China’s Electric Vehicle Challenge to Europe: Red Flags and Red Lines
Summary
Initial trade data suggest that the EU’s tariffs on Chinese electric vehicles (EVs) in 2024 slowed the growth of their share in the single market compared to forecasts. However, it has not blunted the risk Chinese EVs present to European automakers, which was demonstrated by the more than 100,000 job losses announced last year.
The US–China trade war will add to these economic woes as European automakers are squeezed out of the Chinese EV market and could lose the US export market. Moreover, Chinese EV producers are opening plants in Spain, Hungary and the European neighbourhood to circumvent tariffs and divert trade. The Lower Saxony region in Germany, for example, cannot afford the loss of taxes from workers, corporate taxes and dividend payments from Volkswagen if it closes plants in the region.
Nor can policymakers ignore the data security risks: under China’s National Intelligence Law, Chinese EV producers are legally required to work with the Ministry of State Security, and some European companies are advising their staff not to connect their phones or discuss their work in Chinese EVs. Chinese EVs are built on the basis of one-sided technology transfer. In the limited joint ventures in Europe where member states have increased local requirements, Chinese companies have cancelled projects. Alongside the presence of Communist Party cells in these companies, it is highly unlikely that Chinese EV producers will transfer technology to European automakers.
Policy Recommendations
Policy measures to respond to the red flags that Chinese EVs present are as follows:
The EU should encourage European automotive companies to collaborate and pool resources to create a viable alternative to Chinese EVs. This should include tax incentives and coordination with the member states to the NextGenerationEU and multiannual financial framework funds to support the development of the European EV sector, as part of efforts to achieve an EU-wide industrial policy.
The EU should consider introducing a cap on the share of the EV market for Chinese EV producers alongside any minimum pricing agreement that is negotiated. A market share cap for Chinese EVs of less than 10% would ensure that European automakers continue to maintain their market share and industrial base within the single market. This would offer a small headroom for market share growth for Chinese EVs but would prevent them from hitting the 15% threshold by the end of 2025 which the European Commission has cited as a concern. It is also consistent with the EU’s historical approach to Japanese and Korean car manufacturers, which included voluntary export restraints.
Through bilateral dialogues with Brazil, Turkey, Canada and the US, the EU should explore coordination regarding tariffs on Chinese EVs and a move towards a shared tariff rate.
The EU should deepen industrial ties and develop economic security partnerships with Japan and South Korea, encouraging EV battery JVs between Japanese and Korean battery providers and European automotive producers, and explore alternative critical minerals supply chains. This would help consolidate the global market for non-Chinese EV battery production.
Policy measures to respond to the red lines are needed when it comes to Chinese EVs:
Data security
The EU should develop and adopt a sovereign cloud storage system which all EVs operating in the single market should be required to use for data storage and which complies with existing data privacy and security regulations. In the short term, the EU should develop a trusted cloud storage provider scheme and require EVs to use it until this sovereign cloud storage system is completed.
The EU should authorise the European intelligence services and the European Cyber Crime Centre to work with the European commissioner for competition to investigate whether EV companies are transferring data surreptitiously overseas. Evidence found by the office of the European commissioner for competition that foreign EV operators are violating the GDPR by sharing their data outside the European single market should lead to an automatic ban.
The EU should mandate that all EVs operating in the single market should be legally required to use CIMs from European providers.
JVs
The EU should review and amend its current FDI regulation to introduce local ownership, data security and local content requirements, and obligations for technology transfer. This could be underpinned by a timetable for Chinese EV producers to offer technology transfer to European partners or face a ban from the European single market.
The EU should investigate the current JVs between Chinese EV producers and European partners to see whether they comply with foreign subsidy rules and the EU’s GDPR rules.
The EU should direct European intelligence services to investigate the role and influence of Chinese Communist Party cells within European automotive and EV producers and the role that Chinese automotive companies play within European automotive industry bodies, checking for national security risks, in particular.
The EU should investigate European companies’ JVs in China and the extent to which technology transfer is taking place, particularly in the aerospace, pharmaceutical and civil nuclear sectors. The EU should consider declaring these industries elements of strategic sectors and introducing rules to limit the extent of foreign JVs and technology transfer.