BRUSSELS (Reuters) -The European Commission started an investigation on Wednesday to into whether to impose tariffs to protect the European Union against Chinese electric vehicle (EV) imports benefiting from state subsidies.

"Global markets are now flooded with cheaper electric cars. And their price is kept artificially low by huge state subsidies," European Commission President Ursula von der Leyen said in her annual address to the bloc's parliament.

European carmakers have realised they have a fight on their hands to produce lower-cost electric vehicles and erase China's lead in developing cheaper, more consumer-friendly models.

Chinese EV makers are stepping up efforts to expand overseas markets as competition intensifies at home and domestic growth eased. China's auto exports surged 31% in August following a 63% jump in July, according to the China Passenger Car Association (CPCA).

Of new EVs sold in Europe this year, 8% were made by Chinese brands, up from 6% last year and 4% in 2021, according to autos consultancy Inovev.

Shares of Chinese EV producers fell after the EU announcement. BYD shares were trading 4.5% higher before the news, to then close down 2.8%. Nio fell 1% and Xpeng dropped 2.5%.

In April, the founder of Nio said that Chinese electric vehicle makers should brace for the possibility of protectionist policies against them by foreign governments as they seize on their cost advantages to expand exports.

He estimated his company and other Chinese EV makers had a cost advantage of around 20% over rivals such as Tesla thanks to China's grip over the supply chain and raw materials.

Von der Leyen stressed the importance of electric vehicles to the EU's ambitious environmental objectives.

"So I can announce today that the Commission is launching an anti-subsidy investigation into electric vehicles coming from China. Europe is open to competition. Not for a race to the bottom," she told the European Parliament.

(Foo Yun Chee and Philip Blenkinsop and Yun Chee; additional reporting by Kim Miyoung and Anne Marie Roantree, editing by Gabriela Baczynska and Louise Heavens)