High-voltage trade: How Europe should fight the electric vehicle wars

As the European Union attempts to de-risk its trade with China, electric vehicles (EVs) present a particularly high-voltage challenge. The European Commission is currently investigating whether Chinese EV imports are hurting European producers, which could lead it to impose import tariffs on Chinese EVs. It is widely acknowledged that Beijing’s industrial policies helped spark the EV revolution. But the EV probe is a double-edged sword: while it could help protect Europe’s industrial core against a likely onslaught of Chinese car exports in the near future, import tariffs may also end up raising the costs of Europe’s own greener future.

The EV industry shows the challenges of de-risking in practice. China occupies strategic positions at every stage of the EV value chain – from the mining of raw materials to the final assembly, making it almost indispensable to Europe’s clean energy transformation in the field. To fight the EV wars without shooting itself in the foot, the EU needs a wider strategy beyond tariffs that makes strategic use of its interdependencies with other emerging economies, employs security instruments to limit critical dependencies, and provides financial incentives to de-risk the most sticky dependencies.

Chinese overcapacities and de-risking

For now, most EV imports from China are of American and European brands made in China – Teslas produced in Shanghai, for example. But this picture could soon change significantly: faced with an increasingly troubled economy, Beijing has been shifting public money into the manufacturing sector – some $680 billion in the first nine months of this year alone – with much of it directed at producing more EVs and solar panels, along with other high-tech goods.

Supported by subsidies and tax benefits, Chinese companies will likely cement the dominance they already enjoy along the EV supply chain, specifically for lithium-ion batteries. As the most valuable piece in any EV, battery dominance can be a major market-shaping tool. Producing a battery pack in China is around 40 per cent cheaper than it is in Europe and some two-thirds of all lithium-ion batteries are produced in China. China also commands the global production of battery components such as cathode (80 per cent) and anode materials (over 90 per cent). Looking ahead is even more daunting: China accounts for 98 per cent and 93 per cent of all announced manufacturing capacity expansion plans until 2030 for cathode and anode production. Similarly, China dominates the value chain of the raw materials needed to make batteries. Despite many efforts by Europeans and the G7, the project pipeline for processed battery materials does not show any meaningful de-risking on the horizon. China’s battery giants CATL and BYD have made significant investments in lithium mines and processing facilities in South America and Africa. This power over supply allows them to cut battery prices even further and cement their market share.

Where European companies look to de-risk regardless, Beijing uses its power to maintain the status quo. Northvolt, one of the few European battery players, has been on the receiving end of a Chinese ban on graphite exports – used to make anodes in particular – to Sweden since 2020, when Europe attempted to expand its production of battery components. Then, earlier this year, the Chinese battery manufacturing company Putailai announced it was building Europe’s largest anode production factory in Sweden, with Northvolt as its first customer. Northvolt’s recent announcement of a breakthrough in scaling the production of sodium-ion batteries (which relies on significantly fewer inputs from China) could disrupt that dynamic – but China is unlikely to sit by and let its chokepoint be weakened.

While China’s early industrial policy may have been a global public good by allowing the commercialisation of a nascent clean technology, Beijing is now expanding its dominance. Its economic policy will produce overcapacities that could strangle the healthy global competition for the best EV technologies, business plans, and local value distribution and  destroy markets elsewhere, burying any semblance of de-risking with it.

To reduce China’s dominance over the EV industry while lowering the sector’s emissions, Europe needs to introduce additional tactics into its approach:

1. De-risking with partners

Cutting out Chinese suppliers abruptly is not possible anymore, for diversified inputs, like raw materials, are sparse and production costs are high in Europe. Leaving current dynamics unchecked, however, will cement Europe’s long-term dependence on China, stifling any opportunities to de-risk down the line.

De-risking from China in EVs effectively means building an alternative value chain from mine to car. Europe is slowly building its climate and infrastructure diplomacy with emerging economies in Africa and beyond. But European economic statecraft in this realm focuses too much on research and innovation cooperation. To stand a chance at de-risking, it needs to commit more seriously to commercial and industrial cooperation with partners, that is, developing industry and upgrading technology in partner countries in order to friend-shore elements of the EV value chain. As ECFR colleagues have argued in various articles, this external industrial strategy will require direct financing through the EU budget, de-risking of green investments through financial guarantees, and general capacity building in partner countries.

2. Using the economic security toolbox

Chinese firms are increasingly venturing abroad, building regional value chains in South-East Asia, Africa, and Europe. In Europe alone, Chinese battery plant investments soared to over $24 billion in 2022. Encouraging these investments is generally in European countries’ interests as open economies that seek international competition.

But member states must ensure not only that competition is fair, but also that foreign investors do not cement an over-dependence on single suppliers. Governments should use their national foreign direct investment (FDI) screening tools to ensure foreign investors are embedded in and strengthen the European industrial base and bring complementary foreign expertise. Put differently: limiting dependencies in critical sectors, which includes clean energy technologies, is a national and economic security objective for Europe. Security tools, like FDI screening, must therefore enable the EU to achieve these objectives if needed. The review of the EU’s FDI screening regulation provides an opportunity to enshrine de-risking goals deeper in Europe’s economic security toolbox.

3. Financial incentives

Where risks are greatest, such as in raw materials, the EU needs to provide financial support. The recently agreed Critical Raw Materials Act, for example, acknowledges that the EU is in a global race for materials. But its goals of producing 10 per cent and refining 50 per cent of Europe’s raw material needs on the continent by the end of the decade come with little financial backup.

Likewise, calls for companies and governments to consider the real costs of risky foreign suppliers and to accept extra costs for ‘de-risked suppliers’ may ring hollow when, for example, a permanent magnet produced in Europe costs some 20-30 per cent more than it does in China.

European governments can bridge this de-risking price gap with targeted financial incentives. For example, nearly all member states now offer some form of fiscal support to stimulate the market uptake of EVs – but none makes these incentives conditional on diversified material or component supply chains of the producers. Governments can also support long-term offtake agreements between miners and EV manufacturers by agreeing to cover any price differences between Chinese suppliers and de-risked suppliers (for materials not traded in high volumes such as rare earths or copper).

Europe can no longer be frozen by the EV conundrum. As it evaluates Chinese EV imports, it should be prepared to take a broader approach to the industry to de-risk from Chinese EVs without simultaneously pulling the brakes on its own green ambitions.