EU-China Dynamics: Navigating Rivalry and Cooperation in the EV Sector
- Giorgia Sgueglia
- 2 days ago
- 10 min read
The Emergence of China’s Electric Vehicle Industry
Over the past 15 years, China’s electric vehicle (EV) sector has become a prime example of successful industrial policy. The country’s government has strategically intervened, fostering both industry growth and market demand. A major factor behind this success has been the timely alignment of government policies with key advancements in battery technology and the global shift toward EV adoption.
While many traditional automakers hesitated to embrace EV technology, Chinese manufacturers saw an opportunity to leapfrog long-established competitors in the internal combustion engine market, positioning themselves at the forefront of the industry.
Central to China’s EV policy has been a dual approach: boosting demand through consumer incentives and strengthening supply through producer support. The government introduced subsidies that reduced costs for buyers while offering financial and infrastructural support to manufacturers. As a result, China has become the world’s largest EV market, accounting for 60% of new EV registrations and 40% of the global electric car stock by 2023. Beyond vehicle production, China dominates the EV supply chain, particularly in lithium batteries. The country produces 65% of the world’s batteries and 80% of the cathodes used in battery manufacturing, with some U.S. Department of Energy estimates suggesting an even higher market share.
The scale of government support has led to the proliferation of domestic EV manufacturers—by 2021, there were over 300, from industry giants to struggling startups. However, with the phasing out of consumer subsidies in 2023, the industry is undergoing consolidation. Smaller and less competitive firms are expected to exit, leaving behind a more sustainable and competitive landscape.
Local governments also play a crucial role as they offer tax breaks, preferential procurement contracts, and even direct financial stakes in EV companies. A notable example is the Hefei city government’s intervention in 2020 to rescue NIO, an EV startup on the verge of collapse. Such investments highlight the close involvement of local authorities in the sector’s success.
Beyond direct subsidies, Chinese EV manufacturers benefit from below-market financing and credit access, a hallmark of China’s broader industrial strategy. While these mechanisms are most visible in industries like semiconductors, they also play a significant role in EV expansion. Interestingly, even non-Chinese companies benefit from these policies. Notably, this strategy has begun to extend beyond domestic firms. Tesla, for example, became the first foreign company to secure preferential tax rates for its Shanghai Gigafactory—a landmark case that may signal a gradual opening of industrial support to select international players.
Despite the extensive government backing, competition in China’s EV market has intensified. With domestic demand slowing, major manufacturers have engaged in price wars to maintain market share. Tesla, for example, reduced the price of its Model 3 by over $4,500 in China since January 2023, while NIO dropped prices by $4,200 in June. This fierce competition has prompted many Chinese firms to expand into international markets, where pricing pressures are less intense and demand is less saturated.
From 2009 to 2023, Chinese government support for the EV sector totaled an estimated $230.9 billion. In the early years (2009-2017), funding averaged $6.74 billion annually. However, between 2018 and 2020, spending tripled and continued to rise sharply from 2021 onward. This support has come in five primary forms: buyer rebates, exemption from the 10% sales tax, government funding for charging infrastructure, R&D programs, and government procurement of EVs. While buyer rebates and sales tax exemptions accounted for the largest portion of the support, the central government phased out consumer rebates in 2022 and eliminated them in 2023. Nevertheless, sales tax exemptions remained in place, amounting to RMB 87.9 billion or $13.0 billion in 2022 and RMB 121.8 billion or $17.2 billion in 2023.
The Chinese government has also provided substantial subsidies across the EV supply chain, benefiting raw material miners, processors, and battery manufacturers. For example, CATL, which held 43.1% of the Chinese market and 36.8% of the global market in 2023, received government subsidies that grew from $76.7 million in 2018 to $809.2 million in 2023. Similarly, EVE Energy, the fourth-largest battery producer in China, received $208.9 million in subsidies in 2023. Local governments continue to provide tax breaks, preferential procurement contracts, and even financial stakes, underscoring their role in the industry’s growth.
EU and China: A Complex Relationship
As China’s dominance in the EV sector grows, the European Union (EU) has debated implementing anti-dumping duties to protect its domestic manufacturers from what it sees as unfair competition. However, this issue goes beyond merely protecting European industries—China’s rise in the EV market reflects its broader technological and industrial ascent.
Following the European Parliament elections in June 2024, EU- China economic policy has undergone significant shifts. European Commission President Ursula von der Leyen has acknowledged the need for a balanced approach, emphasising that while de-risking remains a priority, there is also “room to engage constructively with China” and even “find agreements that could expand our trade and investment ties.”
