China reduces hybrid car exports to Europe...a lifeline for the auto industry?

The European Union is seeking to reset its trade relationship with China in light of increasing pressure on European industries as a result of the influx of low-cost Chinese imports. In this context, the European Union Trade Commissioner, Maroš Šefčović, held talks in Beijing aimed at addressing the existing trade imbalances between the two sides.

Brussels has been accusing China for years of supporting its local industries, giving it a competitive advantage in global markets, while stressing that European companies still face obstacles in accessing the Chinese market. These negotiations come at a time when the trade deficit between the two parties is approaching one billion euros per day, according to European estimates.

The talks resulted in an understanding that focused mainly on the automotive sector, as China agreed to reduce exports of hybrid and plug-in hybrid cars to Europe in the coming years. The two parties also confirmed adherence to the "price pledges" mechanism for Chinese electric vehicle manufacturers.

This agreement comes after the European Union imposed additional customs duties on Chinese electric cars in 2024. However, this step did not completely stop the expansion of Chinese companies in the European market, as imports of plug-in hybrid cars subsequently increased, which prompted Brussels to seek to include this sector in the new negotiating path.

The European Automobile Manufacturers Association welcomed the agreement and considered it a positive step, while stressing that the final ruling will remain linked to the practical details and implementation mechanisms.

The two sides also agreed to continue facilitating the export of rare earths and permanent magnets from China to the European Union, which are vital materials on which European industries rely heavily. In return, Beijing agreed to expand customs facilities for some European products.

These facilities include reducing duties on products worth about four billion euros, saving approximately 225 million euros, and include sectors such as car spare parts, olive oil, and some food products.

On the other hand, the negotiations did not achieve progress on major issues that remained a source of disagreement between the two sides, including government support for Chinese industries and the yuan exchange rate.

The formula that was reached raised criticism among a number of economic experts. Jürgen Mattes, an expert at the German Economics Institute in Cologne, believes that countervailing tariffs would have been a more effective tool for addressing competitive distortions caused by Chinese government subsidies.

Mattis warned that adopting price floors could give Chinese companies greater profit margins, giving them additional resources to invest in innovation compared to their European competitors. He also criticized the resort to managing trade by determining quantities and quotas, considering that this method departs from the mechanisms of the market economy.

For his part, Chairman of the Trade Committee in the European Parliament, Bernd Lange, considered that the understandings represent tangible progress, but stressed that their final evaluation will depend on the size of the quantities that will be covered by the new restrictions.

The leaders of European Union countries and governments are scheduled to discuss the results of the negotiations during their upcoming summit in Brussels, where they will decide the next steps in dealing with trade relations with China.

German Chancellor Friedrich Merz and French President Emmanuel Macron called in a joint letter for urgent measures to confront imbalances in global trade and practices that they see as distorting competition.

In parallel, experts assigned by the German Parliament called on the European Union to prepare more stringent trade tools to confront any potential escalation by China, considering that the European market represents an important pressure card in light of the Chinese economy’s dependence on exports.

The head of the Federation of German Industries, Peter Leibinger, also called for accelerating the application of anti-dumping and unfair subsidy tools, while reducing bureaucratic procedures and increasing the effectiveness of their implementation, in parallel with continuing the dialogue with Beijing.

Mattis believes that a large part of the decline in European manufacturing in recent years is related to increasing pressures resulting from Chinese exports, stressing the need to find a balance between maintaining fair competition and addressing the distortions that result from government support.

At the same time, European companies operating in China expressed fears of any widespread trade escalation, affirming their support for addressing the existing imbalances, but stressing the importance of continuing negotiations to maintain economic relations between the two parties.

The European Union and China also agreed to hold the third round of this trade dialogue in March 2027, with communication between the two sides continuing until that date.