In a recent summit between the European Union (EU) and China, concerns over China's overcapacity in the electric car industry took center stage. The EU is growing increasingly wary of China's dominance in advanced sectors, including wind turbines, solar energy, and now, battery-powered electric vehicles.

Despite efforts to consolidate the sector, over a hundred Chinese firms continue to produce electric vehicles, with some brands achieving world-class status. These Chinese companies have gained a competitive edge through a combination of subsidies, coercive transfers of foreign technologies, and an agile business approach. However, the alarming consequence of this strategy is the production of far more cars than China's domestic market demands.

European governments have begun considering protectionist measures to safeguard their own industries. In October, the European Commission initiated an investigation into Chinese electric vehicles, examining potential subsidies that may violate international trade laws and adversely impact European firms. If found guilty, punitive tariffs could be imposed, further escalating tensions between the EU and China.

German car manufacturers, who still maintain substantial operations in China despite declining profitability, are particularly concerned about potential retaliation. During a recent speech, Ursula von der Leyen, head of the European Commission, acknowledged the issue of overcapacity in China and highlighted the negative consequences of dumping subsidized Chinese cars on European markets, especially if China's economy slows down and its domestic demand remains stagnant.

China's overcapacity in the electric car industry has not gone unnoticed among international experts. At the Stockholm China Forum, a gathering of American, Chinese, and European officials and scholars, participants discussed the potential disruptions caused by China's manufacturing overcapacity on European efforts to "de-risk" relations with China.

Europe now faces a critical dilemma, attempting to balance its three key goals: embracing green technologies, reducing dependencies on Chinese products, and preserving industrial jobs. Currently, Europe cannot achieve all three simultaneously.

Choosing to prioritize the environment by importing Chinese-made electric vehicles and other clean technologies risks lost businesses and jobs within Europe. Conversely, protecting European industries by blocking Chinese vehicles would hinder Europe's green aspirations while negatively affecting drivers.

Moreover, Europe faces the challenge of reducing its dependencies on Chinese supply chains. China has imposed export controls on critical minerals necessary for manufacturing advanced batteries, undermining Europe's ability to scale up electric vehicle production. Without access to these minerals, Europe may face limitations in its low-carbon revolution.

China, on the other hand, remains steadfast in its manufacturing investments, confident that its market power and control of clean technologies will force Europe to back down. Chinese officials hope that key European governments will not fully support the EU's stance on Chinese overcapacity.

If a mutually agreeable resolution is not reached, the situation could escalate into a full-fledged trade war between China and the EU, with repercussions for both sides.

As Europe grapples with the political risks posed by China's massive overcapacity in the electric car industry, policymakers face challenging decisions that could shape the future of the region's economy and its relationship with China.

This article appeared in the China section of the print edition under the headline "How trade wars start."

Published: December 9th, 2023