Will the EU enter the US-China EV battle?

The global electric vehicle market is currently booming. It is facing a potential storm as the US and China wage a tit-for-tat tariff war, and may boom even more. The US-China trade honeymoon is over. What was once a one-way street from US to China has become a two-way lane, now filled with more expensive Chinese products heading to the US. This was not the intention of the US, which recently imposed a hefty 100% tariff on Chinese-made electric vehicles as a measure to protect domestic automakers (this was part of the White House policy, and in addition to essential materials such as steel and aluminum, lithium batteries and solar cells were also targeted). This seems like a big deal, but the US imports very few cars from China. However, the European Union is a major consumer market with ambitious environmental goals in the EV sector, and it imports a large proportion of Chinese-made EVs. The European Union is now considering whether to follow the US lead and impose its own tariffs.

Meanwhile, China, the world’s largest producer of EVs, has also signaled possible retaliation. What this means for the industry and consumers is only just beginning to become clear. But while this seemingly well-intentioned protectionist approach may garner political attention locally, it could have larger repercussions and unintended consequences for consumers, businesses, and the overall clean transportation transition.

Europe’s EV reliance on China: bargaining chip or vulnerability?

China has emerged as the absolute leader in EV production, on track to export more than 1.5 million units to dozens of markets in 2023. The EU is China’s largest customer for EVs, importing nearly 500,000 units last year, nearly a third of all Chinese EV exports. This dominance gives the EU great influence in the current geopolitical climate, but it could also make it vulnerable to rising tensions.

A full-scale trade war in which the EU mimics U.S. tariffs could lead to significant price increases for European consumers. Affordable Chinese-made EVs, which currently drive EV adoption in the region, could become much more expensive, in contrast to the U.S., which imports only a small fraction (less than 3%) of the EU’s total. This price increase could impact the EU’s ambitious green mobility policy agenda, which relies heavily on lower EV prices to achieve mass market penetration.

Finding the right balance: Negotiation and innovation

The EU faces a complex dilemma: subsidies for domestic Chinese EV production deserve more attention, but the EU cannot afford to become a pawn in the US-China trade dispute. Instead, the European Commission is carefully weighing the benefits of affordable Chinese EVs for its own policies against the potential drawbacks of protectionist tariffs on domestic production.

Negotiating with China to address subsidy issues and establish a level playing field is a more strategic approach, and the EU could also use its reliance on Chinese EVs as a bargaining chip to push for a fairer trade deal that benefits all parties.

The impact on other areas is limited, but the ripple effects go beyond EVs

The impact of tariffs on the global EV market may be overstated; it is too early to say what the impact will be. Alternative markets such as Canada and Mexico will likely absorb some of the Chinese EVs diverted from the US, albeit in relatively small quantities compared to the EU intake.

But the impact goes beyond the auto industry: Existing tariffs on areas such as semiconductors, which are essential to EV production, highlight the potential for widespread disruptions to global supply chains. Such disruptions could lead to production slowdowns, increased bottlenecks and higher prices overall, further impeding the global transition to cleaner transportation.

Tesla, a giant in the EV industry, cannot escape the rifts of the trade war. The company sources some of its battery components from China. Any increase in tariffs on these components could increase Tesla’s production costs, leading to higher prices for consumers. Moreover, China could retaliate with tariffs on U.S.-made cars, affecting the operation of Tesla’s Shanghai Gigafactory.

A driver for change or a missed opportunity?

The current situation can be a catalyst for positive change. The US and EU could use this as an opportunity to rebuild their domestic EV industries. Increased investment in clean car technology, battery production and supply chain resilience could create a more sustainable and self-sufficient EV ecosystem within these regions. Investments have already been made in all three areas, there is just a lot of catching up to do. It is also made worse by the fact that the media continues to add fuel to the fire with anti-EV sentiment. EVs are inevitable, and the hockey stick adoption curve is already turning upwards, with most auto markets seeing new sales penetration rates of over 10% or even higher. These measures, coupled with the removal of trade barriers, could spur innovation, create more jobs and accelerate the global transition to clean transportation.

But an escalating trade war could stifle innovation and slow the global transition to clean transportation. Policymakers in the US, EU and China are faced with a critical choice: whether to prioritize short-term protectionist measures at the expense of the long-term environmental and economic benefits of a clean transportation future.