## Sharing the Road

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**Canonical URL:** [Sharing the Road](https://www.imf.org/en/publications/fandd/issues/2024/12/sharing-the-road-robert-zymek)

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## Bibliographic details
- Authors: JIAXIONG YAO, ROBERT ZYMEK
- Published: December 3, 2024

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### Context and framing
- 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."

### Research question and approach
- 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.

### Key macroeconomic findings
- 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.

### Labor reallocation and social costs
- 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 simulations and outcomes
- 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.

### Emissions and climate implications
- 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."

### Policy implications and recommendations
- 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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_Source: https://www.imf.org/en/publications/fandd/issues/2024/12/sharing-the-road-robert-zymek_