Case Study 2 - Electric Cars

Question 1

Balance of Payments (2.1.4)

How might the tariffs impact the EU’s current account?

Answer 1

• Short-term: Reduced imports of Chinese EVs could improve the trade balance, narrowing the €293bn deficit.
• Long-term: Retaliation by China (e.g., tariffs on EU exports) could harm EU exporters (e.g., German carmakers), worsening the current account. Example: “China is the EU’s second biggest trading partner” (Page 2), so trade disruptions would significantly affect the balance of payments.

Question 2

Balance of Payments (2.1.4)

How does the EU’s trade deficit with China relate to the decision to impose tariffs on Chinese electric vehicles?

Answer 2

• The EU had a €293bn trade deficit in goods with China in 2023 (Page 2), driven by subsidized Chinese exports like EVs.
• Tariffs aim to reduce imports of Chinese EVs (whose market share rose to 11% in 2024, Page 2), narrowing the deficit by lowering import volumes.
• However, retaliation by China (e.g., restricting EU exports) could worsen the deficit if EU firms like German carmakers lose access to China’s market (Page 1: “Leading German carmakers… fear retaliation”).

Question 3

Restrictions on Free Trade (4.1.6)

Why did the EU impose tariffs on Chinese EVs, and how does this reflect protectionism?

Answer 3

• Reason 1: Counteract Chinese subsidies distorting competition (“subsidisation is there,” Page 1). Tariffs (average 20.8% + existing 10%) aim to “level the playing field” (Page 2).
• Reason 2: Protect the EU car industry from rapid market share gains by Chinese EVs (11% in 2024 vs. 9% in 2023, Page 2).
• Protectionism: Tariffs are a trade restriction to shield domestic producers, despite risks like trade wars (Page 1: “fear of retaliation by Beijing”).

Question 4

Restrictions on Free Trade (4.1.6)

Evaluate the EU’s claim that tariffs will “level the playing field” for its car industry.

Answer 4

• For: Chinese EVs benefit from state subsidies, enabling below-market prices (“non-market policies,” Page 2). Tariffs offset this advantage, protecting EU jobs and firms.
• Against: Tariffs may raise consumer prices, slowing EV adoption and EU climate goals (“needs cheap electric vehicles to hit its climate goals,” Page 2).
• Case study evidence: EU acknowledges tariffs are “not prohibitive” (Page 2), but German automakers oppose them due to reliance on Chinese markets (Page 1).