Q&A: The global ‘trade war’ over China’s booming EV industry

Share of Chinese EV exports, %, to the top importing countries or country groupings. EVs include BEVs and PHEVs made by Chinese and non-Chinese companies in China. Data only available until April 2024 so no data included for Q2 2024. Source: Carbon Brief analysis of monthly figures from China Customs. Chart by Carbon Brief.

Nevertheless, Carbon Brief’s analysis, based on data from CPCA, finds that only 12 per cent of China-made NEVs, including FCEVs, were exported in 2023, with 88 per cent of NEV production sold domestically. 

In comparison, Germany, the third largest car exporter in the world behind China and Japan, exported 250,000 of the 308,000 cars – both combustion engine vehicles and EVs – it produced in May 2024. This corresponds to around 81 per cent of production being exported.

Furthermore, CSIS shows that only around 50 per cent of the EVs exported from China in the first half of 2023 were produced by Chinese companies. Some 39 per cent – the largest share – were produced by Tesla. Other joint ventures between western and Chinese companies accounted for another 9.5 per cent of exports in 2023, says CSIS. 

In an analysis, Sebastian, along with CSIS senior fellow Ilaria Mazzocco, has written that this illustrates the “dilemma” facing developed countries:

“[This] reflects the dilemma facing traditional automotive-exporting countries in balancing the interests of domestic companies and fending off the risk of deindustrialisation and overreliance on concentrated supply chains [on one hand] with the need to electrify the transportation sector to meet decarbonisation targets [on the other].”

Meanwhile, the Chinese government has been accused of providing an “unfair” advantage for its own brands via supplying large subsidies that enables them to sell EVs at significantly cheaper prices than their rivals around the world. 

Combined with the rapidly rising exports of Chinese EVs, these concerns have led to a fierce debate around “overcapacity” in recent months.

What is the ‘overcapacity’ debate around Chinese EVs?

“Overcapacity” has traditionally been used to describe where there are too many products – and too much production capability – chasing too few buyers. 

The Paper, a state-affiliated newspaper based in Shanghai, reports the overall “capacity utilisation rate” – the ratio of actual “output” to “production capacity”, according to China’s National Bureau of Statistics – of NEVs last year was between 57 per cent and 76 per cent in China. 

(A separate report from the Paper says “overcapacity” of a product occurs when the “capacity utilisation rate” is below 79 per cent”, which means less than 79 per cent of the manufactured products were used or consumed.)

In 2023, the rates for EV makers Nio and Guangzhou Xiaopeng (known as XPeng) were below 50 per cent, according to the Paper, while only a few leading brands, such as BYD and Tesla, achieved a rate of more than 90 per cent. This means most Chinese NEV makers were producing a lot more vehicles last year than they could sell, which increased the chance of “overcapacity” across the whole NEV industry. 

However, Yao tells Carbon Brief that the current “overcapacity debate” is driven by the US and other western economies’ concerns about “China’s dominance” in the “clean-tech industry”. She adds:

“The market is never in perfect equilibrium, so overcapacity is almost a periodic phenomenon. But it is much more complicated to say whether or not there is a problem of overcapacity in practice than in theory.”

Kyle Chan, author of the High Capacity newsletter, has argued that there are two competing worldviews driving the overcapacity debate. 

One view is that China’s “production of more than its fair share of certain goods”, boosted by “unfair state support”, contributes to overcapacity. The other, Chan explains, is that “everybody benefits” from competition, especially consumers and, in the case of low-carbon technologies, that is a “big win for the planet”.

Chan adds that the argument is essentially about “jobs and a sense of what’s fair”. 

“The overcapacity issue only comes up for certain types of goods tied to certain types of jobs”, says Chan, and nobody accuses China of creating overcapacity in the “clothing or toy or smartphone manufacturing” sectors.

Yao says the argument from the EU and US around the “unfair” competition in the EV industry is a “tactic to gain time for their own domestic industries in the race”. 

