Sharing the Road

Source details

Chinese electric vehicles (EVs) are well-built and affordable; China accounted for "60 percent of global EV sales in 2023."
The EU target: "100 percent of new car purchases by 2035, up from 15 percent today."
Chinese EVs retail for "about 20 percent less" than similar French, German, or Italian models in the EU.
The EU has imposed new tariffs on Chinese EVs, "up to 45 percent in some cases."

Objective: quantify how the EU would be affected if it pursues its EV adoption goals while permitting Chinese manufacturers to capture a significant share of its car market (an "EV shock").
Method: state-of-the-art macroeconomic and trade models comparing the EV shock to a world with EV adoption and China’s market share fixed at pre-2023 values.
Historical benchmark: Japan’s entry into the US market during "1970 and 1985," when the share of imported Japanese cars in the US rose "from almost 1.7 to nearly 15 percent."
Scenario assumption: China could increase its share of the EU market by a "15 percentage point increase" absent trade impediments. This is illustrative, not a forecast.

Aggregate EU GDP impact: "very small for the EU as a whole," but with wide variation across member states.
Distributional effects:
- Germany, France, and Italy: modest income loss due to large, diversified economies and high profitability/labor productivity of their auto sectors.
- Worst-affected economies: "Hungary and the Czech Republic are the worst-affected economies, with a decline in real GDP of 1 percent and 1.5 percent over five years, respectively."
Two countervailing forces:
- Consumer benefit from increased supply of cheap Chinese vehicles.
- Reduced demand for European car manufacturing, a high-profitability, high-productivity sector.

Significant labor reallocation away from the automobile sector.
Dislocated workers estimates: "as much as 2.6 percent of the workforce in the Slovak Republic and 1.7 percent in Hungary."
Reemployment: primarily in services, but large-scale reallocation may have social, economic, political, and psychological costs not captured by the models.

Tariff scenarios modeled: a "25 percent and a 100 percent average tariff on Chinese automotive imports into the EU" facing the EV shock.
Results:
- Tariffs protect domestic auto production and yield limited revenue gains.
- Tariffs raise consumer prices and production costs in sectors that use Chinese vehicles as inputs.
- Net effect: "tariffs make the situation worse, both in the short and long run" and leave "all EU countries poorer," with especially adverse effects on economies without sizable domestic auto sectors.
- Tariff protection does not make European carmakers more competitive in the global market.

Tariffs raise prices, causing some consumers to buy more traditional vehicles over the next decade, which adds to emissions.
However, if the EU maintains policies to achieve "its adoption target of 100 percent EV purchases by 2035," the modeling finds the "overall fallout for emissions is minimal."
Caveat: higher transition costs from tariffs could create pressure to delay adoption targets—and "such a delay would cause a much more severe impact on emissions."

Trade barriers (tariffs) are not recommended; they worsen economic outcomes and raise the cost of the transition.
Policy levers that could lessen adverse impacts:
- Encourage foreign direct investment by Chinese firms producing directly in Europe (analogous to "how Japanese automakers began to serve the US market beginning in the 1980s").
- Promote investment and realistic productivity gains in the European car sector.
- Remove remaining intra-EU barriers to trade and capital flows to exploit economies of scale and incentivize investment in research and development.
- Active policies to assist job transitions (training, reallocation support) while allowing Chinese EVs access to European roads.
The article characterizes this as a "middle-ground solution" balancing preservation of high-value manufacturing jobs and climate goals.

This article draws on IMF Working Paper 2024/218, “Europe’s Shift to EVs amid Intensifying Global Competition.”

JIAXIONG YAO and ROBERT ZYMEK, F&D Magazine, December 2024.

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