In 2023, China’s exports of passenger cars grew by 62%, and for the first time in history the country overtook both Germany and Japan to become the world’s top car exporter. Furthermore, while most of the vehicles produced by European carmakers continue to be internal combustion models, the lion’s share of China’s exports to the EU are electric vehicles (EVs). In fact, since 2021, Chinese shipments of EVs to Europe have increased by over 350%. This meteoric rise in exports has startled China’s trade partners in the West, who worry that Chinese dominance in the sector could harm their economies and contribute to further deindustrialisation and the job destruction this entails.

Part of the impetus behind China’s generous investment into electric vehicle development over the past two decades has been the desire to mitigate its dependence on foreign oil; another important factor was the need alleviate air pollution inside its megacities, where nearly a third of the smog was caused by the combustion engines of cars and public transport. In the early stages of the industry’s development, local governments in each of China’s regions supported their own local producers, resulting in a proliferation of small and medium electric car manufacturers. However, much of the regional governments’ income has historically been generated by selling land to property developers, and the bursting of the real estate bubble has significantly curtailed their capacity for paying out subsidies.

This partial cut-off from state support resulted in an aggressive consolidation of China’s electric car sector – Bloomberg estimates that out of 500 EV companies in 2019, roughly 100 are still in business today, and out of these less than 30 are expected to survive long term. In other words, the reduction in subsidies has engendered cut throat completion in the industry, and a desire to make up for diminishing profit margins by increasing market share. At the same time, the economic downturn resulted in reduced demand within China itself, leaving EV makers with excess production capacity which could only be redirected toward foreign markets.

Last September, President of the European Commission Ursula von der Leyen announced an anti-subsidy investigation into the imports of electric vehicles from China. According to Ms von der Leyen, “global markets are now flooded with cheaper electric cars. And their price is kept artificially low by huge state subsidies.” While the claim that China is subsidizing EV production is undoubtedly true, the same could be said of most European countries who offer substantial rewards to incentivize the adoption of electric vehicles.

Moreover, the timing of the probe is bizarre, as it comes at a moment when Chinese state support for the EV sector is being rolled back and in some cases phased out altogether. For example, the EV purchase subsidy of 12,600 Yuan ($1,750) was discontinued at the end of 2022, and the purchase tax exemption is scheduled to end in 2027. But more importantly, support from the regional governments for local electric car makers has all but dried up.

In April 2024, China’s Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME), released a statement criticizing the European Union’s probe into China’s subsidies of the EV industry as “distorted and unobjective.” CCCME complained that the proceedings lacked transparency, that EU carmakers were allowed to get away with providing inadequate data, and that the European Commission had cherry-picked the sample of Chinese companies under investigation in order to reach a predetermined outcome. CCCME’s spokesperson said that the probe is a “perfect example of the EU’s double standards,” and hinted that its purpose is to justify the bloc’s turn toward protectionist policies.

Nor is this criticism wholly mistaken. In 2018, the Trump administration raised the tariff on Chinese-made vehicles from 2.5% to an eye-watering 27.5%, a measure which was kept in place by the Biden administration. The result is that to this day no Chinese electric cars are sold in the United States.

Currently, the EU tariff on Chinese cars is 10%, but what is at stake in the case of the probe is that, if China is found guilty of anti-competitive practices, Brussels may end up slapping similar punitive tariffs on Chinese EVs. For China’s automotive industry this is almost an existential threat since, with domestic demand stagnating and the United States market closed to it, Europe is the only potential buyer that has both the EV charging infrastructure and is large enough to absorb China’s excess production. On the one hand, Beijing is trying to export its way out of its economic missteps, but on the other, protectionist measures would mean putting the interests of Europe’s carmakers ahead of those of the European consumers and of environmental concerns.

Chinese trade officials are quick to point out that Chinese EVs don’t directly compete with European ones, since they largely target a different market segment. Most European manufacturers produce higher end models of electric cars, which are bought by wealthy consumers. By contrast, Chinese companies manufacture cheaper vehicles which are targeted at the mass market – a good example is the BYD Seagull model, which in China retails from just 69,800 Yuan ($9,700), indicative of the race to the bottom currently taking place in the Chinese EV industry.

The concern among European carmakers is that if China is allowed to capture the lower end of the market, it’s only a matter of time before the Chinese companies will move upmarket and drive domestic manufacturers out entirely. The first reaction to Chinese imports has been a decrease of EV prices across the board, but this is unlikely to help European manufacturers retain market share in the face of Chinese competition. So, the industry is now turning to Brussels, and asking for protection from its Asian rival.

The growth of China’s EV industry has been nothing short of a revolution – it went from 500 electric cars on the streets of Shanghai in 2011, to being the undisputed world leader today, with Chinese carmakers accounting for half of all global EV sales. Now it’s time for the rest of the world to come to terms with it. The European Union’s automotive sector makes up 3% of the bloc’s GDP, and directly employs four million people. Stepping in to protect employment, like the United States did, may be the right call, but it would come with a steep price tag. Not only would it mean more expensive electric cars, but it would also slow the fight to curb greenhouse gas emissions. Ultimately, the choice is shaping up to be a lose-lose scenario for Brussels policy makers.