author Ivan Cardillo
China – EU, Guidance Document for Chinese electric vehicles in Europe
EU tariffs on Chinese electric vehicles: origin of the dispute.
The tariff issue began in 2024, when the European Union imposed additional countervailing duties on battery electric vehicles (BEVs) imported from China, on top of the standard 10% duty. These duties ranged from approximately 7.8% to 35.3%, depending on the manufacturer. EU officials made this decision because they believed that Chinese electric vehicle manufacturers were benefiting from substantial state subsidies, allowing them to charge lower prices than European manufacturers. In other words, the EU saw this situation as a form of unfair competition to the detriment of the domestic automotive industry.
The tariffs were intended to “level the playing field” by neutralising the advantage of subsidies, but they also increased tensions with China.
Beijing strongly opposed these punitive tariffs, and as a result, trade relations between the EU and China became quite tense.
The risk of a trade war and the search for a compromise
Both sides soon realised that a full-blown tariff war would be damaging and unsustainable. China was concerned that EU tariffs (up to 35% on top of normal import taxes) made Chinese electric vehicles much more expensive in Europe, threatening their market share. On the EU side, there were also fears of Chinese retaliation against European exports (e.g., European luxury car brands rely on the Chinese market). Furthermore, it was recognised that excessively high prices for electric vehicle imports, making affordable models less accessible to consumers, could slow down their adoption in Europe, undermining European environmental protection goals.
A trade war would have hurt both sides, economically and politically.
Therefore, both Brussels and Beijing had an incentive to find a compromise. Towards the end of 2025, they resumed negotiations to seek an alternative solution that would address the issue of subsidies without resorting to exorbitant tariffs. This laid the groundwork for the new “minimum price” mechanism as a means of defusing the dispute. Chinese experts even called the compromise a “soft landing” for the conflict, indicating a less confrontational resolution through dialogue rather than continued trade hostilities.
The minimum price mechanism: logic and operation
The new mechanism is based on price commitments, which are essentially commitments by Chinese electric vehicle exporters to sell their vehicles in Europe above a certain minimum price. In exchange for these commitments, exporters would be exempt from additional anti-subsidy duties. In practice, instead of paying a duty to the EU on each imported car, a Chinese manufacturer would agree to set a minimum price for its electric vehicles on the European market. As long as it respects this minimum price, punitive duties (those added to the normal 10% import duty) would not be applied. This agreement aims to neutralise the unfair price advantage that subsidies could offer, effectively integrating the “cost” of the subsidy into the car’s selling price.
The cost of the subsidy is absorbed into the final price, rather than being converted into a customs duty.
The European Commission’s Guidance Document
The European Commission has published a detailed guidance document explaining how these price offers should be formulated and evaluated. Specifically, the EU requires a minimum import price (MIP) specific to each electric vehicle model and even each configuration, not a single, flat-rate price for all vehicles. In other words, each car model or configuration must have its own minimum price proposal, which presumably reflects its size, type and market segment. This prevents a company from compensating for a higher price on one model with a lower price on another. The guidelines also explain how to calculate an appropriate minimum price. One method is based on the exporter’s historical price during the investigation, plus the margin that the duty would have added. In simpler terms, the minimum price should be at least equal to the previous price, including the duty, ensuring that the company is not undercutting the duty-adjusted price. Alternatively, the price can be compared to that of a comparable European electric vehicle (adding typical selling costs and a reasonable profit margin). This ensures that the price of the Chinese car is in line with similar EU models.
The idea is that the minimum price should completely eliminate any prejudicial effect of subsidies and have an impact equivalent to the duty that would otherwise be imposed.
