On Could 21, the China Chamber of Commerce within the European Union announced that they’ve realized from well-informed sources concerning the Chinese language authorities’s plans to impose a 25 p.c tariff on the import of huge vehicles from the European Union (EU) and elsewhere China apparently is contemplating this step in response to the European investigation into suspected illegal subsidies by the Chinese language authorities to its automakers. Based on European politicians, China’s electrical car (EV) producers obtained billions of euros beyond what is permitted by the World Commerce Group’s guidelines.
This transfer is the newest salvo within the intensifying commerce conflict between the EU and China that erupted final 12 months. Nevertheless, the risk comprises a major implication, which is probably not instantly seen. A Chinese language tariff on the import of SUVs from the EU can be extremely damaging for Slovakia, the EU’s second-largest exporter of such vehicles and one among China’s aspiring pals on the continent.
Till now, smaller European international locations have largely stood by as bigger nations have taken the lead on financial safety measures towards China. One notable exception is Hungary, which has actively – and efficiently – courted Chinese investments within the electrical car business. Now, as a consequence of its financial construction, Slovakia has been involuntarily entangled within the latest spat.
Slovakia’s excessive dependence on SUV exports
Often known as the Detroit of Europe, Slovakia is the world’s largest producer of automobiles in per capita terms. Nevertheless, the nation’s outsized dependence on automobile manufacturing and exports makes its financial system extremely susceptible to exterior developments.
The present risk from Beijing is a transparent instance of a doubtlessly damaging exogenous shock. Slovakia’s exports to China are closely concentrated in large-engine autos, significantly the Volkswagen Touareg, which at the moment are being focused by the potential tariffs.
The nation has not solely a excessive dependence on exports to China, however the exports are additionally extremely concentrated in only a few merchandise. A quick have a look at the commerce statistics reveals a textbook instance of an financial system with a particularly skewed and unhealthy construction. Slovakia has the very best share of exports to China (2.7 percent in 2023) inside the Visegrad 4 international locations (which contains Poland, Hungary, and Czechia alongside Slovakia) and one of many highest in Europe. These exports are concentrated exactly within the shipments of SUV-type vehicles (78 percent of all exports). If that weren’t sufficient, the most important firm within the nation – Volkswagen Slovakia – generates a quarter of its revenue from the export of SUVs to China.
The statistics for European exports of cars with engines over 1.5 liters clearly present that since mid-2018, such vehicles have successfully been exported solely from Germany and Slovakia. And though the Germans export far more than Slovakia, the jap European nation would really feel any decline in Chinese language demand for the vehicles it produces far more painfully, as SUV exports are extra essential to its financial system in relative phrases.
Dilemmas in Sino-Slovak Relations
Satirically, Slovakia’s present authorities, in energy since finish of October 2023, has been vocal about its ambitions to enhance its relations with China. This is part of the brand new authorities’s eastward flip, as Slovak diplomats are additionally working to reinforce partnerships with South Korea, Japan, Vietnam, and Russia, whose International Minister Sergey Lavrov recently met with his Slovak counterpart.
The federal government’s pivot towards China has led to the negotiation of a strategic partnership settlement, set to be signed in Beijing in the course of the second half of June. After the unsuccessful assassination attempt on Slovakia’s Prime Minister Robert Fico in early Could, it’s unclear who from Slovakia (if anybody in any respect) will nonetheless journey to China as deliberate. The timing of the signing however, it’s clear that the Slovak authorities has been making concrete steps towards enhancing relations between the 2 international locations.
Given the stress between the development in relations between the 2 international locations and China’s doubtlessly damaging motion, it’s needed to think about the rationale behind the Chinese language steps. It may very well be that the Chinese language policymakers certainly need to inflict ache on Slovakia with the intention to press more durable on the EU institution. Alternatively, Beijing may concentrate on the disruption it might trigger to Slovakia however is prepared to take this “collateral injury” as a worth to pay for coercing the EU politicians into altering insurance policies they don’t like. A 3rd risk is that Chinese language policymakers might merely not concentrate on the results of those actions for Slovakia.
As a begin, it must be understood that the casual nature of the details about China’s still-hypothetical tariffs implies that this isn’t a well-thought-out and deliberate legislative step. It is just part of the Chinese language aspect’s makes an attempt to place strain on the European Fee, which is yet to decide whether or not to impose elevated tariffs on the import of Chinese language vehicles and at what stage. This might observe the latest step taken by america, which imposed tariffs of up to 100 percent on the import of Chinese language electrical autos. The Chinese language authorities is of course against any change in tariffs and is hinting at how it might react in the event that they have been carried out.
China’s response makes it clear that they’re primarily making an attempt to strain Germany. The present investigation of Chinese language automobile producers by the European Union was initiated by the French, whereas the Germans have been reluctant and should not inclined to assist this step, exactly as a result of their automobile producers both export loads to China or have excessive investments there. China is thus clearly placing strain on the Germans to cease the brand new tariffs.
If Germany is the first recipient of the Chinese language message, then the results for Slovakia are, from China’s perspective, both collateral injury – if the Chinese language authorities is conscious of it – or unintended penalties, in case there’s no data of the difficulty in Beijing.
China’s Strategy Towards Structural Tensions
In broader phrases, it will likely be attention-grabbing to look at how China navigates the stress between pursuing its financial targets – which, amongst others, embrace sustaining export dominance for key industries – and managing its relations with pleasant international locations. Plenty of international locations in Central and Japanese Europe are depending on the automotive business. There are additionally a rising variety of populists within the area in search of to enhance relations with China, most notably Slovakia’s Robert Fico.
Nevertheless, if China’s aspiring pals within the area begin experiencing an financial downturn brought on by a droop in industrial manufacturing as a consequence of Chinese language competitors, they is likely to be compelled to embrace extra protectionist measures. International locations like Slovakia have been very sluggish in adopting the de-risking framework adopted by the European Fee in 2023, but they’re conscious of the precedents set by the photo voltaic business, the place Chinese language firms utterly pushed European rivals out of the market. Most European firms went bankrupt, and right this moment solely a small variety of individuals are employed on this business.
Given the exponential development in Chinese language automobile manufacturing, there are issues the automotive business might observe an analogous trajectory to that of solar panels a decade in the past. The distinction, nevertheless, is that the automotive business is essential for a lot of European international locations. About one in every 14 employees within the EU works immediately or not directly on this business.
The mix of the de-risking laws on the EU stage and the risk to the competitiveness of European automobile producers signifies that even China-friendly international locations are presently on a structural trajectory towards a extra conflictual relationship with the East Asian large. Because the Slovak instance reveals, the Chinese language authorities doesn’t seem to have a plan on methods to handle such conflicts even with international locations which can be eager to keep up pleasant relations.
