China-proofing European cleantech is a tricky business

Welcome to Trade Secrets, as the northern hemisphere heads towards the summer break. The big news is obviously the closing of the Strait of Hormuz, but once again oil prices haven’t really reacted that much. I got quite a lot of pushback to the optimism I expressed in my last column: readers said that crude prices staying surprisingly low might reflect governments releasing oil from their strategic reserves, which are now perilously depleted. But that doesn’t explain why oil traders, who presumably know this, aren’t reacting more strongly this time. Nor does it explain why products such as urea and fertiliser, for which governments don’t hold large stocks, also appear — and I stress appear — to be in reasonable supply. Let’s see.

Today I dive into the detail of what governments in the EU could be and have been doing to protect strategic clean industries. Charted Waters, where I look at the data behind world trade, is on food and fuel prices.

Finding friends and making enemies

Enough of the vague hand-wavy stuff about the EU standing up to the China challenge and strategic autonomy. Let’s say you buy the argument that the EU is vulnerable to supply chain chokepoints and foreign control of critical technologies. What exactly are you going to do about it?

There are two studies I’ll look at today. First, an attempt by the not-for-profit Clean Technology Partnerships Initiative (CTPI) to work out EU vulnerabilities in clean technology supply chains and how to address them. Second, an examination of the 2024 EU anti-subsidy tariffs against Chinese electric vehicles by Transport and Environment (T&E), an NGO that works on clean energy. Obviously I can only summarise them here. I recommend reading both at length.

First, the CTPI study. It examines eight technologies including the famous ones — batteries and offshore wind — and the less salient — geothermal and green ammonia. It concludes that an investment across Europe of €19bn to €36bn in 10 supply chains relevant to those technologies could increase production in partner countries by between 10 and 15 per cent. (This compares with current annual investments in European energy of more than €600bn.) Note the precision-targeting of this investment; the FT reports today on a study that suggests the Eurozone would need to spend an ambitious $9.1tn to replicate all critical industries dependent on China.

Now, I have degrees in history and economics rather than advanced engineering. I’m not remotely qualified to judge the technicalities of whether and how the EU can, for example, build a battery sector combining cathode active material, precursor cathode active material and recycling. But a couple of things struck me as interesting.

First, of the dozens of actions required of partner countries, only one mentions the US. The most frequent names are South Korea, Japan, Australia, Canada and Brazil, with the odd seasoning of Zambia (copper) and Turkey (transformers). President Donald Trump’s administration might want to make the US the linchpin of a global production and procurement agreement for rare earth elements, for example, but this analysis isn’t buying Washington’s role as a leader. This strikes me as quite right: the EU, although it should think of itself as a trade superpower, needs to be in the same nonaligned game as the middle powers it wants to partner with, not relying on the US.

Second is the selectivity of the actions required. Different sectors and products will require a variety of interventions, including inward direct investment, long-term purchase commitments (“offtake agreements”) and strategic imports. It certainly makes a change from slapping tariffs on everything.

The unknowable but vital issue here, given that this is essentially aimed at making the EU less dependent on China, is how Beijing will respond. It has been pretty spicy in threatening retaliation, even at the early design stages of the EU’s Industrial Accelerator Act (IAA). You might think its behaviour is pretty rich given its own attitude towards foreign companies, but there you are.

You can well imagine China trying to knock these plans off course by flooding the market with products that European companies are trying to produce at a profit or withholding key inputs as a form of leverage, such as our old friends rare earths, for example. Along with the strategic plans to reduce dependency there will have to be a tactical plan to cope with Beijing’s reaction. I don’t expect anyone to write one down publicly now, but I hope the European Commission will think of something before embarking on such a programme.

Tariffically pointless

So that’s what sophisticated multi-layered industrial policy might look like. What happens when you just whack some tariffs on and hope for the best? That’s a somewhat harsh summary of the EU’s anti-subsidy duties on Chinese-built EVs, of course. They were calibrated by company and designed to encourage adoption and allow enough Chinese imports to provide competition, while giving European businesses the space to build up their operations.

Did they work? Not really, in my view, and I think it’s fair to say that view is widespread in Brussels. The T&E study is a bit more generous. True, imports of Chinese-made battery EVs (BEVs) have made up a notably lower share of the EU market since the duties came in, from 22 per cent in 2024 to 17 per cent in the first quarter of 2026.

There have also been moves by Chinese companies to situate production in the EU, with these efforts currently concentrated in Hungary and Spain. But whether this is a good idea depends on how much value those plants are genuinely going to add and how many local jobs they will create, on which the jury is still out.

T&E also notes where the campaign clearly didn’t work: imports of batteries and hybrids, which were not covered by the tariffs, have rocketed and to some extent clearly acted as substitutes for the BEVs. (I feel as if the EU might have seen this one coming.)

Even among BEVs, Chinese-made vehicles remained on average much cheaper (21 per cent) in the EU market than those made in the bloc. And a lot of the fall in imports from China was concentrated among western carmakers, particularly Tesla. Chinese brands fared better. In particular BYD, which had obtained relatively low tariffs of 17 per cent on top of the standard 10 per cent, has seen its sales more than double. 

The Chinese response to the tariffs was evidently a mix of driving down costs, cutting profit margins, shifting from BEVs to hybrids and siting production in the EU. Per the CTPI report above, EU interventions have to be more sophisticated than sticking tariffs on one category of imports if they are to add up to a coherent industrial policy. T&E suggests extending tariffs to batteries, making better efforts to prevent circumvention and using the IAA to provide an incentive for “made in Europe” production. Whether or not those measures would achieve the desired objectives remains to be seen, but it’s clear that the 2024 anti-subsidy tariffs did not.

Charted waters

High food and fuel costs (remember the obsession with egg prices?) were not really former US president Joe Biden’s fault, but they did hammer his popularity. As it happens, eggs are right down in price, but the cost of gasoline has shot up again entirely due to Trump’s inane war, as have fruit prices.

Trade links

• The Council on Foreign Relations fellow Brad Setser on how not even China has de-dollarised, let alone the rest of the world.

• Atul Gawande in the New Yorker talks about the human cost of Elon Musk’s catastrophic cuts to the US Agency for International Development.

• Prime Minister Mark Carney has talked a good game about attracting investment to diversify Canadian trade, but when it came to it, the country says it’s not ready for the investment currently being offered by the United Arab Emirates.

• The FT’s Martin Sandbu says the threat of the “China shock” to the EU is heavily overdone.

• The Heatmap news service looks at why the EU is struggling to make climate tech at scale.

Trade Secrets is edited by Harvey Nriapia