The EU firmly believes that any price commitment must meet strict criteria in order to be accepted. First, the minimum prices offered must eliminate the harmful effects of subsidies – in practice, they should cancel out the unfair cost advantage of subsidised Chinese electric vehicles. The Commission explicitly states that the undertaking must have an effect equivalent to duties in offsetting the subsidy. This means that if, for example, it has been established that a particular model benefited from a 20% subsidy, the minimum price should increase its price by approximately the same 20% (which is what a 20% duty would have done). Secondly, the scheme must be workable and enforceable. The Commission will only accept undertakings that it can monitor and verify without undue difficulty. This means that companies must provide transparent pricing data and, where appropriate, accept monitoring mechanisms so that the EU can ensure that they are not secretly selling below the agreed minimum price.
The EU is clear: undertakings must be rigorous, verifiable and enforceable.
The issue of cross-compensation
Another key condition concerns the prevention of cross-compensation between vehicle categories. Cross-compensation refers to a company’s attempt to offset the price increase imposed on one product by lowering the prices of another product. The EU’s concern is that, for example, a manufacturer selling both electric and hybrid vehicles (or even petrol cars) could increase the price of the electric vehicle to comply with the commitment, but then apply aggressive discounts on other models (which are not subject to the commitment) to maintain its overall market share. This would undermine the spirit of the agreement. In fact, after EU tariffs hit Chinese battery electric vehicles, we saw a huge surge in Chinese exports of plug-in hybrid cars, which had no additional tariffs: an increase of almost 900% in imports of Chinese plug-in hybrids in early 2025. This demonstrated how companies could shift towards products not subject to duties to compensate for losses, and the EU intends to block any similar loopholes in the future. Therefore, the guidelines state that offers covering all battery electric vehicle models are preferred (to avoid gaps) and emphasise that the company must not use other product lines to circumvent the spirit of the agreement. The Commission even suggests accepting commitments only for a limited period or with volume limits to reduce the risk of cross-compensation.
The EU will apply objective and non-discriminatory standards to all companies’ offers, assessing each one according to the same legal criteria, in line with World Trade Organisation rules.
This was important to reassure China that the process is not arbitrary: the guidelines explicitly mention adherence to WTO principles and fair treatment of all players.
The difficulties of implementation and the risks of the system
This approach presents several challenges. Implementation and monitoring will be among the most important issues. Unlike a tariff, which is collected at customs and is relatively straightforward, a price commitment requires continuous supervision of how companies set the prices of their cars on the market. Authorities will need to verify that each Chinese manufacturer is actually selling at or above the agreed minimum price for each model, potentially across multiple EU countries and sales channels. Ensuring compliance “without undue effort”, as the EU states, could prove complex. Companies could try various methods to effectively lower the selling price, such as through discounts, free add-ons, dealer incentives or financing agreements that are not immediately visible on the list price. The EU will have to decide how to account for such indirect price reductions. If a violation is discovered, presumably the agreement for that company would be void and tariffs could be reinstated, but detecting violations in real time is not trivial. This type of mechanism for a complex finished product is unprecedented for the EU: at the end of 2025, the EU had never used a price commitment for something as complex as a complete motor vehicle (it was more common for raw materials in trade disputes). This is therefore a novelty, and with novelty comes uncertainty.
For the EU, this is an unprecedented mechanism applied to a complex product such as a car.
Another critical issue is the accuracy and adequacy of the minimum price level. If the minimum price is set too low, it may not completely eliminate the subsidy advantage, allowing Chinese electric vehicles to continue to sell at lower prices to the detriment of EU manufacturers (defeating the purpose of the measure). If set too high, it could excessively penalise Chinese brands and even harm EU consumers by keeping prices artificially high. The guidelines provide methods for calculating the minimum import price, but there will undoubtedly be debates over the details. For example, what is a “comparable” European model for a given Chinese electric vehicle? And how do you take into account differences in brand, perceived quality or battery range? These technical details can be controversial. The Commission will need to carefully examine each offer to ensure that the proposed prices truly neutralise the effect of subsidies. There is also the issue of market dynamics: as costs change (e.g., falling battery prices or a change in Chinese subsidy policy), the appropriate minimum price may vary over time.
