Volkswagen AG said higher import tariffs for Chinese-made EVs in the European Union will offer only a short respite, with lower costs necessary to stay competitive over the long run. 

That’s because Chinese automakers are set to start making cars in Europe, according to Chief Financial Officer Arno Antlitz, who said the EU’s plan for additional barriers risks painful retaliatory actions. On Wednesday, China signaled it’s ready to unleash tariffs as high as 25% on imported cars with large engines, as trade tensions escalate with the US and European Union.

“We have to use the next two to three years to become even more competitive on the cost side,” Antlitz said in a post on LinkedIn. “It is very questionable whether the current tariff discussion leads into the right direction.”

Carmakers are again finding themselves in the crosshairs of shifting global trade tectonics, with manufacturers like VW, BMW and Mercedes-Benz Group particularly exposed to retaliatory measures. All three count China as their biggest market — and Mercedes imports all of the luxury S-Class and Maybach models it sells in China. 

The EU is due to inform Chinese exporters of the results of a probe into EV subsidies in early June, and higher tariffs on top of the current 10% levy could take effect a month later. Trade tensions between the EU and China have soared since the EV probe was announced last year, after President Xi Jinping’s visit to Europe this month seemingly did little to relieve the strain.

EVs made by Chinese brands like MG Motors and BYD Co. last year accounted for just under 9% of battery-only vehicle sales, according to Dataforce, though this is set to rise to about a fifth by 2027, lobby group Transport & Environment said in March. 

BYD, which is weighing two plants in Europe, plans to introduce its Seagull hatchback in the region next year at a price below €20,000 ($21,657). This will undercut VW, Stellantis and Renault’s offerings while the industry is already battling slowing EV uptake. 

“The next few years present a significant opportunity to advance our cost competitiveness,” said VW’s Antlitz. This will “improve the affordability of our EVs while securing the margins we need to finance the transformation ahead.”