Europe’s difficult path on China’s EVs is a lesson for North America

North America and Europe are facing an economic security crisis in the making, as China muscles its emerging electric vehicle monopolies and overcapacity into the Western market.

Europe has already shed more than 10,000 automotive jobs in the face of Chinese EV sales to the European Union. The U.S. could be cornered into similar job losses. 

For a critical emerging technology disrupting an industry sector responsible for 3 percent of our national GDP and 22 percent of all trade in North America, the leaders of the U.S., Mexico and Canada simply cannot allow that.

North America and the European Union, the world’s two largest free trading blocs, face a similar dilemma: China’s non-market tactics to stifle EV competition and circumvent tariffs are restricting the development of European and North American EV manufacturing, supply chain and marketing industries.  

China has used massive subsidies, procurement contracts and tactical regulations to create its monopoly on critical minerals processing, midstream battery components, lithium-ion batteries, and the EV technology that now seeks to flood Western markets. European car companies are feeling the squeeze from their Chinese competition, with iconic German brands like Volkswagen facing falling sales and plant closures.  

China produces 90 percent of the active material for EV battery cathodes and 97 percent of the active material needed for anodes. It also assembles 66 percent of the world’s EV battery cells. This provides China with unrivaled leverage over the entire automotive supply chain — which allows it to destabilize prices, drive out competitors and set standards that affect how global car manufacturers do business.

In Europe, EV dependency goes even further. Major Chinese investments in batteries and vehicle factories on the EU’s eastern flank provide China with “made-in-Europe” labels for products that might otherwise face import obstacles, such as tariffs designed to counter China’s non-market practices. 

For example, in Debrecen, Hungary, China’s battery giant, CATL, made its biggest-ever overseas investment of approximately $9.7 billion. Meanwhile, EVE Energy, another Chinese battery manufacturer, made a $1.32 billion investment to produce large cylinder batteries in Debrecen.  

Hungary now receives nearly half of China’s foreign direct investment into Europe — more than Chinese foreign direct investment into the United Kingdom, Germany and France combined.  

That investment may lead to jobs in the short term, but it also undermines the development of domestic suppliers across the entire free trade zone, creating dependencies that are exceptionally hard to dislodge. Major Chinese investments are popping up elsewhere in Europe, too, including in Spain and Turkey.  

Americans currently buy fewer EVs than Europeans, and the North American EV supply chain is still under development. But like the EU model, where components are largely sourced from around the trading bloc, much of the U.S. automotive sector co-produces automobiles with partner companies in Mexico and Canada.

American cars cross a North American border an average of eight times, capturing efficiencies along the way. But the North American free trade model is not without vulnerabilities. As in the EU, the penetration of one North American country by Chinese companies opens the door for tariff-free imports to the other countries in the bloc.  

Already, we see Chinese firms pushing their way into the Mexican EV market. BYD is currently in final talks to build one of the largest auto plants in Mexico. China’s Chery is looking for a factory site in Mexico. The Mexican government is in talks with China’s Ganfeng Lithium to exploit Mexico’s untapped lithium reserves, a key input in EV battery production.  

As of now, China’s footprint in Mexico remains modest, but cheap EV imports are already arriving in Mexican ports at a brisk pace. Currently, one out of every five new cars sold in Mexico is Chinese — a number that is likely to increase, as seven new Chinese car brands entered the Mexican market last year.  

The U.S., Mexico and Canada must develop a coordinated strategy that comprehensively mitigates the risks caused by China’s non-market practices, starting with more stringent requirements for “rules of origin” under the United States-Mexico-Canada Agreement which should require that Chinese manufacturers rely on North American-sourced components, materials, and labor.  

Tariffs are also essential, but they will be insufficient on their own if they do not further target mid-stream supply chain dependencies. The U.S., Canada, and the EU have all recently announced tariffs to keep Chinese EVs from flooding North American and European markets. But this will do little to solve the larger problem of China’s dominant role within EV supply chains. 

Targeted tariffs on key battery inputs — such as processed critical minerals, precursor cathode active material and cathode active material, foundational components of EV battery cell manufacturing — could further assist Western companies in competing against Chinese players. 

Mexico can also protect itself by implementing the proposed inbound investment review mechanism. Foreign direct investment should not undermine North American economic and national security. 

Investment review will also protect Mexico’s domestic manufacturing market from Chinese investments that risk hollowing out Mexico’s EV production capacity in the coming years. Canada is considering blocking Chinese investment into new auto-sector factories — Mexico should be considering the same thing. 

North America’s leaders need to develop a coordinated strategy to blunt China’s advances. We should be partnering with democratic allies globally to develop a resilient democratic EV supply chain — pushing back on China’s non-market monopolies from critical minerals to finished vehicles.  If we don’t do that now, we will regret it later. 

Elaine Dezenski is senior director and head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies, where Niko Stavropolous is a research intern.