The current plan does not specify whether and how changes can be made to the commitments after they have been accepted, so flexibility could be an issue in the long term.
Cross-compensation also remains a sensitive area. Even with safeguards in place, if a manufacturer also sells other types of vehicles not covered by the commitment, it is difficult to control its pricing strategy for these other vehicles. The EU has signalled that it will be cautious in accepting offers from companies with significant sales of hybrid or non-electric vehicles because of this risk. But in practice, many of the major players have mixed portfolios (e.g., Geely or BYD may sell hybrid vehicles, and even Tesla sells non-electric powertrains through its Chinese plant in the form of energy storage systems, etc.). The Commission may have to extract promises, for example, that hybrid vehicles will not be placed on the EU market as an alternative solution. This intersects with legal complexity, namely ensuring that these collateral commitments are enforceable under commercial law. Finally, the success of the programme depends on the cooperation of Chinese companies and authorities. It is a delicate voluntary agreement in lieu of tariffs. If mutual trust breaks down – for example, if the EU believes that companies are not participating in good faith, or if the Chinese authorities perceive that the EU is rejecting reasonable price offers – the entire agreement could unravel, bringing us back to a tariff war.
Therefore, maintaining goodwill and open communication will be key to addressing any issues that may arise.
In summary, although the minimum price plan is a smart compromise, it is complex to manage and there are many elements at play that must work properly for it to truly resolve the subsidy dispute.
Impact on European industry
For European car manufacturers, this agreement is largely a relief. The EU’s main objective was to protect its automotive industry from being undermined by cheaper Chinese imports. If Chinese electric vehicles are forced to move closer to European prices (by adding the current tariff margin to their prices or adjusting to the prices of cars produced in the EU), then European brands such as Volkswagen, Stellantis, Renault, etc., will not have to face rock-bottom prices that weaken them. This stabilises the competitive landscape. European manufacturers should regain some breathing space on prices: they may not have to engage in a price war with subsidised Chinese models. In fact, one of the conditions of the price commitment is explicitly that it should have an effect equivalent to tariffs, meaning that Chinese cars would effectively be as expensive as if tariffs had been paid. In practice, this significantly reduces the price gap. This helps to level the playing field, at least on price, allowing European electric vehicles to compete more on their own merits (quality, brand, service) rather than being immediately outpriced. The European industry also avoids the uncertainty of an escalating trade war. In particular, German car manufacturers feared that exorbitant tariffs and Chinese retaliation could damage their lucrative exports (such as high-end cars) to China. A negotiated solution averts this scenario, so it is also diplomatically advantageous.
Competition returns to being based on quality, brand and service, not just price.
Effects for Chinese manufacturers
Chinese car manufacturers, on the other hand, lose some of their price advantage but gain certainty and continued access to the market. They effectively agree to charge higher prices in Europe than initially planned, but in return they avoid paying high tariffs to the EU.
An interesting aspect is that, instead of paying a tariff cost to the European authorities, this margin is retained by the companies as additional revenue (assuming consumers continue to buy at the higher price).
Industry experts have noted that, under this scheme, it is ‘unlikely that consumer prices in Europe will fall’: the difference is that the extra amount goes to the car manufacturer rather than as a tax to the EU. So Chinese companies could actually make more money per car sold in Europe, although perhaps at the expense of volume. They would obviously prefer this solution to tariffs, because a tariff is essentially a penalty that could completely exclude them from the market if they tried to absorb it. With a minimum price, at least they maintain their profit. Furthermore, this agreement could push Chinese brands to improve brand value and service, because if they have to charge prices closer to European ones, they will have to convince consumers that their cars are worth roughly the same as European ones. Some Chinese manufacturers were already moving in this direction: for example, BYD and others have started investing in local factories in the EU (BYD is starting production in Hungary, for example). In the long term, if Chinese companies localise production in Europe, they can circumvent import measures altogether and also score points with regulators, which the guidelines explicitly encourage by stating that investments in the EU will be taken into account. So Chinese carmakers could adapt by increasing their presence in Europe, which could create jobs and reduce political tensions.
