China’s rise in electric vehicles is becoming one of the clearest tests of whether the global economy is moving away from the free-trade consensus that shaped much of the last three decades. Chinese manufacturers such as BYD have expanded rapidly, China has become the world’s largest automobile exporter, and inexpensive Chinese electric vehicles increasingly threaten established European, American, Japanese and Korean manufacturers. The United States and European Union argue that extensive Chinese subsidies, preferential financing and industrial policy may create unfair competition, while Beijing argues that its advantage reflects innovation, manufacturing scale and years of investment in batteries and clean technology. The disagreement appears to be about cars. It is really about a much larger question: what happens when the technologies required for the green transition become industries governments consider too strategically important to leave entirely to comparative advantage?
The conventional economic argument for trade is straightforward. Countries should specialise in goods they can produce relatively efficiently and exchange them with others. Consumers receive lower prices, firms gain larger markets and resources move towards their most productive uses. If Chinese companies can manufacture electric vehicles at lower cost than European or American firms, importing those vehicles should benefit Western consumers while accelerating decarbonisation. A cheaper EV makes switching away from petrol more affordable, and faster adoption reduces transport emissions more quickly. From that perspective, restricting Chinese imports because domestic manufacturers cannot compete looks like ordinary protectionism: consumers pay more so politically influential producers can avoid competition.
The industrial-policy argument begins from a different premise. Electric vehicles are not merely another consumer product. Cars support enormous manufacturing ecosystems involving batteries, semiconductors, steel, software, chemicals, charging infrastructure and millions of jobs. Governments also expect transport electrification to become a central component of the twenty-first-century economy. Losing domestic EV production today could therefore create technological and industrial dependencies lasting decades. A government may rationally accept higher prices now if preserving production creates future innovation, employment and strategic resilience. The disagreement is therefore not simply free trade versus protectionism. It concerns the time horizon over which economic efficiency should be measured.
China itself demonstrates why the distinction matters. Its present EV advantage did not emerge from a textbook laissez-faire market. For years, national and local governments supported electric vehicles through consumer subsidies, tax incentives, procurement, industrial policy, infrastructure and financing. Beijing also cultivated the battery supply chain, while Chinese firms developed extraordinary manufacturing scale and competed intensely with one another. Government intervention helped create the market; competition inside that market subsequently forced companies to improve products and reduce costs. Treating China’s success as either entirely state-created or entirely market-created therefore misses the interaction between the two. Industrial policy created capabilities, while competition determined increasingly which firms could use those capabilities effectively.
This is a more useful way to analyse subsidies than asking whether subsidies are inherently good or bad. The relevant question is what they purchase. A temporary subsidy helping an infant industry overcome high initial costs can create productive capability that survives after support declines. A permanent subsidy keeping inefficient firms alive transfers resources from taxpayers towards politically connected producers. Both appear identically as government support in a budget. Their economic effects differ radically. Successful industrial policy therefore requires additionality: the state should generate investment, innovation or capacity that would not have occurred otherwise rather than paying companies for behaviour they already had incentives to undertake.
China’s EV industry increasingly appears to contain genuine productive capability rather than firms surviving only because government writes cheques. BYD overtook Tesla in global battery-electric vehicle sales during the final quarter of 2023, Chinese battery manufacturers hold major global market shares, and firms have developed increasingly sophisticated vehicles across several price segments. Government support remains relevant, but the existence of subsidies cannot by itself explain why particular Chinese companies have become internationally competitive. Many governments subsidise industries that never become global leaders. State assistance can create opportunity; firms still need to convert it into productivity.
That distinction matters for Europe because describing every Chinese cost advantage as “unfair subsidies” can become a convenient way to avoid examining European weaknesses. European manufacturers were global leaders in internal-combustion vehicles for decades and possessed enormous engineering capability, capital and brand recognition. Yet several Chinese firms moved faster into affordable electric vehicles and battery integration. If European policy responds only by making Chinese cars more expensive, domestic manufacturers receive additional time without necessarily receiving stronger incentives to use that time productively. Protection creates breathing space. It does not determine what firms do while breathing.
This is the central danger of tariffs. A temporary tariff can allow an industry to invest, restructure and reach competitive scale. The same tariff can allow incumbent firms to preserve margins while delaying difficult adaptation. Consumers pay the cost in both cases. The economic justification therefore depends on what happens behind the tariff wall. If European manufacturers use protection to reduce costs, develop batteries and improve EV technology, temporary protection may purchase strategic capability. If they simply sell more expensive cars into a protected market, the tariff becomes a transfer from European consumers towards European shareholders and workers.
