Among the biggest issues in world trade at the moment are the new tariffs being imposed by several western markets on imports of electric vehicles (EVs) from China. This has rapidly become one of the most important trade disputes of 2024 and could have the potential to escalate into a full-scale trade war between the world's largest economies.

While EVs still make up a relatively small part of the automotive market, efforts by governments to speed up the transition away from internal combustion engines mean their share of the market is likely to grow rapidly in the coming years. And as this sector has highly complex supply chains and many suppliers, the knock-on effects of tariffs and tougher rules of origin are likely to be widespread.

So what does the dispute involve and what are the next steps likely to be as countries try to avoid escalating the dispute?

Why are nations concerned about the rise of China's EV industry?

At the heart of the matter are concerns from several governments - especially those in Washington and Brussels - about the impact of Chinese imports on their domestic EV markets. Both the US and EU have raised concerns that heavy subsidies from Beijing for the Chinese EV market are allowing brands such as BYD, Geely and SAIC to undercut their domestic manufacturers with cheaper imports.

In the EU, for example, Chinese-owned EV brands grew from 0.8 percent of the market in 2019 to eight percent in 2022, with the European Commission forecasting that it could reach as much as 20 percent by 2027 without action.

Meanwhile, the US has also raised concerns about the impact on Chinese imports on its own manufacturers and workforce. In a briefing earlier this year, the White House stated: "For too long, China’s government has used unfair, non-market practices." It added that these "contribute to China’s growing overcapacity and export surges that threaten to significantly harm American workers, businesses, and communities".

What do new tariffs mean for world trade?

In response to these concerns, a range of new tariffs have been implemented this year. Washington, for example, announced in May that it would quadruple its duties on imports, from 25 percent to 100 percent. In August, Canada followed the lead of its southern neighbor with similar duties.

By comparison, the tariffs that the EU has imposed on Chinese imports may seem less tough. However, as the EU is currently a much bigger market for Chinese EVs than North America, it is likely that Brussels' move may have the bigger short-term impact. The fact that each manufacturer is facing its own tariffs - from 17.4 percent for BYD to 37.6 for SAIC - may also affect the market by influencing consumer buying decisions.

Several Chinese manufacturers have already sought to shift their manufacturing and supply chain processes in order to avoid EU tariffs, setting up new facilities within the EU or other countries that have preferential trade deals. BYD, for instance, announced in July its intention to invest $1 billion into a new factory in Turkey, which has a customs union with the EU, although it does have its own 40 percent tariffs on EV imports.

What could the future hold for trade relations?

While China has filed a complaint with the World Trade Organization against the tariffs, any resolution in this forum is likely to be many years away. In the meantime, there are concerns that the tariffs will lead to retaliation from Beijing and escalate into an all-out trade war.

Indeed, many European auto manufacturers have spoken out against the duties due to concerns that tit-for-tat measures from Beijing will harm their own efforts in the Chinese market, which is one of the most important territories for many EU-based brands.

A range of tariffs on western imports to China may be announced in response to the moves. Duties aimed at EU exports could include meat and dairy products, as well as beverages. Meanwhile, luxury goods such as handbags, watches, perfumes, shoes, clothing and jewelry could also face restrictions.

As well as more tariffs on imports, China could also use export controls in sectors such as rare earth minerals. The country is among the world's largest suppliers of these raw materials, which are essential in items such as electronics, and has already shown a willingness to curb exports during past trade disputes.

This may mean both sides are forced to diversify supply chains and look elsewhere for critical items. As a result, it will be important for companies across many sectors to be fully aware of what trade incentives are available and seek out sources that can provide them with the most competitive opportunities.