European consumers
For EU consumers, the immediate impact is that prices for electric vehicles manufactured in China are likely to remain higher than they would have been without tariffs or commitments. As mentioned, the new framework is designed in such a way that a Chinese electric vehicle in Europe will cost roughly the same as it would have cost with a 20-30% tariff included. Therefore, consumers who were hoping that 2026 would bring a wave of ultra-cheap electric cars from China may be disappointed. The upside is that the variety of electric vehicles on the market is maintained. As the dispute was resolved through a compromise, Chinese brands are not excluded by prohibitive tariffs. A wide variety of models, from entry-level compact electric vehicles to high-end offerings, will remain available to European buyers, albeit at moderate prices.
This could be seen as a way of maintaining stability: consumers benefit from increased competition (Chinese brands are still present and expanding in Europe), but not from the full price competition that subsidies could have allowed.
There is also broader consumer interest in the rate of adoption of electric vehicles: some observers fear that by keeping prices artificially higher, the spread of electric vehicles could slow if budget-conscious buyers had fewer low-cost options. However, this must be balanced against the EU’s industrial goals. Analysts have predicted that, even with minimum prices, Chinese electric vehicle manufacturers will continue to make inroads into Europe, potentially reaching a market share of around 10% by 2030 (up from around 5-6% in 2025). We can therefore expect Chinese electric vehicles to continue to be a growing presence on European roads, but growth may be somewhat less explosive than it would be if they were allowed to lower their prices.
Legal relevance and WTO profiles
From a legal point of view, this mechanism is quite significant. It demonstrates a creative use of the trade remedy instruments provided for in WTO rules. In trade law, price undertakings are a well-established concept: they are most commonly found in anti-dumping cases, but can also be applied in anti-subsidy (countervailing duty) cases. Essentially, instead of imposing duties, the importing country can accept a commitment from exporters to raise prices to a non-injurious level. Such undertakings are permitted as long as they remedy the unfair trade practice as effectively as a tariff. The EU had to ensure that this agreement was compatible with WTO rules, and the language of the guidelines repeatedly refers to WTO principles and “objective and fair” assessments.
The Chinese government, for its part, was very keen that any solution should fall within the WTO framework and not be seen as discriminatory punishment.
Indeed, the Chinese Ministry of Commerce welcomed the guidelines, saying they demonstrate that differences can be resolved through dialogue and that the solution would ‘maintain the stability of the automotive supply chain’ in line with WTO rules. So, diplomatically, both sides are framing this situation as a victory for multilateralism and rules-based trade. It could set a precedent for resolving similar disputes: other sectors where subsidies are an issue may consider price commitments as a compromise tool.
However, some trade experts point to the unusual nature of applying this principle to complex consumer products.
The EU has historically avoided price commitments for goods such as cars because monitoring is difficult and there are concerns that they may not fully offset the unfair advantage. The Commission itself was initially sceptical that minimum prices would be sufficient to offset the damage caused by subsidies. By going down this route now, the EU is showing flexibility, but it is also insisting on very strict conditions (specific prices per model, etc.) to avoid loopholes. From a legal point of view, if a company violates its commitment, the Commission can reinstate the duties; this possibility should encourage compliance with the rules. It is worth noting that this agreement does not automatically apply to everyone: each Chinese manufacturer must apply and obtain formal acceptance of its price offer by the Commission. There is therefore a legal process: applications, evaluations and then acceptance (which would suspend duties for that company) or rejection (in which case duties would remain in force). There may be companies that choose not to offer undertakings, or whose offers the EU considers insufficient: these would continue to be subject to duties.
Another legal aspect is transparency: these undertakings and the calculations underlying the minimum prices could be subject to verification or challenge.
