The automotive industry is being shocked by China. Industrial policy has super-charged Chinese firms’ rise to become the main manufacturers and suppliers of electric vehicles (EVs). 

As domestic demand has eased and excess capacity has emerged, China has increasingly turned to export markets. 

This is not entirely a China story though. Western brands have a prominent role in Chinese exports, complicating the Western policy reaction, particularly in Europe. 

The US is determined to keep China out of its domestic market, with a Trump presidency potentially leading to a more aggressive tariff and rules of origin policy. 

In contrast, the EU will take a more measured approach as it seeks to remain WTO-compliant and advance its green transition. This approach is however likely to do little to protect its auto supply chain. 

Reducing reliance on China remains a Western policy priority, but decoupling the EV supply chain may prove challenging given China’s dominance in the critical minerals and battery production spaces. 

Building domestic capacity and new sources of critical raw materials risk amplifying excess capacity. It is unlikely that US and European policymakers have fully understood the cost of decoupling. 

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