Governments consequently need performance conditions. Industrial support should be linked to investment, productivity, innovation, exports or measurable technological capability. Firms failing to meet those conditions should eventually lose support. This is difficult politically because subsidies create constituencies. Once thousands of jobs depend on protection, removing it becomes electorally painful even when the original economic justification has disappeared. Temporary industrial policy has a tendency to become permanent because beneficiaries organise more effectively than dispersed taxpayers paying its cost.
This is a classic concentrated-benefits and dispersed-costs problem. A tariff protecting one automobile plant may preserve thousands of highly visible jobs concentrated in one region. Its cost is distributed across millions of consumers paying slightly more for vehicles. Workers therefore have strong incentives to lobby government, while each consumer has relatively little incentive to organise against the tariff. Political systems can consequently produce more protection than aggregate welfare alone would justify even without corruption.
The United States has moved further towards protection than Europe. Chinese-made electric vehicles already face a 27.5% US tariff, combining the ordinary automobile tariff with an additional levy introduced during Donald Trump’s trade confrontation with China and retained under Joe Biden. Chinese EVs consequently have only a tiny presence in the American market. Washington is simultaneously subsidising domestic clean-technology production through the Inflation Reduction Act, which ties some consumer incentives to North American assembly and battery sourcing. The United States is therefore attempting both to raise the cost of Chinese competition and lower the cost of domestic production.
This represents a significant change in American economic policy. For decades, Washington encouraged countries to liberalise markets, reduce trade barriers and allow production to move according to comparative advantage. National-security exceptions existed, but manufacturing location was often treated primarily as an efficiency question. US-China competition has changed the calculation because policymakers increasingly view semiconductors, batteries, critical minerals, telecommunications and clean technology through the language of economic security.
Once economic security enters the model, the definition of efficiency changes. The cheapest supplier may no longer be the economically optimal supplier if there is a meaningful probability that geopolitical conflict interrupts access. Economists can represent this as a risk-adjusted expected cost. Suppose a Chinese battery costs 10% less under normal conditions but carries a small probability of becoming unavailable during a major geopolitical crisis. The expected cost includes both the purchase price and the expected loss associated with disruption. Diversified supply can therefore be economically rational even when it appears more expensive on today’s invoice.
This is the intellectual foundation of de-risking. The objective is not necessarily eliminating trade with China. It is reducing dependence where concentration creates disproportionate vulnerability. The difficulty is determining which industries genuinely satisfy that condition. Semiconductors used in military systems have an obvious national-security dimension. The strategic argument for protecting every ordinary consumer product is much weaker. If governments describe everything from washing machines to solar panels as national security, de-risking becomes protectionism with a geopolitical vocabulary.
Electric vehicles occupy the difficult middle. Cars are not weapons, but automobile manufacturing supports large industrial ecosystems and technological capabilities. Batteries are relevant to electricity storage and military supply chains. Vehicles increasingly contain enormous amounts of software and data collection, raising cybersecurity concerns. Yet ordinary consumers also benefit substantially from affordable imports. The sector therefore contains legitimate security externalities without making complete exclusion economically obvious.
The environmental trade-off makes the decision harder. Europe wants rapid electrification because transport contributes substantially to greenhouse-gas emissions. Chinese manufacturers can potentially make EV adoption cheaper. Tariffs designed to protect European producers therefore risk raising the cost of climate policy. Governments may find themselves simultaneously subsidising consumers to purchase electric cars and taxing some of the cheapest electric cars available.
That contradiction does not automatically make tariffs irrational. A government can reasonably decide that long-term domestic production justifies higher short-term transition costs. It should acknowledge the trade-off honestly. Industrial resilience is not free. If Europe wants both rapid decarbonisation and domestic manufacturing, taxpayers and consumers may need to pay more than they would under unrestricted imports. Politics becomes the process through which society decides whether that insurance premium is worth paying.
China faces a mirror-image problem because its industrial success increasingly depends on foreign markets absorbing production. Chinese domestic investment has been extraordinarily high while household consumption remains relatively weak relative to the size of the economy. If manufacturing capacity expands faster than domestic demand, firms naturally seek customers abroad. Western governments increasingly describe this as overcapacity, arguing that subsidised Chinese production is flooding global markets and threatening domestic industries.
The word requires care. Economies do not possess one objectively correct quantity of production capacity. If a Chinese company can sell vehicles profitably abroad because its costs are lower, exports are not automatically evidence of economically irrational overcapacity. Germany, Japan and South Korea built successful development models partly through large manufacturing exports. The more relevant question is whether prices reflect genuine productivity or whether state support allows firms to produce and export persistently below economically sustainable cost.
