Over the past decade Chinese electric vehicles (EVs) have developed remarkably. In 2022, the sales volume of EVs in China reached 25.6% of the total sales of new cars, three years ahead of schedule, to meet the 25% target set in China’s New Energy Vehicle Industry Development Plan (2021–2035).

This raised questions of why Chinese-made EVs have come to dominate the market, why the European Union (EU) has taken measures to restrict imports of Chinese-made EVs, and how to resolve this conflict with Europe over Chinese EV dominance.

In 2024, China sold 12.87 million EVs, accounting for 40.9% of the total new car sales. EVs accounted for 21.8% of China’s vehicle exports in 2024, with 1.28 million EVs shipped out of 5.86 million vehicles.

The United States and the EU have responded with trade restrictions and accused China of using distortionary subsidies to push expansion of its EV sector.

In October 2023, the EU initiated an investigation into subsidies in the Chinese EV industry and EU imports from China. One year later, the European Commission concluded its investigation, imposing countervailing duties on EV imports from China for five years. Valdis Dombrovskis, then European commissioner for trade, announced that the tariffs would average 20.8%, on top of an existing 10%, claiming they would not close the market to Chinese imports but level the playing field.

The European Commission’s Draghi report that was commissioned in parallel with its investigation of Chinese subsidies, estimated that Chinese subsidies for clean-tech manufacturing, as a share of gross domestic product, were twice as high as those in the EU. According to the International Energy Agency, these policies have left the EU with a significant cost disadvantage — the cost of manufacturing battery cells in China, for example, is 20%–35% lower than in Europe.

China has countered that US and EU firms also benefit from subsidies to support production but that Chinese firms have become more competitive.

Neither side tells the full story.

Subsidies have indeed played a crucial role in the early phase of China’s EV development and have been widely used to support brands that would likely be phased out if not for their role protecting the economy and jobs.

Estimates by the US Center for Strategic and International Studies suggest that cumulative government support to the EV sector in China totaled RMB393 billion (US$58 billion) between 2009 and 2017 and that this support jumped to RMB560 billion (US$78 billion) from 2018 to 2021.

The Organisation for Economic Co-operation and Development (OECD) estimates that Chinese industrial firms received government support equivalent to 4.5% of their revenue. The support is largely in the form of below market rate lending. With additional tax concessions and government grants, Chinese firms may receive up to nine times more government support — relative to sales — than comparable OECD firms.

But the market advantage of Chinese EVs is not solely due to subsidies. Early industrial layout, long-term industrial policy guidance, and long-term support that promoted large-scale domestic demand, more than producer subsidies, were key factors. Continuous increases in research and development investment (upgrading batteries and intelligent technology), industrial production chain advantages, and a rich pool of engineers and skilled workers also contributed to Chinese EV market dominance. An especially large domestic market, strengthened by internal competition, provides huge pressure to lower production costs and prices.

The European Commission cannot afford to take a laissez-faire approach to Chinese EV imports. Simulations by the European Central Bank suggest that if subsidies to the Chinese EV industry follow a similar trajectory to the photovoltaic solar industry, EU domestic production of EVs would decline by 70% and EU producers’ global market share would fall by 30%.

Chinese car companies and the Chinese government are both taking action to alleviate this problem in European markets.

EU tariffs are imposed only on EVs imported from China. In response, Chinese brands are moving to expand their manufacturing presence in Europe to circumvent these measures.

But there are several issues to consider when Chinese automakers go global.

Chinese companies have to recognize that, when building factories overseas, it will be difficult to replicate the advantageous cycle operating in China. It is also expected that the EU will tighten local content requirements to a minimum value that must be added in EU countries. Chinese EV and battery manufacturers should also be prepared to make technology transfers in return for market access if they invest in the EU.

To safeguard its interests, the Chinese government has filed an application under the Multi-Party Interim Appeal Arbitration Arrangement against these measures within the World Trade Organization (WTO). China has also requested WTO consultation over Canadian, EU, and Turkish tariffs on EVs. China has additionally pushed for a minimum import price that would avert the need for extra tariffs.

While minimum pricing has been used for homogeneous commodities, EVs are highly sophisticated products — with multiple models and configurations sold at substantially different prices. The large number of product types carries a high risk of cross-compensation and is likely to render minimum pricing unenforceable and impractical.