As Chinese cars speed into global markets, tensions will only escalate

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The writer is author of ‘Chip War’

China’s emergence as the world’s largest auto exporter caught many people — including the biggest carmakers — by surprise. Cars used to be a rare type of manufacture in which western companies retained durable technological advantages. The transition to electric vehicles has given Chinese companies an opportunity to leap ahead, threatening to reshape trade flows in the process.

The surge of Chinese cars into foreign markets poses two dilemmas that will complicate trade. The first relates to security. New cars feature dozens of sensors, complex software systems and semi-autonomous capabilities. Western leaders have only just begun to consider the security implications of fleets of foreign-made, sensor-stuffed cars on their roads. Beijing, by contrast, has imposed strict data localisation rules on Tesla — China is its biggest market outside the US — and banned Tesla’s cars from sensitive locations.

Italy’s recent decision to limit a Chinese shareholder’s influence in Pirelli, a leading tyremaker, signals a change. The Italian government may be partly motivated by protectionism but it also cited Pirelli’s advanced Cyber Tyre, which collects and transmits driving data, as a rationale for curbing China’s influence in the company. Now even tyremakers are tech companies, the auto industry is unprepared for an intensified focus on security concerns about Chinese cars.

The second challenge is to Europe’s industrial base. Legacy automakers, especially in the price-sensitive middle market, face tough competition. Chinese cars source components mostly from Asia, not from Europe; facing a surge of Chinese car imports, some European businesses are calling for help. Chinese EVs are high quality, though their price competitiveness has benefited from a decade of protectionism and government support totalling tens of billions of dollars annually. Western car companies are no strangers to bailouts or public ownership stakes, but the scale of support to China’s EV industry far exceeds other states’ generosity.

History suggests that governments will be loath to let their companies lose auto market share. Japan’s success in selling to US consumers in the 1970s and 1980s caused tariff threats and currency disputes, leading American auto workers to bash Japanese cars with baseball bats. Tension was defused only when Japanese companies opened factories in the US.

This time, the US is not bashing China’s cars but copying its methods, imposing major trade barriers such as the Trump-era 27.5 per cent tariff on imports of all Chinese vehicles. Now, Joe Biden’s Inflation Reduction Act provides generous subsidies for EVs that meet local content thresholds, excluding Chinese vehicles. In the face of these tariffs and subsidies, Chinese companies simply can’t compete in the US.

But the EU’s car market remains open to imports. The continent’s EV subsidies have caused a surge of imports — partly because Chinese cars are cheaper and partly because European automakers were late in rolling out competitive EVs of their own. European nations are beginning to debate the wisdom of this approach. German automakers oppose protectionism lest Beijing respond by limiting their access to the vast Chinese market. France, however, recently announced environmental rules that, in practice, will ensure EV subsidies only apply to cars made in Europe. Senior French politicians call for dumping investigations — and even tariffs.

News that Chinese EV makers now face overcapacity at home escalates these concerns. Nio, one of the country’s leading EV start-ups, cut prices by $4,200 per car in June, responding to slowing demand in China. From China’s playbook in sectors from steel to solar panels, domestic overcapacity may be addressed by ramping up cut-price exports.

If so, the implications for trade would be wide ranging. Trade in car parts and finished autos exceeds $1tn annually. Alongside electronics, autos are one of the most complex and internationalised supply chains.

Escalating auto trade tension would have an impact on another sector that has seen plenty of recent disputes: semiconductors. A typical EV has more than $1,000 of semiconductor content inside. The chips that manage EV power supply are mostly produced by western companies. If Chinese cars are locked out of foreign markets, will foreign chips be allowed in Chinese cars? Beijing would need only to point towards the IRA’s local content requirements as justification for further splintering trade in one of the world’s most globalised industries.

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