Tensions to Escalate as Chinese Cars Race into Global Markets

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The writer is the author of ‘Chip War’

China’s unexpected emergence as the world’s leading auto exporter has disrupted the industry and caught major carmakers off guard. Traditionally, Western companies had a technological advantage in car manufacturing. However, the shift towards electric vehicles has given Chinese companies an opportunity to surpass their competitors and reshape trade flows.

The influx of Chinese cars into foreign markets raises two significant dilemmas that will complicate trade. The first dilemma concerns security. Modern cars are equipped with numerous sensors, complex software systems, and semi-autonomous features. Western leaders are only just beginning to address the security implications of foreign-made cars packed with sensors on their roads. In contrast, Beijing has already implemented strict data localization rules on Tesla, its biggest market outside the US. They have also banned Tesla cars from sensitive locations.

Italy’s recent decision to restrict the influence of a Chinese shareholder in Pirelli, a leading tire manufacturer, marks a shift in attitude. The Italian government’s motivation includes protectionism, but they also cited concerns about China’s influence due to Pirelli’s advanced Cyber Tyre, which collects and transmits driving data. The auto industry, unprepared for enhanced security concerns posed by Chinese cars, is discovering that even tire manufacturers can be tech companies.

The second challenge lies in Europe’s industrial base. Legacy automakers, particularly in the price-sensitive middle market, now face stiff competition. Chinese cars primarily source components from Asia rather than Europe, and with the surge of Chinese car imports, some European businesses are appealing for assistance. Chinese EVs are known for their high quality, but their price competitiveness has benefited from a decade of protectionism and significant government support amounting to tens of billions of dollars annually. While Western car companies are familiar with bailouts and public ownership stakes, China’s EV industry receives unprecedented levels of government support.

Historically, governments are reluctant to let their companies lose market share in the auto industry. Japan faced tariff threats and currency disputes when they succeeded in selling cars to US consumers in the 1970s and 1980s. American auto workers even resorted to vandalizing Japanese cars with baseball bats. The tension only eased when Japanese companies established factories in the US.

In the present scenario, the US is not attacking China’s cars but rather emulating their methods. The Trump administration imposed a 27.5% tariff on all Chinese vehicle imports. Now, under Joe Biden’s Inflation Reduction Act, generous subsidies are provided for locally produced EVs, excluding Chinese vehicles. Consequently, Chinese companies cannot compete in the US market due to these tariffs and subsidies.

On the other hand, the EU’s car market remains open to imports, causing a surge in imported vehicles, including Chinese cars. European automakers were slow to introduce competitive EVs of their own, and the cheaper prices of Chinese cars make them an attractive choice for consumers. However, European nations are beginning to question the wisdom of this approach. German automakers oppose protectionism, fearing that China may restrict their access to the vast Chinese market in response. France, on the other hand, has implemented environmental rules that effectively limit EV subsidies to European-made cars. Senior French politicians have called for dumping investigations and even tariffs.

Recent news of overcapacity in the Chinese EV market further amplifies concerns. Leading Chinese EV startup Nio had to reduce prices by $4,200 per car in response to sluggish demand in China. Following China’s playbook in sectors like steel and solar panels, they may resort to ramping up cut-price exports to address domestic overcapacity.

If this happens, the implications for global trade would be far-reaching. Car parts and finished autos amount to over $1 trillion in trade annually. Alongside electronics, automobiles have one of the most complex and internationalized supply chains in the world.

Escalating tensions in the auto trade would also impact the semiconductor industry, which has seen its own share of recent disputes. A typical EV contains over $1,000 worth of semiconductors, mostly produced by Western companies. If Chinese cars are locked out of foreign markets, it raises the question of whether foreign chips will be allowed in Chinese cars. Beijing can use local content requirements as a justification to further fragment trade in one of the world’s most globalized industries.