That is difficult to measure because industrial ecosystems generate genuine scale economies. Producing millions of batteries lowers unit costs through learning, supplier clustering and fixed-cost distribution. Early subsidies can therefore create later cost advantages that remain even after direct support falls. At what point does an advantage initially created by industrial policy become ordinary comparative advantage? There is no simple line.
This exposes a weakness in the global trade system. World Trade Organization rules were designed primarily around an economy where states regulated markets but private firms generally competed within them. China’s model contains deeper relationships among state banks, local governments, industrial planning and private or state-owned firms. Identifying the exact monetary value of support becomes difficult because advantages can come through cheap land, preferential credit, infrastructure or procurement rather than one transparent subsidy cheque. Different economic systems therefore compete inside trade rules that assume more similarity between those systems than actually exists.
Western industrial policy is simultaneously making the distinction even less clear. The United States is spending enormous amounts supporting semiconductors and clean technology. Europe operates its own battery and green-industry programmes. Japan and South Korea support strategic industries. Once every major economy subsidises sectors considered important, complaints about Chinese state intervention become less about whether governments should intervene and more about how much intervention, under which rules and with what reciprocal access.
The world may therefore be moving from an era of liberalisation towards managed industrial competition. Governments will still trade extensively, but they will intervene more actively in where strategic production occurs. Tariffs, subsidies, investment screening, export controls and local-content rules become ordinary economic-policy instruments rather than exceptional responses to crises.
This can produce genuine benefits. Countries may build more resilient supply chains, accelerate green investment and reduce dangerous concentrations. It can also produce enormous inefficiency if every government attempts to replicate every strategic industry domestically. Not every country needs its own semiconductor fabrication industry, battery champion, solar manufacturer and electric-car company. Comparative advantage still exists even when geopolitics matters.
The optimal system therefore probably lies between hyper-globalisation and autarky. Firms should continue using global supply chains where disruption risk is manageable. Governments should diversify sectors where concentration creates systemic vulnerability. The analytical challenge is identifying the threshold between ordinary commercial dependence and strategic dependence.
Concentration is one useful measure. If 20 countries can supply a product competitively, dependence on imports may create little geopolitical vulnerability. If one country controls 80% of a critical processing stage, disruption becomes more consequential. Substitutability matters too. Losing access to toys is inconvenient; losing access to advanced chips can stop factories and weapons systems. Time-to-substitution matters because a supply chain replaceable within three months creates less vulnerability than one requiring ten years of new mines and factories.
Strategic policy therefore needs something like a dependency matrix measuring concentration, criticality, substitutability and replacement time. Without that discipline, politicians can label industries strategic according to lobbying strength rather than economic importance.
The automobile industry possesses another politically important characteristic: geography. Car factories employ large numbers of workers directly and support suppliers clustered around particular regions. When production moves abroad, losses become geographically concentrated. The benefits of cheaper imported vehicles spread across the entire country. Political backlash therefore becomes predictable even if national consumer welfare increases.
This is one reason globalisation generated such different political reactions from what aggregate economic models sometimes predicted. Trade can increase total income while creating regions experiencing persistent decline. A worker losing a specialised manufacturing job cannot necessarily move instantly into the export sector gaining from trade. Skills, housing, family and geography create adjustment costs. People are less mobile than capital and economic models sometimes assume.
Good trade policy therefore needs adjustment institutions. Worker retraining, regional investment, infrastructure and social insurance can distribute the gains from trade more broadly. Protectionism becomes politically attractive partly when governments fail to compensate people bearing concentrated adjustment costs. Telling a worker that cheaper consumer goods make the country better off overall does not replace a lost career.
Europe’s EV dilemma therefore cannot be separated from industrial employment. German, French and Italian policymakers know automobile manufacturing is not simply another line in GDP. It anchors regions, apprenticeship systems, engineering capabilities and political identities. Chinese competition threatens an ecosystem accumulated over generations.
But history cannot become entitlement. An industry does not deserve permanent protection because it was important previously. If Chinese firms have developed better or cheaper technology, European manufacturers need to adapt. Industrial policy should facilitate that adaptation rather than prevent it.
This is dynamic comparative advantage. Countries are not born permanently destined to manufacture particular goods. Capabilities can be created through education, investment and policy. China deliberately created capabilities in batteries and EVs. Europe can create new capabilities too. The economic question is whether the social return from doing so exceeds the cost.
