Executive summary:
Over the past years, China has propelled itself as the world’s biggest car manufacturer and exporter, overtaking Germany and Japan. Most notably, China has become the world leader in electric vehicles (EVs). In response to this rising EV production and export capacity, several countries have implemented tariffs on Chinese EVs in an attempt to localise manufacturing. The EU has also imposed tariffs on Chinese EVs despite internal and external opposition. American and European policymakers have justified this stronger trade stance on the basis of so-called “overcapacity” and the argument that Chinese carmakers are propelled to market dominance due to excessive subsidies. This paper refutes this narrative in the specific case of electric vehicles, arguing that while direct subsidies did play an important role, they are not the singular reason why China’s EVs have become globally competitive. Furthermore, there is currently no overcapacity in EV manufacturing. Rather than purely subsidy-oriented, China’s momentous rise is due to wide-spanning policy measures. This strategy included tariffs, local content requirements, and measures inducing vertical integration within the value chain as well as internal competition between Chinese car manufacturers. Nevertheless, European tariffs on EVs – used in a strategic and considerate manner in combination with increased investments in local value chains – can be a useful policy tool to localise manufacturing and create a level playing field, contributing to European and Chinese competitiveness in EVs alike.
Policy recommendations:
- Implement tariffs to provide European automakers with breathing room to innovate, build up, and commercialise EV supply chains.
- Keep European automakers exposed to global competition and innovation, particularly from China, to enhance competitiveness.
- Encourage Chinese investments in Europe’s EV sector, ensuring value-added production and technology development locally, rather than mere assembly.
- Leverage China’s Li-ion battery overcapacity to reduce short-term production costs while improving EU battery production and innovation capacity.
Invest in local battery and chip ecosystems to reduce long-term dependencies.
Stay tuned with us by reading more: Reconnect China Policy Brief 17_How China’s EV Dominance is Shaping EU Trade Strategy