Brussels’ Overreaction: The Consequences of Counter-Tariffs against China

The EU responds to China’s state subsidies with punitive tariffs – but is this really the right approach? In their guest article, Professor Klaus Schmidt of LMU Munich and ZEW President Professor Achim Wambach argue that counter-tariffs not only burden trade but also jeopardise important global goals such as climate protection and security of supply. Instead, they argue for a nuanced industrial policy that uses subsidies wisely to strengthen European interests without escalating international conflicts.

It’s not without a certain irony: the European Commission is imposing (WTO-compliant) punitive tariffs on imports of electric cars from China because their manufacturers are heavily subsidised. At the same time, there are calls for more domestic state aid: Former Italian Prime Minister Letta, in a report for the Commission on the Single Market, stresses the need for a more flexible state aid governance framework as part of a new industrial policy, giving European states more freedom to support their companies. So, basically, subsidising is only bad if it’s done by someone else.

Indeed, there is a strong case for an active industrial policy in Europe, too. The transition to climate neutrality won’t happen on its own, even though the EU has successfully established emissions trading as a key tool for climate protection. Ensuring security of supply in times of crisis, for example for medicines and raw materials, also requires active government intervention. While securing supply chains is also in the individual economic interest of companies, the wider economic damage caused by disrupted supply chains is not fully taken into account.

This raises the question of how to deal with subsidies from third countries. These may distort competition in the Single Market, but they also have advantages for local customers: if Chinese taxpayers subsidise their solar industry so that the EU can benefit from cheaper solar panels, that’s good for Europeans who want to install them on their homes.

Another argument comes into play: the overarching goal of climate policy is to achieve global climate neutrality, a global public good. When third countries subsidise their green industries, it helps all nations meet their climate goals at a lower cost. China’s subsidies, for example, also contribute to global CO₂ reductions. From this perspective, it’s unwise for the EU to counter Chinese subsidies for solar panels and electric cars.

Even the controversial Inflation Reduction Act (IRA) in the US, a massive subsidy programme, can be seen as an opportunity: these subsidies not only lower the cost of climate protection, but also reduce dependence on China and contribute to more secure supply chains. These supply chains, in turn, often have the characteristics of global public goods. Investments in new extraction sites or incentives for increased stockpiling make supply chains less likely to be disrupted during crises.

To be clear: well-designed subsidies can contribute to climate change mitigation and resilience in Europe. However, this is not a blanket endorsement of state aid or increased state control over the economy. Subsidies distort competition, increase lobbying and cost taxpayers’ money. Not every subsidy currently proposed in the name of climate protection and resilience is therefore beneficial. For example, the Scientific Advisory Board of the German Federal Ministry of Economic Affairs recommends that the transition of basic industries to climate neutrality should be promoted primarily through green lead markets, with as little reliance as possible on subsidies in the form of climate protection contracts.