BRUSSELS — This is how it starts.

In the midst of an invasion by Chinese electric cars, European Commission President Ursula von der Leyen launched an anti-subsidy investigation Wednesday against Chinese imports. It’s a step that risks snowballing into a trade war that could make a tussle over solar panels with Beijing a decade ago look like a tea party.

“Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies,” von der Leyen said in her annual State of the Union address. “This is distorting our market.”

The stakes couldn’t be higher: China’s massive investments have established it as the dominant maker of the battery technology that powers clean cars. Global sales of electric vehicles are forecast to grow by nearly a third in 2023 alone to nearly more than 14 million units — worth $560 billion — and without fair competition the EU sees its industry losing out.

First reported exclusively by POLITICO in June as a key demand from Paris, the move against China delighted French ministers. “I welcome the investigation,” Economy Minister Bruno Le Maire said in Berlin. “If these subsidies do not comply with the rules of the World Trade Organization, Europe must be able to fight back.”

German Economy Minister Robert Habeck also welcomed the decision. “It is about unfair competition. It’s not about keeping high-performance, low-cost cars out of the European market; it’s about looking to see if there are hidden, direct or indirect subsidies that create an unfair competitive advantage,” he said at a joint news conference with Le Maire.

But the European car industry is worried — especially German auto makers that are most exposed to the vast Chinese market. “From the business point of view it runs the risk of retaliation,” one automotive lobbyist said on condition of anonymity.

China has yet to comment, but the China Chamber of Commerce to the EU posted on X (formerly Twitter) to express its “strong concern and opposition” to the probe. That post was retweeted by Wang Lutong, head of the Europe department at the Chinese foreign ministry.

With China already controlling 60 percent of global battery production, Brussels fears that, without countermeasures, Chinese companies will gain a stranglehold on EV markets just as major western economies on both sides of the Atlantic commit to tackling pollution by phasing out sales of traditional combustion engine vehicles.

A similar conversation is taking place in the United States, where the White House is grappling with demands to make sure that Chinese technology isn’t made eligible for massive subsidies aimed at kick-starting an EV industry under the Inflation Reduction Act. That’s a problem, since even the likes of Ford license battery technology from China’s CATL, which is by far the world’s largest cell-maker and has two plants in Europe.

Von der Leyen’s announcement came less than a week after her meeting with Chinese Premier Li Qiang in New Delhi, where the No.2 Chinese official urged her to “uphold the principles of market economy and fair competition, keep its trade and investment markets open, and provide a fair, transparent and non-discriminatory environment for Chinese enterprises,” according to the Chinese readout.

Tradecraft

The announcement gives the EU Trade Commissioner Valdis Dombrovskis key leverage in his negotiations with his Chinese counterparts when he visits Beijing on September 25. Dombrovskis has already indicated he expects China to lower trade barriers for European exports, to help fix a yawning bilateral trade deficit.

The meeting is part of the buildup to an EU-China summit expected to happen later this year.

The Commission launched the investigation on its own initiative, according to a European Commission spokesperson, and not in response to a complaint. That makes it a political choice by the EU executive, with the attendant political risks. 

The car industry’s chief lobbyist in Brussels, Sigrid de Vries from ACEA, said the probe was a “positive signal” that the Commission was taking the threat to European carmakers seriously. “China’s apparent advantage and cost-competitive imports are already impacting European auto makers’ domestic market share,” she said.

But von der Leyen’s call is controversial because big German brands are heavily exposed to the Chinese domestic car market, with huge manufacturing capacity in China. Until recently Volkswagen was the biggest seller there, while BMW and Mercedes dominate the premium market. 

That means any retaliatory measures from Beijing could hammer the Germans, more than anyone else.

French cars’ share in the Chinese market has dropped to 0.4 percent by August, according to statistics released by the China Passenger Car Association — while their German counterparts account for a comfortable 17 percent.

“It should be clear that the French manufacturers [who pushed for the probe] are not only targeting Beijing, but also their German competitors,” said one senior lobbyist from a major German brand on condition of anonymity. “They will suffer from countermeasures. I fear that the Commission is prepared to risk a trade war with China in a very dangerous area.”

Habeck said he had taken into account the views of the German car industry in coming to the conclusion that fair competition was crucial. “If this investigation finds massive violations of competition rules, then of course we have to take action,” he said.

Who’s dumping?

What’s more, it’s not even clear Chinese carmakers are flooding the market with cheap cars anyway — for now.

“They are actually likely selling vehicles at a profit here with much higher prices here than they are offering in China while taking the tariffs and shipping costs into consideration,” said Matthias Schmidt, an independent automotive analyst.

While China’s electrification strategy was developed with significant state support, Chinese automakers have focused their attention on the premium end of the market rather than cutting costs in the mass market segment.

“Also, VW are effectively price dumping on the Chinese market with their [electric passenger car] ID.3 being offered way below the European model’s price point, which we shouldn’t forget,” said Schmidt.

After the European Commission officially starts the anti-subsidy investigation, it’s up to its trade department to prove that China is subsidizing companies exporting the electric vehicles to the EU and that this is causing injury to the European industry. 

A trade lawyer said it wouldn’t be easy to track down enough evidence to build a case, adding that the Commission often takes a “very political approach” to such investigations. “They can turn the figures, so you can expect some very big lobbying here.”

“This is the start of a long journey,” said Simone Tagliapietra from think tank Bruegel, noting the time it will take to get import duties in place. “It could ultimately work, but this must go in parallel with an active industrial policy to make sure EU industry quickly develops its competitiveness.”

Camille Gijs, Victor Jack, James Bikales, Giorgio Leali and Hans von der Burchard contributed reporting. This story has been updated.