Tesla’s Shanghai facility, which opened in 2019 and was the first entirely foreign-owned facility in the world’s largest car market, was a watershed moment for electric vehicles and international carmakers. But it also signaled the start of a larger trend that has the potential to upend global manufacturing structures, usher in a new era of deindustrialization in Europe, and elicit trade tensions comparable to those of the 1980s. China’s rise as a vehicle exporter is part of this trend.
China’s car exports are booming, according to Gregor Sebastian and François Chimits of the Mercator Institute for China Studies, with the majority of them going to Europe. China exported 0.5 million electric vehicles in the year 2021, up from nearly nothing a few years earlier, and its market share in Europe was second to only Germany’s. Europe may soon find itself in a trade imbalance with China as the car sector shifts to electric vehicles.
That would be a huge change in the market structure. Europe and Japan are already buying consumer items from China while sending luxury vehicles — or their most critical components — the other way. The insignia on Chinese vehicles that arrive in Europe may or may not betray their true origins. Teslas from Shanghai account for about half of them, with Dacia, Polestar, and BMW rounding out the rest of the lineup. Although Tesla just constructed a plant in Germany, other manufacturers’ production selections show that China has a significant cost advantage.
The ramifications will be enormous if batteries substitute combustion engines and China dominates vehicle manufacturing. Europe’s and Japan’s prosperity is based on automobile manufacturing. Millions of people are employed in steady, skilled manufacturing jobs by companies like Toyota and Volkswagen and their supply chains. National current account surpluses are supported by them. A transfer in vehicle manufacturing location would have a far higher impact than previous migrations of steel, electronics, and shipbuilding.
Sebastian and Chimits suggest that Europe should now be fighting back against Chinese industrial regulations that supply cheap funding to carmakers and bind electric vehicle incentives for Chinese customers to domestic production. Meanwhile, European consumers can benefit from EU subsidies for Chinese-made electric vehicles, which have a 10% tax compared to the US’s 27.5 percent.
Fair and reciprocal conduct should be a top priority for Europe. Competitiveness, on the other hand, cannot be replaced by protection. Even if the United States and Europe impose hefty tariffs on their car markets, the reward in the worldwide automotive trade is to manufacture for the numerous wealthy nations — from Australia to Norway and the Middle East — that lack the capacity to support their automobile industries.
While electric vehicles are high-tech, they are not complex, which is a challenge for Japanese and European automakers. Industrial prowess in the twentieth century was based on internal combustion engines. A vehicle constructed around one is a complicated assembly of crankshafts, pistons, fuel pumps, turbochargers, and a slew of other components that must all be learned and integrated. It is still a complex task, requiring deep technical understanding and a broad network of suppliers instead of access to the lowest available labor prices, even after 150 years of progress.