Developing countries should watch this debate carefully because the return of industrial policy changes the rules under which they are expected to develop. Western countries spent decades advising poorer economies to reduce subsidies, privatise industries and expose firms to international competition. Now wealthy governments increasingly subsidise domestic semiconductor plants, batteries and clean technologies because they consider them strategically important.
Some developing countries will reasonably perceive a double standard. Rich countries used industrial policy during earlier stages of development, later promoted liberalisation once their firms became competitive and are now returning to industrial policy when Chinese competition threatens them.
The appropriate lesson should not be that every developing country should subsidise everything. Most governments possess much less fiscal capacity than China, America or Europe, and failed industrial policy can consume scarce resources rapidly. The lesson is that industrial policy should be evaluated pragmatically rather than ideologically. State intervention can create capability under the right conditions. It can also create rent-seeking and fiscal waste.
India faces exactly this opportunity. US-China competition creates demand for alternative manufacturing locations, while India’s enormous domestic market, labour force and improving infrastructure make it a plausible destination. New Delhi has introduced production-linked incentives across electronics, batteries and other industries. The objective is partly to use temporary government support to build manufacturing ecosystems capable of competing without permanent protection.
The critical measure will again be additionality. If India pays a company billions to assemble products it would have produced in India anyway, taxpayers receive little strategic return. If incentives create supplier networks, technology transfer, worker skills and exports that persist after support ends, industrial policy has created capability.
This is why the Chinese EV story matters beyond China. It demonstrates what successful industrial policy can eventually look like: a state-supported sector becomes competitive enough that other governments begin demanding protection from it. The irony is extraordinary. For years, Western policymakers criticised Chinese firms for lacking innovation and depending on cheap imitation. Now one of the central Western complaints is that Chinese clean-technology firms have become too capable of producing at low cost.
That should generate some humility. China’s advantage contains subsidies and distortions that deserve investigation. It also contains engineering, scale, supply-chain coordination and competition that other economies need to understand rather than dismiss.
The correct Western response therefore cannot be simply “keep Chinese cars out.” It needs to be “use the time created by protection to become genuinely competitive.” That means battery research, charging infrastructure, software capability, lower manufacturing costs, skilled workers and enough market competition that domestic firms cannot survive merely through political protection.
China should face reciprocal pressure too. Beijing cannot demand completely open foreign markets while maintaining barriers, subsidies or regulatory structures favouring domestic companies. A sustainable trade system requires reciprocity sufficient that countries believe competition occurs within rules rather than through one-sided access.
The WTO was designed to provide those rules. Its weakening is therefore dangerous because bilateral tariffs and subsidy races can become self-reinforcing. One country subsidises batteries. Another responds with tariffs. The first retaliates. A third subsidises its own factories to prevent investment moving elsewhere. Every individual policy can appear rational while the collective result is fragmented trade and enormous fiscal expenditure.
This is a prisoner’s dilemma of industrial policy. All governments might prefer a world with moderate subsidies and open markets. Each fears remaining open while others subsidise strategic industries heavily. The rational individual response is therefore to subsidise too. Collective intervention rises even if nobody initially preferred the equilibrium.
Escaping that outcome requires updated international rules capable of distinguishing legitimate strategic support from predatory distortion. That will be extremely difficult because governments disagree fundamentally about the role of the state in economic development. Yet without rules, industrial competition increasingly moves into geopolitical bargaining where economic size determines leverage.
Smaller economies lose most in that environment because they cannot match American, Chinese or European subsidies. A world of subsidy competition therefore risks concentrating new industries inside the countries already possessing the greatest fiscal capacity.
This is another reason the green transition needs international coordination. Climate change is a global externality. Cheap solar panels, batteries and electric vehicles produce benefits beyond the country manufacturing them because faster adoption reduces emissions. Protection that slows diffusion therefore imposes environmental costs internationally.
At the same time, excessive concentration of green supply chains in one country creates strategic vulnerability that can undermine political support for decarbonisation later.
Climate efficiency and geopolitical resilience therefore pull in different directions.
The objective should be diversified abundance: produce enormous quantities of clean technology across enough countries that competition keeps prices low while no single government controls indispensable supply chains.
That is harder than simply choosing between China and domestic production.
It requires building alternative capacity without eliminating Chinese capacity.
This is the distinction between de-risking and decoupling again.
China should remain a major producer of electric vehicles and batteries if its firms are competitive.
Europe, America, India and others should build enough additional capacity that Chinese production does not become an unavoidable dependency.
Competition then produces lower prices while diversification reduces strategic risk.
The challenge is getting from today’s concentrated system towards that equilibrium without turning every clean-technology market into
