EU duties on Chinese electric vehicles, one year on: undertakings, tariffs and trade finance

When definitive countervailing duties on battery electric vehicles from China entered into force, the prediction in much commentary was a sharp contraction in the trade. That is not what happened. Volumes of battery-electric imports softened; volumes of hybrid and other models from the same manufacturers rose; announced European assembly capacity accelerated; and negotiations over price undertakings — minimum import prices in lieu of duties — continued through the year. The trade adapted, as trade does.

From a trade finance desk the adaptation is visible in the documents. Duties that vary by exporting company, undertakings that convert a tariff into a price floor with reporting, and a shift of final assembly into the Union each leave a mark on the letters of credit, guarantees and receivables structures that finance the flow.

Company-specific rates make identity a variable

The measures assign different duty rates to different Chinese producers, based on the subsidy findings for each. That means the landed cost of an otherwise identical vehicle depends on which company exported it, and importers have responded by sourcing selectively. For a bank financing the import, the identity of the exporter has become part of the credit analysis: a distributor whose model line-up shifts to a producer on a lower rate has a different margin profile from one that does not.

It also means that the certificate of origin and the exporter declaration carry more weight than they did. Customs authorities examine them more closely, and so should the documentary examiner. A credit that does not call for the exporter to be identified consistently across the commercial documents is a credit that has left a gap.

A duty that varies by exporter makes the exporter’s identity a pricing variable. The commercial documents need to establish it consistently, and the credit needs to call for that.

China Everbright Bank Europe — Trade Finance Desk

Undertakings convert tariffs into paperwork

Where a minimum-price undertaking is accepted for a producer, the duty is replaced by a commitment that vehicles will not be sold into the Union below an agreed price, supported by an undertaking invoice and periodic reporting. Economically this is a tariff by another route. Operationally it is a documentary regime, and it is one that sits awkwardly with the documentary credit unless the credit is drafted with it in mind. The undertaking invoice has prescribed content; the credit should call for it by description and check for consistency with the commercial invoice, not ask the examiner to assess compliance with the undertaking itself.

• Identify the exporting producer consistently across invoice, packing list, certificate of origin and transport document.
• Where an undertaking applies, call for the undertaking invoice as a named document and check consistency, not compliance.
• Reflect the applicable duty rate in the importer’s working-capital sizing; the duty is paid at import, before the vehicle is sold.
• Expect customs authorities to scrutinise origin and valuation, and build the time into the facility’s tenor.

Localisation moves the financing need

The structural response is assembly inside the Union. Several Chinese producers have committed to plants in central and southern Europe, and vehicles assembled there from imported components are not subject to the measures on finished vehicles. For trade finance this moves the need from import finance on finished cars to import finance on components, which is higher-frequency and lower-value, and from the distributor to the plant and its supplier network. It also opens the project-finance questions — offtake, public support, local content — that we expect to occupy the coming year.

Our trade finance desk has spent the year re-drafting documentary conditions for clients on both sides of this trade, and the lesson is the same one we draw from carbon border documentation: a policy measure becomes a documentary requirement, and a documentary requirement drafted carelessly becomes a payment delay. Draft it once, in the sale contract, and let the credit refer to it.