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The Chinese government’s strategy to deal with its economic troubles revolves around  that are supposed to be unleashed in strategically important industries, especially . In practice, this implies government intervention to build domestic advanced manufacturing supply chains. The rationale for these policies is not primarily economic. Instead, they seem to aim at hardening strategic sectors against foreign interference. Economies of scale will be key to make on-shored value chains commercially viable, and thus those value chains will most likely also be export-oriented.

This spells trouble for Europe. Much of the European industrial landscape consists of medium-sized advanced manufacturing companies. China’s strategy means that more and more European producers might face direct competition from Chinese-government supported imports. In response, the European Commission has stepped-up in recent months and employed new tools to counteract Chinese subsidies. It has intervened in several public procurement processes and  of a Chinese security-equipment company.

Meanwhile, Chinese electric-vehicle imports into Europe are surging at a time when anxiety about domestic industries is already high and tensions with China are mounting. The launch by the European Commission in October 2023 of an  is maybe the most consequential EU policy action taken so far.

The accusation being investigated by the Commission is that Chinese EV manufacturers have benefitted substantially from various types of government support. This has taken the form not only of classical subsidies from the central government, but also support from local governments and preferential treatment from state-owned banks and other state-controlled entities.

Party control of such entities is a fundamental element of Chinese economic policymaking. While the various levers of party control are , their non-legal nature makes such state support difficult to challenge through legal proceedings. The shift to even stronger control of ‘strategic’ industries in China means such indirect policies are becoming more important and the EU therefore needs to find a way to deal with them. The United States closing its market to Chinese clean-tech exports makes matters even more pressing, as Europe remains the only open market of comparable size. 

However, the EU should not follow the US in all but banning imports of Chinese EVs. The EU carbon border adjustment mechanism and other climate policies have already been accused of being ‘green protectionism’; it is not in the European interest to give any justification to such claims and thus undermine its credibility as a reliable supporter of the rules-based trading system. Chinese EVs will also help accelerate the EU economy’s green transition. They are very cost competitive and increase the pressure on other manufacturers that have been dragging their heels.

However, arguments that anti-subsidy measures should not be taken for fear of retaliation should not be given much credence. The EU should not signal that unfair advantages in its market can be gained through blackmail. It must also avoid setting bad incentives for its own businesses. Some of the companies lobbying against EU anti-subsidy measures  when human rights abuses there were already well known, likely also to buy political support from the Chinese government. Those that invest in a country with poor rule of law should not expect their governments to undermine fair competition at home to protect such investments.

An EU green policy that would lead to the demise of domestic manufacturers because of unfair competition would not be politically sustainable. Therefore, the EU’s strategy should be to counteract the effect of Chinese government subsidies in order to maintain open markets. This can be done through countervailing duties.

The aim of these would not be to exclude Chinese products from European markets, but rather to level the playing field for other producers, domestic or foreign. Chinese EVs would still be able to compete on commercial grounds, they would only be denied an unfair advantage. In the past, most EU countervailing duties against Chinese companies , sometimes higher if companies were non-cooperative. Given that some EVs are 50% cheaper in China than in Europe, duties of this size would not do away with incentives for exports to the EU.

Eventually, well-calibrated duties could incentivise more transparency and negotiations on what is fair game for green subsidies. But to reach this point, Europe will have to pay a price and counter Chinese subsidies. This will imply costs in the form of retaliation and slightly higher EV price tags. However, fairer and more sustainable trade is worth it.