The measure to protect the European car that can make it more expensive by 2,000 euros

BrusselsThe European automotive sector is in a difficult moment. Electrification, Chinese competition, and stagnant consumer demand have pushed the European Union to take measures to protect the sector. But they are leading the industry down the "wrong" path. Brussels is trying to protect the European industry from foreign competition instead of making it more competitive. This is the conclusion of a report by the prestigious think tank Bruegel, on European policies, published this week, in which it warns that the continent's prosperity "is at stake".

Experts warn that the measures recently pushed by Brussels –such as applying tariffs on Chinese vehicles, reducing environmental ambition, or promoting the production of components manufactured within European territory– are not entirely correct, because they do not help manufacturers "adapt to a new competitive environment".

The clearest case of this problem is the condition that all components of a vehicle must have been manufactured in the EU to be able to benefit from certain incentives, the requirement known as made in EU. "If all subsidies for automotive consumption are conditioned on components being produced in the EU, this implies that prices will increase," says one of the document's authors, Ignacio García Bercero, to ARA.

Conditioning subsidies on batteries having to be manufactured in community territory can increase the price of electric vehicles by about 2,100 euros, according to the entity's calculations. If steel also has to be, an additional 200 euros would need to be added, while the savings derived from the simplified vehicle homologation rules proposed by the EU would only be 61 euros per car. "The more components that have to be manufactured in the EU, the higher the vehicle's price will be," adds García.

Experts describe the current policy as an "implicit pact" to protect manufacturers from foreign competition and, in return, demand that they bring their supply chains to Europe. But it warns that those who bear the costs of these protective measures are "the consumers and taxpayers". Furthermore, the burden falls on the cheapest models and, therefore, the emptiest pockets. All in all, the report does not oppose protectionist measures if they are temporary. It argues that they can give oxygen to manufacturers, but they should not become the strategy with which Europe faces the transformation of the sector.

Being leaders

What happens, then, with the fragility of production chains in such a volatile context? Would it not be better for Europe to manufacture all the components to ensure it has them available if there is any supply problem? Here the authors' argument is that protectionism does not solve geopolitical vulnerability. "The real risk," they assert, is not collapse, but "the erosion of export markets, technological leadership, and supplier networks." That is to say, what the sector should really be worried about is losing ground in international competition.

Thus, in the opinion of the experts, it is not about producing everything in Europe, but about being a place where it is competitive to manufacture. Instead of focusing on the nationality of manufacturers, the document maintains, the EU should prioritize the location of factories, and treat foreign investment as an "opportunity for development and not as a threat."

The same logic applies to the transition towards the electric vehicle. Europe is also trying to protect the industry by relaxing the pressure of the transition, but the report points out that this may harm competitiveness. It argues that postponing the transition to the electric vehicle makes it difficult for the European bloc to be a leader. "It is clear that the future of the automotive industry is electric. The more it is delayed, the less competitive the European industry will be," maintains García. Mind you, according to the report, the fastest way to electrify transport is through competitive global supply chains. That is to say, by acquiring components, such as batteries, from other countries. In return, Europe can compete to export electric vehicles.

In this context, the authors recommend avoiding a tariff war with China and advocate for negotiating a temporary agreement with Beijing. The pact should require a commitment for the Asian giant to stop applying restrictions on the export of inputs and critical raw materials for the electric vehicle value chain. Their proposal, therefore, does not imply eliminating external dependence, but rather managing it without losing competitiveness.