European Trade Commissioner Maroš Šefčovič further emphasised this dual approach, stating that while the EU remains committed to de-risking, there is still potential for expanding economic engagement with China. This nuanced stance reflects the EU’s recognition that completely sidelining China is neither feasible nor beneficial.
Maintaining economic engagement with China provides Europe with a counterbalance to escalating trade frictions with the United States. On March 12, the U.S. imposed tariffs of up to 25% on steel, aluminium, and certain products containing these materials from the EU and other trading partners. Additionally, starting April 2, 2025, a 25% tariff on all foreign-made cars and light trucks will take effect. These measures have already unsettled global markets, with European stocks reacting negatively—Stellantis dropped by 4.2%, Mercedes-Benz by 2.7%, and BMW by 2.55%.
This growing uncertainty in transatlantic trade relations underscores the need for Europe to diversify its economic partnerships rather than fully disengage from China.
The Broader Context: Economic Security and Industrial Policy
De-risking continues to be central to the EU’s strategy toward China, but the landscape has shifted. Previously, EU- China relations were shaped by trade imbalances, market access restrictions, and security concerns, particularly regarding 5G networks and China’s stance on Russia’s invasion of Ukraine. Today, new economic and geopolitical realities are influencing European policy.
China’s economic trajectory has shifted. Once a booming market with abundant opportunities, China’s slowing growth and overcapacity have led to increased competition and diminishing returns for European companies. The EU’s EUR 300 billion trade deficit with China highlights the urgency of addressing structural imbalances.
Europe’s reliance on China in strategic sectors has grown. China is now a major competitor not just in third markets but also within the European single market. To mitigate this, the EU has introduced policies like the Chips Act and the Critical Raw Materials Act to reduce dependency on China for critical technologies and resources.
The EU’s newly adopted Economic Security Strategy reflects this recalibration, signaling a more cautious approach. While de-risking remains important, there is growing recognition that strategic autonomy and economic pragmatism must guide future EU- China relations, particularly in the EV sector and broader technological competition.
EU Tariffs and the Impact on the EV Market
In March 2025, the European Commission launched an investigation into BYD, one of China’s leading electric vehicle (EV) manufacturers, regarding alleged unfair subsidies provided by the Chinese government to build its plant in Hungary, according to the reports from the Financial Times. The investigation, which comes amid rising concerns over China’s growing dominance in the EV market, has only intensified the already tense trade relations between the European Union and China.
BYD’s €4 billion investment in Hungary, which could create up to 10,000 new jobs, has raised alarms in the EU. Hungary’s Prime Minister Viktor Orbán, known for his pro-China stance, hosted Chinese President Xi Jinping in Budapest last year and has actively courted Chinese investment, including BYD’s plant. The probe into whether BYD benefited from government support in the form of preferential financing or other subsidies could lead to significant consequences, including the potential for the company to sell assets, scale back production, repay subsidies, or face fines for non-compliance with EU rules.
This investigation is just the latest development in the EU’s ongoing battle with China over EV imports. In the past year, the European Commission has been scrutinising the influx of cheaper Chinese EVs, claiming they benefit from state subsidies that give them an unfair advantage in the European market. As a result, in October 2024, the Commission introduced new tariffs on Chinese-built electric vehicles, ranging from 7.8% for Tesla to 35.3% for companies like SAIC, in addition to the EU’s standard 10% car import duty.
These tariffs, which could reach as high as 45.3%, are seen as a response to what the EU describes as China’s “unfair trade practices.” With China’s production capacity for EVs far surpassing Europe’s demand, the EU is particularly concerned about the impact of Chinese imports on European manufacturers, especially as the US and Canada have already imposed 100% tariffs on Chinese EVs. Europe, as the most accessible market for these vehicles, has become the focal point of this growing trade dispute.
In response to the tariffs, several Chinese EV manufacturers, including BYD, Geely, and SAIC, have filed legal challenges against the European Union at the Court of Justice of the European Union (CJEU). These companies argue that Tesla, the largest exporter of Chinese EVs to Europe, was excluded from the official tariff sample, thus benefiting from a lower tariff rate of 7.8%. Had Tesla been included in the sample, they claim, the tariffs faced by the other manufacturers would have been much lower.
The EU’s concern is that its EV sector, still in its developmental phase, cannot yet withstand direct competition from China’s heavily subsidised manufacturers. China’s state-driven industrial policy—coordinating both state-owned and private enterprises—enables its firms to produce EVs at significantly lower costs. In contrast, the EU’s fragmented approach to industrial development lacks the same level of centralised coordination, placing European firms at a competitive disadvantage. As the Draghi Report points out: “Industrial strategies today – as seen in the US and China – combine multiple policies, ranging from fiscal policies to encourage domestic production, to trade policies to penalise anti-competitive behaviour, to foreign economic policies to secure supply chains. In the EU context, linking policies in this way requires a high degree of coordination between national and EU efforts. But owing to its slow and disaggregated policymaking process, the EU is less able to produce such a response.” Even when there is a shared objective, EU member states often struggle to follow up with cohesive, joint policy actions.
