As Chinese corporations build factories one after another in Morocco, a North African country that borders Europe, concerns are growing that they are trying to circumvent the European Union (EU) tariff.
According to the Financial Times (FT) in the U.K. on the 31st of last month (local time), a 5 million-square-meter agricultural area in Tangier, the Moroccan port city, has been transformed into an auto parts cluster. More than 10 Chinese corporations, including the Century Tire factory, the BTR battery factory, and the APG brake factory, are operating or building plants there.
Cai Junjie, APG's project manager, who plans to establish a $70 million (about 106 billion won) factory in Tangier this year, said the plant will operate by combining local labor and materials with Chinese parts and technology, adding, "We can procure what we need near factories in Europe at competitive prices."
Gotion, a Chinese battery company, is also building a large plant worth $1.3 billion (about 2 trillion won) in Kenitra, located between Tangier and Casablanca. Medi Laraki, head of the Morocco-China Chamber of Commerce, said that since the COVID-19 pandemic, two to three Chinese investment delegations have been visiting Morocco every week.
Buoyed by this investment boom, the scale of China's announcements of large-scale foreign direct investment (FDI) projects in Morocco amounts to about $6 billion (about 9 trillion won) from 2023 to 2025. During the same period, Chinese-backed North African investment projects were counted as 19 in Morocco, 9 in Egypt, and 6 in Algeria. This far exceeds the United Arab Emirates (UAE, 3), Saudi Arabia (2), and Qatar (1).
The reason Chinese corporations are building factories in Morocco in quick succession is the geographical advantage that makes exports to Europe easier, along with the ability to reduce tariff burdens. Morocco faces Europe across the Strait of Gibraltar. Recent instability in the Middle East is also cited by Chinese investors as a factor that increases the appeal of North Africa.
Morocco, for its part, is aggressively seeking to attract overseas corporations by touting a five-year corporate tax exemption, a young workforce, green energy supplies, and free trade agreements (FTAs) with about 50 countries, including the EU and the United States.
For the EU, which sought to prevent Chinese cars from encroaching on the European market through high tariffs, this poses a conundrum. The EU, based on the results of its investigation into the Chinese government's subsidies for the electric vehicle industry, is imposing tariffs of up to 45% on Chinese-made EVs. However, if products made by Chinese corporations are recognized as Moroccan in origin, they can enter the EU market tariff-free.
Maroš Šefčovič, the EU's executive vice president for trade and economic security, said in an interview with the FT that Chinese corporations' investments in Morocco may be an attempt to reroute exports to Europe via a third country to address China's overcapacity problem, adding, "It is becoming a very big problem for Europe."
In Europe, questions have already been raised about Chinese corporations' strategies to avoid tariffs. A representative case is the EU's imposition last year of countervailing duties on Moroccan-made aluminum wheels for vehicles. The EU determined that the products benefited from unfair subsidies linked not only to Morocco but also to China's Belt and Road policy.
However, even if Chinese corporations use Morocco as an export base to avoid tariffs, it is not easy to regulate. That is because European automakers such as Renault and Stellantis also operate large production facilities in Morocco. EU officials told the FT that it is not easy to distinguish whether cooperation between China and Morocco is genuine industrial cooperation or a strategy to circumvent EU tariffs.
Whether Morocco will be recognized as an origin treated the same as European-made under the Industrial Acceleration Act (IAA) that the EU is pushing to bolster the competitiveness of European manufacturing is expected to be an important test ahead. The bill includes applying a "manufactured in the region" requirement in public procurement and subsidy payments for strategic industries such as automobiles, steel, cement, and aluminum, as well as green industries like wind turbines. China is strongly protesting.
Bob Savic, head of international trade at the London-based Global Policy Institute, said, "Chinese intermediate goods are transported to North Africa, undergo limited processing, and are exported to the EU under preferential trade agreements," adding, "As the EU's 'de-risking' strategy to reduce dependence on China intersects with China's 'offshoring' strategy in this region, North Africa could emerge as a much fiercer arena of economic competition."