (Spain is the EU’s second-largest carmaker.)
In the post-Brexit era, the UK government agency responsible for trade interventions is the euphemistically named Trade Remedies Authority.
However, an investigation must be initiated following a complaint from an automaker or a direct request from Reynolds.
No complaint has yet been received from a carmaker, a Whitehall source said. They also claimed the economy secretary was under no pressure from the industry – or Britain’s closest international allies – to intervene personally.
“It is something that is constantly being reviewed,” the source added. “But we want to support our domestic auto industry, and the industry is telling us they don’t want tariffs.
“You don’t want to shoot yourself in the foot without getting any benefit from it.”
The situation is also politically favourable for Labour, which has adopted a set of highly ambitious electric car sales targets from the Conservatives and has signalled its intention to increase them further.
Under the so-called zero-emission vehicle (ZEV) mandate, at least 22 percent of cars sold by manufacturers in Britain must be electric from this year. The requirement will be increased annually until it reaches 80 percent by 2030.
Labour has also pledged to tighten the process by banning the sale of new petrol and diesel cars from 2030.
With demand for electric cars declining as consumers are put off by high prices, the arrival of cheaper Chinese cars could be a useful way for the government to achieve its goals.
In addition to the EU tariffs, the ZEV mandate will make the UK a magnet for Chinese brands, which sell far more electric cars than their western counterparts, said Matthias Schmidt, founder of consultancy Schmidt Automotive.
“The UK remains a highly profitable market for Chinese manufacturers, while margins in the European Union will effectively be in the single digits or close to zero after tariffs,” Schmidt said.
Not only do Chinese manufacturers benefit from sales in Britain, they also stand to make money from the way the ZEV mandate works.
The mandate punishes carmakers with fines of £15,000 for every petrol and diesel they sell above a certain limit. However, those who exceed their targets are given carbon ‘credits’ that can be sold to rivals who fall short.
“The ZEV mandate is a huge tailwind for them,” Schmidt says. “The Chinese can effectively clean up when it comes to regulatory credits.”
Against that backdrop, the MG4, produced by Shanghai-headquartered SAIC, has already become one of the UK’s best-selling electric vehicles, with rival BYD beginning to open showrooms across the country.
The pricing strategy the Chinese will employ remains to be seen, Schmidt says. The cars are cheap, but could get cheaper: these vehicles are still more expensive in the West than in their home market, suggesting more discounts are on the way.
“For the Chinese, the ball is in their court,” Schmidt says. “They can be aggressive, lower prices and go for volume, or have relatively conservative volumes with higher prices and make very high profit margins.”
By comparison, most major Western manufacturers – from Volkswagen to Ford – have effectively abandoned the affordable end of the market when it comes to EVs. There is no battery equivalent for the best-selling Ford Fiesta or VW Polo.
That’s because Western manufacturers are having to invest billions in electrification and are trying to boost sales of higher-margin, more profitable vehicles.
However, Robert Forrester, CEO of dealer network Vertu Motors, warns that European manufacturers would be unwise to assume that Britons will remain loyal to trusted brands.
In fact, over the decades they have shown themselves willing to embrace a number of foreign brands, whether American, German, French, Japanese or Korean.
“Consumers are very focused on value for money,” says Forrester, who has just partnered with BYD. “If the Chinese can produce price-competitive cars with great technology and great quality, they will take market share in the UK.”
Not everyone in Westminster is happy about the threat of Chinese invasion.
Kemi Badenoch, the shadow housing minister, has accused Beijing of trying to “bankrupt other countries’ industries” through unfair competition, despite taking no action on tariffs when she was economy secretary.
“It’s not just the competition on production costs, it’s also the fact that they’re not playing by the rules,” she said in a recent article for The Telegraph.
Tom Tugendhat, the shadow security minister who is running with Badenoch for the Conservative Party leadership, is also concerned about security.
“These aren’t just cars; they’re mobile machines that are gathering intelligence,” he says. “As we all know, modern electric vehicles are loaded with sensors that are collecting all sorts of data about a vehicle’s surroundings, but there’s currently no clarity on how that data is being used, whether it’s being stored or whether it’s being sent to China.
“We all want to see the price of electric vehicles come down, and fair competition is key to achieving this. What we are seeing, however, is yet another example of China using trade-distorting subsidies to gain control over key industries of the future.
“The first duty of any government is to keep the country safe, and by not imposing tariffs on Chinese electric vehicles like our allies, Labour is not showing the leadership the country deserves.”
On Wednesday, Mr Reynolds met with chief US trade negotiator Katherine Tai. Tariffs may have been on the agenda, but ministers appear determined to stick to their guns.
“We have made it clear that any decision must be the right one for our domestic auto industry,” a spokesman for the Ministry of Trade and Affairs said.
If this leads to affordable electric cars, consumers may thank them for it.
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