If, for example, a European competitor believes that a Chinese company’s minimum price is still too low (perhaps suspecting hidden subsidies that have not been accounted for), it could put pressure on the Commission or even take legal action to review the decision. Similarly, Chinese companies will be vigilant to ensure that everyone is treated fairly according to the criteria, to avoid any hint of favouritism or politicisation. So far, the guidelines and statements emphasise that every bid will be evaluated using the same criteria, which aims to prevent legal action for discrimination. Overall, this agreement will likely be studied in international trade law circles as an example of a negotiated solution to a subsidy dispute, and its success or failure will influence how such cases are handled in the future.
Operational recommendations and future prospects
A key recommendation is rigorous monitoring and enforcement. The EU should establish a clear mechanism for monitoring the prices of these Chinese electric vehicles in real time, possibly requiring regular reports from companies and using independent market data to verify compliance. If irregularities are detected, authorities must act swiftly (e.g., with a warning or reimposition of duties) to preserve the credibility of the system. This will reassure European manufacturers that the compromise is not being exploited and signal to all stakeholders that the rules are serious. In addition, the EU could consider an initial trial period for these commitments. For example, accepting price undertakings for one or two years and then evaluating the results. If the data show that the undertakings have effectively eliminated the subsidy injury (e.g., EU producers are no longer losing market share solely because of price differentials) and have been complied with, then they can continue; if not, the minimum price levels should be adjusted or duties reinstated.
A periodic review clause would make the system more adaptable to changing market conditions or costs.
For EU policymakers, another suggestion is to facilitate Chinese investment in the European electric vehicle sector to complement this agreement. The guidelines already suggest that any commitment by Chinese car manufacturers to invest in production or research and development facilities in Europe will be viewed favourably when evaluating their price offers. This is wise, because if Chinese companies build factories in Europe (creating jobs and using local suppliers), the political pressure to penalise them decreases and they also become subject to the same cost structures (labour, energy, etc.) as European manufacturers. Policy makers could therefore proactively encourage such win-win investments, for example by speeding up approvals for new electric vehicle plants or joint ventures. In this way, over time, dependence on import price control measures could decrease as more “Made in Europe” electric vehicles are produced (even if they are Chinese brands).
This essentially involves integrating Chinese operators into the European industrial ecosystem.
For the European automotive industry, the suggestion would be to use this respite effectively. The minimum price mechanism essentially serves to buy time for European manufacturers to close the competitiveness gap (whether it be improving cost efficiency, innovating in electric vehicle technology or securing their own battery supply chains).
European companies should not view this as a permanent shield, but rather as a temporary respite to accelerate the transition and become more cost-competitive.
It is important to remember that the current agreement does not necessarily last forever: if Chinese cars are no longer subsidised or if European companies catch up, the rationale for these restrictions will disappear. Furthermore, consumer sentiment may change; if European consumers demand cheaper electric vehicles en masse in the future, there will be pressure to lower or remove these minimum prices. Therefore, EU brands must be prepared for a future in which they will have to compete without further protections.
In short, they need to invest in innovation, streamline production and perhaps focus on segments where they have an advantage (performance, luxury, brand heritage) so that they are not competing solely on price.
Finally, both sides – EU regulators and Chinese companies – should keep the lines of communication open. Complex agreements such as this one can give rise to misunderstandings or technical disputes (e.g., how to treat a new car model or a new feature that changes the cost of a car). It would be advisable to establish a joint committee or regular consultation process to address any issues that arise in the implementation of the price commitments. This could prevent minor issues from escalating into broader conflicts. The fact that this agreement was reached “through dialogue” is a positive sign, and maintaining this spirit will be crucial. If managed successfully, this EU-China agreement on electric vehicle pricing could become a model for resolving trade disputes in the green technology sector without resorting to destructive tariffs.
It is a delicate balance, but with vigilant enforcement, continued cooperation and forward-looking investment, the agreement has a good chance of achieving its goal: protecting European industry while allowing trade to flow and consumers to benefit from a variety of electric vehicles.
