The opening of Tesla’s Shanghai factory in 2019 was a breakthrough for electric vehicles and for overseas carmakers: it was the first wholly foreign-owned plant in the world’s largest car market. But it also marked the start of an even bigger trend, which promises to upend the structure of global manufacturing, bring a new wave of deindustrialization to Europe, and trigger trade tensions of intensity to match the 1980s. That trend is the emergence of China as a car exporter.
As Gregor Sebastian and Francois Chimits of the Mercator Institute for China Studies documented recently, China’s car exports are taking off, many of them are electric vehicles and most are going to Europe. From almost nothing a few years ago, China exported half a million electric vehicles in 2021, and its market share in Europe was second only to Germany’s. As the car market goes electric, Europe could quickly find itself running a trade deficit with China in automobiles.
That would be a dramatic shift in market structure. Europe and Japan now buy consumer goods from China and send luxury cars — or their most vital components — in the other direction. The badges on Chinese vehicles arriving in Europe do not necessarily reveal their origins. About half of them are Teslas from Shanghai; other marques include Dacia, Polestar and BMW. Tesla has recently opened a European plant in Germany, but the production decisions of other makers suggest a meaningful cost advantage for China.
If batteries replace combustion engines, and China dominates car production, the disruption will be immense. Automobile manufacturing underpins the prosperity of Europe and Japan. Companies such as Toyota and Volkswagen, plus their supply chains, employ millions of people in stable, skilled manufacturing jobs. They underpin national current account surpluses. A shift in the location of car manufacturing would have an even greater impact than the past migrations of steel, electronics or shipbuilding.
Sebastian and Chimits argue that Europe should already be retaliating against Chinese industrial policies, which provide cheap capital to carmakers and tie electric vehicle subsidies for Chinese consumers to local production.
Meanwhile, Chinese-made electric vehicles are eligible for EU subsidies to European consumers and they attract a tariff of just 10 percent compared with the 27-5 percent levied by the US.
Europe should indeed demand fair and reciprocal treatment. Protection, however, is no substitute for competitiveness. Even if the US and Europe wall off their car markets with high tariffs, the prize in the global automotive trade is to produce for the many wealthy countries — from Norway to Australia and the Middle East — that lack the scale to support a car industry of their own.