Both the US and the EU have implemented tariffs to limit the impact of Chinese EVs on their home markets and domestic manufacturers. 

On 26 August, Canada announced it will impose a 100 per cent tariff on China-made EVs, following the US and EU. The UK, a top importer of Chinese EVs, however, has not announced any measures – and reports to date suggest it may not do so. 

Nevertheless, Carbon Brief’s analysis shows EVs “are an important part” of limiting global warming to “well-below 2°C or 1.5°C”. 

An analysis by Lauri Myllyvirta, lead analyst from the Centre for Research on Energy and Clean Air, says China’s goal of raising the share of NEVs sales in total vehicle sales to 45 per cent by 2027 provides an “opportunity” for China to meet its climate goals. 

With the sales of NEVs now surpassing 51 per cent in July, the country could achieve its own climate targets earlier than initially pledged.

Why did the US impose tariffs?

In May, the US increased tariffs on China-made EVs from 2.5 per cent to 102.5 per cent. 

President Joe Biden explained that the US tariffs are a response to China “cheating” and the resultant “damage here in America”. In a statement, the White House said “extensive subsidies and non-market practices leading to substantial risks of overcapacity” was the main reason for the decision. 

Joseph Webster, a senior fellow at the Atlantic Council, a US-based thinktank, tells Carbon Brief that, “in order to level the economic playing field, the US is levying these tariffs” and “there’s also an interest in maintaining the strategic industrial capacity in the US and elsewhere”. 

Last month, Reuters reported that the US may also “impose limits on some software made in China” for EVs. Washington has already targeted nearly the whole supply chain of EVs, which includes batteries and semiconductors. 

This is a reflection of Chinese EV components entering into the US via the US-Mexico-Canada free trade zone, says Webster, despite the US not being a big receiver of Chinese EVs. 

According to Webster, lithium-ion batteries also have military applications, as he explained in a recent article for national security outlet War on the Rocks. He says this may have been a further consideration when the US administration was deciding on EV tariffs. Webster wrote:

“Batteries, often overlooked, could quietly tilt the balance of military power…Batteries have military implications, creating difficult tradeoffs for policymakers balancing strategic, economic, and decarbonisation priorities.

“While mainland China’s lithium-ion storage batteries are useful for meeting economic and decarbonisation goals across the US, Europe, and elsewhere, its battery complex poses potential security risks.”

An additional concern is the potential for internet-connected vehicles to be used for real-time surveillance, Webster says. He explains: “It’s not a huge [leap of] imagination to think that these vehicles can be used for surveillance purposes”, considering “China has a long history of hacking everything, everywhere, all the time”.

What are the EU’s measures?

The EU proposed provisional duties on Chinese EV, which are set to become definitive by November if member states back the measures as expected. In July, the provisional duties came into force, despite Beijing calling on Brussels to “scrap” them. 

Different rates are applied to different automakers, following the result of an earlier investigation. For instance, state-affiliated SAIC faces tariffs of 38.1 per cent… with the investigation, receives 17.4 per cent, according to the Hong Kong-based South China Morning Post. 

Jacob Gunter at MERICS tells Carbon Brief that, in his conversations with EU policymakers, they were “very proud of the fact that, at every step in this process…[their actions] fell under World Trade Organisation (WTO) compliance”, which includes implementing different tariff rates to different Chinese EV companies.

The objective, as European Commission president Ursula von der Leyen explained, “is to engage China and get Beijing to course-correct and address the problems at their root”.

Gunter believes the tariffs are not “intended to fully block all Chinese EV imports into Europe”, but “are meant to try to mitigate and block the distortions coming from the whole industrial policy subsidy package from China, and [EU policymakers] have a pretty expansive definition of that”. 

Belinda Schäpe, China policy analyst at the Centre for Research on Energy and Clean Air (CREA), tells Carbon Brief that the EU will have to balance the economic interests of its manufacturers against the need to meet its climate goals. She explains:

“The question remains what exactly the EU’s long-term goal is in balancing priorities for economic and climate security. The European car industry is at the heart of Europe’s industrial power, but it has also overslept on the electrification trend…If Europe doesn’t want a large share of Chinese EVs, the question arises where the EVs on Europe’s roads from 2035 will come from – and, perhaps more importantly, who will be willing to pay the premium?”

