The European Union on Wednesday opened an investigation into whether China’s electric vehicles industry is receiving unfair subsidies, a move that could lead to punitive tariffs and threatens to spark a trade war with Beijing. European Commission President Ursula von der Leyen cited “the fact that global markets are flooded with cheaper Chinese EVs, whose price is kept artificially low by huge state subsidies.” The EU can eventually impose import duties nine months after launching the investigation.

The probe is seen as a test case by Brussels, which has long sought to avoid a trade war with Beijing but appears to have grown increasingly frustrated that its innovative firms are losing ground to their Chinese counterparts. As the EU has struggled with economic stagnation and a migration crisis, its companies are seeking new sources of growth. Many are turning to innovation, particularly in EVs. But that strategy is being threatened by the influx of Chinese carmakers, which have leapt ahead in the sector after investing billions of dollars to boost production and develop their brand image.

Several European carmakers, including Volkswagen, Audi, BMW and Mercedes, are struggling to compete with Chinese producers in their domestic markets. The rise of Chinese EVs, many of which are priced about 30 percent below their equivalents in the EU and the United States, has also pushed some established carmakers to consider cutting jobs.

Europe’s auto industry employs about 13 million people and is a key part of the economy. European Commissioner for Trade Cecilia Malmström has said the bloc’s manufacturers face a “very real threat.” But she has been careful not to provoke Beijing, fearing retaliation that could hurt growth.

The FT reported that Tesla and other European carmakers that export from China to the EU will be part of the bloc’s probe into whether the country’s EV makers are receiving unfair subsidies. The probe will cover sales of electric vehicles sold in the EU, as well as their components and batteries.

BERLIN CARMAKERS NERVOUS: Germany’s automakers have made clear that they are worried about the impact of any EU tariffs resulting from an anti-subsidy investigation by Brussels. Germany’s economy minister, Robert Habeck, has urged the EU to adopt a system of outbound investment screening that would block companies from moving high-tech factories or research to China if they pose a risk of giving sensitive technologies to Beijing or creating dependencies.

The European Union on Wednesday launched an investigation into Chinese electric vehicle subsidies, accusing the world’s second largest economy of flooding global markets with cheap cars backed by massive state support. The probe, which could result in punitive tariffs, is a major shift in the bloc’s approach to non-market economies like China. It is the highest-profile EU probe against Beijing since an investigation into Chinese solar panels nearly triggered a trade war a decade ago.