The European Union is moving forward with plans to impose provisional tariffs on electric vehicles imported from China, which could raise tariffs to as high as 48%. The move is likely to escalate trade tensions with Beijing.

The EU confirmed on Thursday that it will apply provisional duties on three Chinese manufacturers that have been singled out for subsidy investigations. State-owned MG maker SAIC Motor Corp will face a 37.6% duty on top of the existing 10% rate, while Volvo Car parent AB Geely and BYD will be saddled with additional levies of 19.9% and 17.4% respectively.

Other EV manufacturers in China that cooperated with the investigation but were not selected will be subject to a weighted average duty of 20.8%, while firms that did not cooperate will face an increase of 37.6%. Western carmakers such as Renault $RNO.PA+0.2%, BMW $BMW.DE+2.2% and Tesla $TSLA-0.3% are also affected, with US manufacturers currently accounting for the majority of EV shipments to the EU from China.

Interim tariffs will start on Friday and final tariffs could be in place by November unless both sides agree on some alternative solution or a qualified majority of EU member states block the final move. The EU, which said talks with China have intensified in recent weeks, concluded in its investigation that China is subsidising its EV industry to the extent that it is causing economic harm to European carmakers.

"These talks with China are ongoing," Valdis Dombrovskis, executive vice president of the European Commission, said in an interview on Bloomberg Television with Francine Lacqua. "If a win-win solution emerges, we can also find ways not to apply definitive tariffs in the end - but it's very clear that this solution has to address the current market distortions."

The EU's move follows the US decision to impose a 100% tariff on EVs from China, even though supplies are currently almost zero. Canada said last month that it was also considering tariffs. While China has threatened to retaliate, the EU and its relatively wealthy consumers represent an important outlet for domestic EV manufacturers struggling with overcapacity.

China has already launched a targeted investigation into dumping on pork imports. The results of the European spirits investigation are expected early next year, but could come at any time, based on past experience. Beijing has warned that it could hit European agricultural products, aviation and cars with large engines. China could also decide to challenge the EU investigation at the World Trade Organisation.

The EU and China are consulting on the way forward and both sides plan to continue talks over the next four months. Chinese EV manufacturers are increasingly penetrating Europe, although their overall market share of EV sales is still below 10%. MG, the former UK brand that SAIC has relaunched, leads the way, followed by companies such as BYD and Nio$NIO-7.2%.

Nio, which sells the ET7 luxury sedan in Europe, said on Thursday it may raise prices in the future because of tariffs. Tesla last month added a notice to its ordering pages in Europe to alert potential car buyers to the need to take delivery of the models (Model 3) ahead of an expected price increase starting in July.

The carmaker makes the Model 3 at a factory in Shanghai and has asked to be included in a lower tariff rate than other manufacturers, arguing that it benefited from less substantial state support.

For Brussels, any solution must be based on WTO rules and address the underlying harmful subsidies identified by the investigation. Beijing is trying to turn the investigation into a negotiation and is seeking to divide member states through pressure.

During the negotiations between the two sides, China asked the EU not to impose provisional measures at all - or consider lower tariffs based on fewer criteria, and then raise them in November if a solution had not been found by then before the final duties, according to sources familiar with the situation.

Impact

The tariffs are likely to cut imports from China by a quarter, representing a value of about $4 billion, according to an estimate by Moritz Schularick, president of the German Institute for the World Economy in Kiel.

Many European automakers have made clear they oppose higher tariffs, with companies such as Mercedes-Benz Group AG and Volkswagen AG warning against them. Indeed, China is the biggest market for Mercedes, VW and BMW AG.

BMW CEO Oliver Zipse said the tariffs are a "dead end" and will not strengthen European carmakers.

"On the contrary: Not only does it harm the business model of globally active companies, it also limits the supply of electric vehicles to European customers and may even slow down decarbonisation in the transport sector," he said in a statement.

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