The economic impact of these duties could be significant, particularly for Chinese manufacturers. With around €10 billion worth of EVs imported from China annually, the tariffs will raise costs for Chinese firms, making it harder for them to maintain competitive pricing in the European market. European automakers, already established in the region, may retain an edge, while Chinese firms could face declining profits. Given the price disparity between identical models in China and the EU, these tariffs could erode much of the profit Chinese manufacturers would have earned. This may force them to absorb costs, pass them on to consumers, or pivot to alternative markets.
These duties raise concerns about the EU’s broader green transition. The most immediate effect will be higher consumer prices, which could slow the adoption of EVs, especially among lower-income consumers. This would be a setback for the EU’s climate goals, which aim to accelerate the transition to zero-emission vehicles. The EU must balance its protectionist policies with the need to accelerate decarbonisation and maintain competitiveness in a rapidly evolving global market.
While Chinese EV manufacturers may explore the option of establishing operations in lower-cost countries such as Morocco or Turkey to gain easier access to the EU market, such strategies are increasingly constrained. Within the EU, Hungary—owing to its close political and economic ties with China—might appear to be a favorable destination for investment. However, the European Commission’s Foreign Subsidies Regulation (Regulation (EU) 2022/2560) significantly limits this kind of maneuvering. The regulation equips the EU with the authority to investigate and address distortive foreign subsidies, closing loopholes that previously allowed non-EU firms to benefit from state support while operating within the single market. As a result, while such relocation strategies remain theoretically possible, they are now subject to heightened regulatory scrutiny.
The evolving economics and politics of the EU’s trade environment are complex. The EV case underscores the difficult trade-offs the EU must navigate. While the goal of decarbonisation is paramount, the EU must also balance industrial protection with its broader environmental and economic goals.
The EU's Next Move
One distinct advantage of the European Union’s trade strategy, compared to the US, is that it does not seek to completely exclude Chinese electric vehicles (EVs) from the European market. Instead, the proposed measures allow Chinese producers to continue exporting to the EU, albeit at a higher cost due to tariffs and countervailing duties. This approach maintains market openness, benefiting EU consumers by ensuring a competitive landscape that encourages innovation and drives investment. By permitting foreign competitors, including Chinese EV manufacturers, to retain access to European markets, the EU forces its domestic producers to stay competitive and continuously innovate to meet the challenges posed by these external players.
In the long term, competition fosters industrial growth and technological advancement. A key example is Volvo’s recent decision to shift its EV production from China to Belgium, with the company currently under the ownership of China’s Geely. This move demonstrates how Chinese companies are eager to engage with the European market despite the challenges posed by tariffs. Not only does this enhance the EU’s manufacturing base, but it also reinforces the strategic value of allowing foreign players to contribute to the European economy. Such investments foster a dynamic, competitive environment where innovation thrives.
In addition to maintaining competitive pressure through open markets, the EU must remain receptive to Chinese investments in the EV sector, particularly in manufacturing. While other regions, such as the United States, may take a more protectionist stance by blocking foreign investments on the grounds of national security concerns, through mechanisms like the Committee on Foreign Investment in the United States (CFIUS), an inter-agency body authorised to review foreign acquisitions of U.S. businesses—the EU should aim for a more balanced strategy. Individual member states may use Foreign Direct Investment (FDI) screening mechanisms, but these tools should be used sparingly and with careful consideration. Overreliance on such measures could risk stifling the flow of investments that bring technological progress and economic growth.
The EU should embrace these investments as opportunities to integrate cutting-edge technologies and strengthen its industrial capabilities. The EU can ensure that its manufacturing sector remains globally competitive while fostering deeper economic ties with China. This strategy will ultimately contribute to long-term growth and help position the EU as a leader in the global EV market, promoting innovation and sustainability in the transition to greener energy.
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ABOUT THE AUTHOR
Giorgia Sgueglia is a multilingual professional with expertise in international relations, policy analysis, and cross-cultural communication. She is experienced in fostering global collaboration, coordinating high-level events, and producing insights on Asia-Pacific economic trends and EU-China relations. She is a native Italian speaker, fluent in English and French, with working knowledge of Spanish and intermediate Chinese. She is committed to advancing global policy dialogue and building stronger international partnerships.
This article was edited by Luca Rastelli and Alice Colantoni.
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