Daniel Gros, the director of the Institute for European Policy-Making at Bocconi University,  has argued in an article for Project Syndicate that a key driver behind the difference between the US and EU’s approach is that “the US is so fixated on its geopolitical rivalry with China that it has effectively closed its market to green Chinese products”, while the EU “does not have as dominant a position to lose”. 

“That’s a very different policy [approach] than the US”, according to Webster. He argues that “the probability of the US accepting large-scale EV investments from China is very low and substantially lower than Europe.”

What is the UK’s attitude?

Despite the change in government in July, UK policy on Chinese EVs has – so far – remained consistent. Former Conservative transport secretary Mark Harper responded to concerns about Chinese EVs “flooding” the UK market by emphasising that the country’s “robust” legal structure “will make sure that competition is fair and that there’s a level playing field”. 

Both new current trade secretary Jonathan Reynolds and chancellor Rachel Reeves have signalled that they are not currently considering implementing EU-style tariffs.

“I am not ruling anything out, but, if you have a very much export-oriented industry, the decision you take [has to be] the right one for that sector,” the Financial Times quotes Reynolds saying.

However, a Times commentary by the newspaper’s economy editor, Mehreen Khan, argues that this decision limits the UK’s ability to avoid a “pernicious dependency” on Beijing.

She adds: “If there are simply not enough buyers for Chinese wares, then, at best, tariffs could force Beijing into an economic rebalancing that it is unwilling to voluntarily undertake.”

An article from the Economist thinks the “main motivation” behind the UK’s strategy “is likely to be fear of retaliatory tariffs”. It says:

“China is a big export market for high-end producers like Rolls-Royce, Jaguar and Bentley, which make up a big chunk of Britain’s car industry. Losing the market for Chinese tycoons would hurt.”

What is China’s response?

China has strongly opposed the EU’s import duties.

The Chinese Ministry of Commerce filed an appeal with the WTO on 9 August over the EU’s imposition. The ministry said the EU’s “preliminary ruling lacks a factual and legal basis, seriously violates WTO rules and undermines the overall situation of global cooperation in addressing climate change”. 

The Financial Times reported that the European Commission responded that it “was ‘carefully studying’ the details of the Chinese complaint” and would react “in due course, according to the WTO procedures”. 

Meanwhile, the “escalated” trade dispute with the EU has led China to launch an “anti-dumping” investigation into European dairy products as a countermeasure. It is China’s third such probe, after brandy and pork, since the EU announced the tariffs.  

Beijing has also called on the WTO panel to resolve a dispute over US subsidies for domestically manufactured EVs under the Inflation Reduction Act.

For its part, the WTO said last month that China has a “lack of transparency” on its industrial subsidies, citing this as a possible cause for the international concerns around “perceived” overcapacity.

Chinese manufacturer Neta Auto views the tariffs as a “temporary setback” – the growth rate of Chinese NEV exports in June dropped 20-30 percentage points – that will incentivise Chinese companies to explore other overseas markets, such as in Africa.

Xiaojian Wang, head of supply chain for Allchips, a Chinese electronic components distributor based in Shenzhen, tells Carbon Brief that separate US tariffs force the automobile chip industry to reduce “reliance on chip brands from Europe, the US and Japan” in favour of “domestic production of automotive chips”. He says:

“The US tariffs on Chinese semiconductors are expected to further accelerate this localisation process. Due to concerns about potential sanctions from the West, more Chinese EV manufacturers are likely to consider Chinese automobile semiconductors as a viable alternative. 

“Many NEV manufacturers have their own power semiconductor department, as far as I know. BYD, for example, also owns plants for [automobile chip supply] in China to [meet its chip demand for NEV manufacture].” 

This story was published with permission from Carbon Brief.