The European Union and China agreed to halve exports of Chinese-made plug-in hybrid vehicles (PHEVs) to the EU over the next four years.

On Oct. 10, foreign media including electric vehicle outlet CleanTechnica reported that the two sides prepared measures under which China would cut imports of Chinese-made plug-in hybrid cars in exchange for China cutting tariffs on some European items and streamlining rare earth export licensing procedures.

The agreement is a response to Chinese companies increasing plug-in hybrid exports after the EU imposed tariffs on Chinese electric vehicles (EVs). The EU imposed tariffs when inflows of Chinese-made EVs into the European market surged 2 years ago, but it did not apply similar measures to Chinese PHEVs at the time. Chinese companies stepped up their push into Europe with PHEVs featuring improved battery capacity, driving range and efficiency.

EU Trade Commissioner Maros Sefcovic (마로시 셰프초비치) visited Beijing last week and held talks with Chinese authorities. After 2 days of discussions, China agreed to halve plug-in hybrid export volumes over the next 4 years. In return, China agreed to cut tariffs on European products worth about 4 billion euros a year, including auto parts, olive oil and shoes. Sefcovic said the measure would reduce European exporters' tariff burden by about 125 million euros a year.

Rare earth supply issues were also included in the talks. China's Ministry of Commerce said it was willing to continue to smoothly handle export licensing procedures for rare earths and permanent magnets bound for the EU. With rare earths a key raw material in supply chains for electric vehicles and wind power generation, the agreement addresses not only vehicle import volumes but also related supply chain issues.

The two sides stressed that the agreement complies with World Trade Organization (WTO) rules. In a separate statement, China's Ministry of Commerce said the two sides reached an understanding on plug-in hybrid trade in a way consistent with WTO rules. Sefcovic explained that directly limiting import volumes rather than using tariffs is effective in concretely reducing the number of imported vehicles. In a joint statement, the two sides also agreed to continue reviewing the possibility of cutting or eliminating tariffs on some goods in line with WTO rules.

Not all issues have been resolved. It has not been decided whether the EU will withdraw measures requiring key components for advanced technologies such as electric vehicles and wind turbines to be produced within the bloc, or whether it will impose countervailing duties on wind turbines. Sefcovic said further consultations are scheduled for early next year.

The deal could also affect the profitability of Chinese automakers. With losses among Chinese companies growing amid overheated competition in the European market, limiting export volumes could create room to defend prices and improve profitability. With pressure on its domestic market growing due to a recent drop in real estate values and weak new-car sales, China needs to support the economy through manufacturing exports. Analysts said it could benefit both sides if Chinese companies can secure profits instead of continuing low-price sales while absorbing losses.

The EU has been concerned about the impact of rising imports of Chinese products on manufacturing within the bloc. Germany's auto industry, in particular, is facing weak sales, and Volkswagen has announced plans to cut 100,000 jobs and close up to 4 plants in Germany. The agreement is seen as a measure to protect Europe's auto industry while managing trade conflict with China.

The deal is also similar to a 2013 case in which the EU and China agreed that China would voluntarily limit exports of Chinese-made solar panels in exchange for the EU not imposing tariffs. At the time, Chinese companies raised prices and improved profitability after supplies in Europe were restricted, and invested the gains in research and development and factory expansion. Attention is focused on whether the approach of combining volume limits and tariff adjustments will affect future trade talks in electric vehicles and clean technology.