AUTONEWS

Germany seeks to tax Chinese plug-in hybrids like EVs—and then some

With the German government's backing, the SPD is pressuring the European Union to rectify a past mistake. In its eagerness to offset the incentives the Chinese government granted to local automakers—incentives deemed illegal by both the World Trade Organization (WTO) and the European Union—Brussels focused exclusively on electric vehicles (EVs), overlooking plug-in hybrids (PHEVs). This oversight created a loophole that Chinese automakers have since heavily exploited.

German automakers have bet most heavily on PHEVs and rely on them the most, primarily because the technology is substantially cheaper than embarking on the design and production of purpose-built electric vehicles—which require dedicated battery-electric platforms to maximize the technology's advantages. However, the tax loophole for Chinese PHEVs allows them to bypass the surcharges imposed in Europe, which reached as high as 45.3% (a 35.3% additional levy on top of the standard 10% import duty). Capitalizing on this, Chinese PHEVs have begun making life miserable for their European rivals, particularly the German ones.

The German government has never hesitated to penalize Chinese vehicles—whether electric, PHEV, or otherwise—for violating international trade agreements. If it hasn't done so until now, or pressured the European Union (as its largest contributor) to punish Asian manufacturers, it was solely because German automakers—Porsche, Mercedes, BMW, Audi, and VW—insisted that penalties on Chinese models remain minimal. They sought to prevent China from blocking or hindering exports of German models. Now, however, they realize that despite this caution, sales of those models are dead—or virtually so. 

SPD leaders in both Berlin and Brussels want, above all, to bring vehicle production back to Europe rather than losing it to China, while also closing the loophole that allows PHEVs to bypass regulations under current (and imperfect) laws. German Chancellor Friedrich Merz (CDU) is prepared to advocate for applying additional tariffs to as many vehicle types as necessary (EVs and PHEVs), but SPD leader Lars Klingbeil—who serves as Vice-Chancellor and Finance Minister—has revealed that the German government is willing to go even further by forcing Chinese companies to form joint ventures with European manufacturers and establish factories in Europe.

The proposals put forward by the SPD closely resemble the requirements China imposed for decades on Western automakers seeking to sell vehicles in that country. They entail requiring Chinese companies to form joint ventures before selling in the German or European markets and, as previously mentioned, extending the tariffs originally designed for electric vehicles—aimed at offsetting the unfair state advantages granted to local manufacturers—to include PHEVs. If implemented, these new rules would trigger major market shifts, with the goal of attracting more investment to Europe and creating more jobs.

German social democrats push EU tariffs to cover Chinese hybrid cars...The SPD is pressing Brussels to extend current EU duties on China-made electric vehicles, which run up to 45%, to include plug-in hybrids too. Right now hybrids are not covered, and the party wants that gap closed to level competition for European automakers. The draft puts it plainly: "We must protect our automotive sector more resolutely against Chinese models that are offered at very low prices through unfair practices," and, "We call on the federal government to use its influence to ensure that the EU finally closes the loophole for plug-in hybrids and imposes tariffs on them just as it does on fully electric cars."

The political push and risks...This amps up pressure on German Chancellor Friedrich Merz as he looks to harden policy on China without provoking Beijing, at home and at the EU level. Berlin has historically tread lightly to avoid retaliation that could hit key industries, and in 2024 it opposed the EU's EV tariffs. The SPD frames the moment as a strategic reset: "The shift toward geo-economic power politics by other countries is forcing Germany and the EU to develop new geo-economic strategic capabilities."

What this means for your portfolio...The SPD wants leaders in Berlin and Brussels to pull more production back to Europe, crack down on currency manipulation, strengthen protections for workers, introduce "new trade defense instruments that apply across as many sectors as possible," and require local sourcing for certain goods. On Tuesday, Lars Klingbeil said that in the weeks ahead, Berlin intends to roll out a set of tougher steps aimed at addressing what it considers unfair Chinese trade practices. 

Among the measures under consideration are mandates that Chinese firms form joint ventures before entering the German or EU market, additional tariffs on categories such as plug-in hybrids, and purchasing preferences for goods made in Germany or Europe. If these ideas advance, they could reshape costs and competition across Europe's auto supply chains and public procurement, so keep an eye on Friday's SPD vote and the EU's next steps.

Why Germany wants the tax:

-The loophole: Fully electric cars from China face heavy EU import duties up to 45%. However, plug-in hybrid electric vehicles (PHEVs)—which use both gas and battery power—only pay the standard 10% EU import tax

-Rising sales: Chinese hybrid car sales in Europe surged 155%, taking a large share of the market from local brands

-Fair competition: German leaders, supported by reports detailed in Automotive News, argue that Chinese state subsidies give these hybrid cars an unfair price advantage

Proposed changes:

-Equal tariffs: Expanding current electric vehicle penalties to cover all Chinese plug-in hybrids

-Joint ventures: Forcing Chinese automakers to partner with European companies and build local factories before selling cars in the region, as outlined by Autonews and Briefs