Now it’s official: the Hungarian economy is back in a technical recession, given a decline in two back-to-back quarters. The flagship automotive industry is confronted with alarming signs, too, having fallen 12.4% year-on-year in August. Much of the pain originates not here but in Germany, where the sector is already struggling, not least because of Chinese competition. Volkswagen is even contemplating closing German factories for the first time ever.
This may just be the beginning, though. The specter of protectionism looms over 2025, with a new tariff war potentially in the making, posing a considerable threat to stakeholders in the open and, therefore, exposed Hungarian market. For starters, the European Union has decided to impose punitive tariffs on Chinese electric vehicles to protect European automakers. It is a highly divisive measure, considering that just 10 out of the 27 EU member states voted in favor. The biggest portion of 12 states abstained, but Germany and Hungary were among the five who voted against (Germany was the only one of the EU’s six largest economies to do so).
Minister of Foreign Affairs and Trade Péter Szijjártó expressed deep concerns over the decision, calling the tariffs “another blow to the continent’s competitiveness.” Szijjártó argued that the decision by the European Commission disregarded the positions of many member states and the interests of major European automotive firms, which opposed the measure.
“The success of Europe’s electromobility strategy is difficult to imagine without cooperation with Chinese suppliers,” he said. The CEO of the Hungarian Investment Promotion Agency, István Joó, shared the minister’s criticism.
“Car buyers stand to lose the most due to the European Union’s punitive tariffs on Chinese electric vehicles,” Joó stated. He highlighted the significant partnerships that already exist between Chinese suppliers and German automakers such as BMW, Audi, and Mercedes-Benz. The latter have substantial manufacturing capacities in China, and the idea is to forge closer relations on Hungarian soil as well. Joó further warned that, without cooperation, Europe risks lagging in EV innovation and production as automakers increasingly rely on Chinese battery technology and expertise.
The fallout from these tariffs could have significant implications for Hungary’s economy. As an emerging EV production hub, Hungary relies on foreign investments in the automotive sector to fuel job creation and economic growth. Chinese EV investments are particularly vital, with companies like NIO already active in the country. The factory BYD is building in Szeged will put that southern university city among Europe’s 30 biggest industrial centers. Leading battery manufacturers such as CATL and Eve Power have also announced large-scale projects here recently, among others.
Germany’s leading automakers such as Audi, BMW, and Mercedes-Benz, which dominate the industrial landscape in Hungary, have also criticized the tariffs. They argue that the restrictions hinder their competitiveness and disrupt established supply chains, underscoring the interconnected nature of global automotive production.
The first countermeasure has already arrived. China has responded with a directive urging its automakers, including BYD, Geely, and SAIC, to halt major investments in European countries that supported the tariffs. At an Oct. 10 meeting, China’s Ministry of Commerce advised these companies to pause asset-heavy projects in such nations. Hungary, which opposed the EU’s proposal, may see a relative benefit from this decision as Chinese companies look for alternatives among EU countries.
BYD is, apparently, considering moving its European headquarters from the Netherlands to Hungary due to cost concerns.
The EU-China showdown is just one piece of the puzzle. The election of Donald Trump projects even more challenging times for the sector. The president-elect recently told Bloomberg: “To me, the most beautiful word in the dictionary is ‘tariff,’” and he even called the EU “a mini-China.”
It remains to be seen to what extent he’s bluffing. Pundits have been speculating he might use tariffs to protect domestic players and increase government revenues to compensate for the impact of promised tax cuts. He has expressed his view several times that he would prefer German automakers to shift production to the States rather than import models made elsewhere.
This has partially happened already: last year, a record 908,000 German-branded vehicles were manufactured in America. However, the existing U.S. factories of German car manufacturers don’t have enough spare capacity to absorb a large-scale shift of production from Germany to avoid tariffs.
Some 15-20% of the EU’s vehicle manufacturing output is exported to the United States. If tariffs are introduced, it would be a massive blow to the industry, and Hungary would be negatively affected.
On top of all that, Trump has suggested introducing a 60% tariff on Chinese imports. The incoming American president might want to use this policy to make partner countries form a united front against the Asian giant. Again, this development is bound to harm Hungary’s interests due to her increasing exposure to Chinese investments.
Trump’s eventual tariffs on EU imports alone would result in the German economy losing 0.2% of growth in 2025, while the drop could be 0.1% in other European countries, according to Berenberg Bank. It is a projection that sends a clear message to Hungarian stakeholders: brace for impact.
This article was first published in the Budapest Business Journal print issue of November 29, 2024.
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