The European Union faces a delicate balancing act as it prepares to rev up taxes on Chinese electric cars to protect European industry, while steering clear of a U.S.-style showdown with Beijing that could spark a trade war.

Europe's automotive sector is the jewel in its industrial crown — behind iconic brands from Mercedes to Ferrari — but it faces an existential threat from the looming end of combustion engines and China's head start in the switch to electric.

When Brussels launched a probe last year into Chinese electric car subsidies, officials said they wanted to put the brakes on what they claimed were unfair practices undercutting Europe's car manufacturers.