Europe’s Shift to EVs Amid Intensifying Global Competition

IMF Working Papers, October 11, 2024

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Authors: Philippe Wingender, Jiaxiong Yao, Robert Zymek, Benjamin Carton, Diego A. Cerdeiro, Anke Weber
Published: October 11, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400291371.001

European countries aim to reduce carbon emissions by transitioning to electric vehicles (EVs), a sector that China increasingly dominates globally.
The paper analyzes tradeoffs between Europe’s shift towards EVs and key macroeconomic outcomes, and evaluates which policies may sharpen or ease those tradeoffs.
Scenario analyzed: the share of Chinese cars in EU purchases rises by 15 percent over 5 years due to a positive productivity shock in China’s car production and a demand shock shifting consumer preferences toward Chinese cars.
Main headline finding: for the EU as a whole, the GDP cost of this shift is small in the short term, in the range of 0.2-0.3 percent of GDP, and close to zero over the long term.
Short-run adverse effects are concentrated in smaller economies heavily reliant on the car sector, mainly in Central Europe.
Protectionist policies, such as tariffs on Chinese EVs, would raise the GDP cost of the EV transition.
Increased Chinese FDI that leads to a significant share of Chinese EVs being produced in Central European economies would offset losses in those economies by supporting their shift from supplying the internal combustion engine (ICE) production chain to that of EVs.

Models used: state-of-the-art macroeconomic and trade models (as described in the paper).
Scenario parameters preserved from the source:
- Increase in Chinese cars’ share of EU purchases: 15 percent.
- Adjustment horizon: over 5 years.
- Shocks driving the scenario: (1) a positive productivity shock for car production in China; (2) a demand shock shifting consumer preferences toward Chinese cars.
Outcomes evaluated: GDP effects (short term and long term), distributional impacts across European economies, effects of policy responses (tariffs), and the role of Chinese FDI in local production.

EU-wide GDP impact:
- Short term GDP cost: in the range of 0.2-0.3 percent of GDP.
- Long term GDP cost: close to zero.
Heterogeneity across countries:
- Smaller economies heavily reliant on the car sector, mainly in Central Europe, experience more significant adverse short-run effects.
Policy responses:
- Protectionist policies (e.g., tariffs on Chinese EVs) increase the GDP cost of the EV transition.
- A substantial rise in Chinese FDI inflows that results in a significant share of Chinese EVs being produced in Central European economies can offset losses there by facilitating a shift from the ICE production chain to the EV production chain.

Avoid protectionist measures that target Chinese EVs, as tariffs would raise the GDP cost of the EV transition for the EU.
Facilitate the reallocation of production within Europe toward EV-related value chains to mitigate short-run losses in car-sector–dependent economies.
Consider policies that attract productive FDI in EV production to Central European economies, which can help offset losses from reduced ICE production.
Design targeted support for smaller, car-sector–dependent economies to smooth the short-term adjustment toward EVs and preserve employment and output while the long-term equilibrium impact is small.