Tommaso PARDI

Director of Gerpisa, CNRS

In just four years, Europe has become the main destination of fast-rising Chinese automotive exports. Between 2000 and 2024, global Chinese exports of batteries, auto parts and cars increased by €145 billion, and almost one third of this staggering growth went to Europe (€45 billion). 

The causes and consequences of this disruptive trend are clear. On the one hand, huge and still growing overcapacities built by China’s automotive sector are pouring into the single market at an increasing rate. On the other hand, European companies do not stand a chance against price competition that is currently 30-40 per cent below their best prices for equivalent-quality products. The European supply chain will be the first to disappear; European carmakers will eventually follow suit.

The ‘Chinese challenge’ is not an entirely new phenomenon. Europe has faced similar challenges in the past: the American challenge in the 1960s and the Japanese challenge in the 1980s. The questions raised by these past challenges were fundamentally the same: how to protect domestic markets against fast-growing imports and direct foreign production? How to catch up with the competitive advantage acquired by other countries in key strategic industries? How to navigate the economic and social crises generated by these competitive gaps and their trade consequences? 

The answers Europe found to successfully meet these challenges in the past were bold combinations of trade, currency and industrial policies. 

For instance, in the case of the booming Japanese car exports of the 1970s, an eighteen-year market quota was negotiated between 1981 and 1999, freezing the Japanese market share below 12 per cent, and a strict local content policy was forced upon Japanese direct investments in car manufacturing (80 per cent minimum European content after two years of production). 

The Chinese challenge is bigger and faster than the Japanese challenge and much more threatening, precisely because Europe has so far struggled to develop the same type of bold, proactive and protective approach. To date, the unique concrete European response to the fast-rising imports of Chinese batteries, cars and auto parts in the single market has been the ‘exceptional’ tariffs on imports of Chinese battery-electric vehicles implemented by the EU in 2024. But even these modest tariffs (between 8 per cent and 35 per cent, depending on the automaker, when the international average is well above 50 per cent and up to more than 100 per cent) have been met with strong resistance within the EU. Germany and four other member states voted against their implementation at the EU Council level, twelve countries abstained, and only France, Italy and eight other countries voted in favour. 

The ‘Strategic Dialogue on the Future of the European Automotive Industry’ launched in January 2025 by the European Commission was meant to reach a more consensual and ambitious view on how to address the Chinese challenge, in particular via the introduction of local content policies to protect the European supply chain from aggressive Chinese economic dumping and avoid unfair competition from new Chinese assembly car factories in Europe. After more than one year of tense negotiations, the result is neither consensual nor up to the task of meeting the Chinese challenge. 

A principle of ‘European preference’ for new cars ‘made in EU’ has been introduced in the Industrial Accelerator Act (IAA) proposed by the European Commission in March 2026. However, it only applies to electric and plug-in vehicles (currently less than 30 per cent of new car sales), it does not include automotive parts, it is set at a low level (70 per cent versus a current average level of local EU content of 85 per cent) and it considers as ‘made in EU’ also auto-parts imported from third countries with which the EU has free trade agreements (more than eighty). 

There are two main problems in the text proposed by the European Commission. 

The first problem is that the text strives to strike an impossible compromise between three conflicting approaches: a) the ‘made in EU’ approach, pushed by France, the EC’s directorate general ‘Growth’ and auto-suppliers, which can meet the Chinese challenge but requires a much more ambitious version of the IAA and a clear break from the WTO order; b) the ‘made with China’ approach, pushed by Germany and carmakers, which gives to EU-based carmakers a substantial margin to keep reducing their production costs via Chinese products and sourcing, but at the cost of disrupting the European supply chain and increasing the European dependence on Chinese companies, products and technologies; and c) the ‘made with Europe’ approach, pushed by Northern European countries and the EC’s directorate general ‘trade’, which tries to preserve the WTO order but at the cost of taking most of the substance out of the ‘made in EU’ approach. So far, Europe has not been able to decide where it stands regarding China and the WTO. If it keeps delaying the decision, it will simply be too late to make headway in any direction. 

The second problem is that the text conflates the objective of protecting the strategic industries we already have (automotive manufacturing, for example) with that of building the strategic industries we do not yet have (battery manufacturing, for example). The result is the introduction of ‘made in EU’ requirements mainly for the industries that we do not yet have (without any significant industrial policy attached), while almost no protection at all is given to the industries that we do have, but which we will lose to Chinese competition without an effective ‘made in EU’ safety net. 

Despite this lack of consensus and confusion on how to move forward, the diagnosis behind the IAA is clear and well established: stopping the Chinese expansion immediately has become the condition sine qua non of short-term survival for the European automotive sector and the first step in meeting the Chinese challenge. 

The European Commission proposal for the IAA clearly is not up to this task and must be amended to include internal combustion engines and hybrid electric vehicles, to include auto-parts along with cars and vans, to raise the bar to 80 per cent for cars and vans, and to exclude third countries outside the EU from the European preference.

Photo credits: Shutterstock/servickuz