The Report underlines that diversifying global value chains, reducing trade costs through digitalization, and transitioning to a low-carbon economy can create new opportunities for low- and middle-income economies. Furthermore, when trade policies are complemented by domestic measures, such as labour, education and competition policies, the gains from trade can more easily flow to workers and consumers. Enhanced WTO cooperation with other international organizations can magnify their combined action to increase inclusiveness across and within economies.

To read the report as it was published on the World Trade Organization webpage, click here.

To read the full report, click here.

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Critical raw materials (CRMs) are the bedrock of the world’s renewable energy systems. As economies around the world are committing to decarbonization, demand for critical minerals—the key components of clean technologies powering the green transition—is swiftly outpacing supply: the International Energy Agency (IEA) forecasts that the global energy sector’s requirements for energy transition minerals could quadruple by 2040. Confronted with growing competition for control over critical mineral supply chains, governments worldwide have implemented new policies, marshaled funding, and forged alliances to protect their access to these essential materials.

Although concerns over CRM supplies were raised as early as 2008, supply chain insecurities exposed during the Covid-19 pandemic and the challenges of reducing the EU’s energy dependencies in the aftermath of Russia’s invasion of Ukraine catapulted the issue of reliable access to energy transition minerals to the top of the EU’s political agenda.

The need to reduce dependencies on the EU’s access to CRMs figured prominently in Ursula von der Leyens political guidelines which were presented to the European Parliament on July 18th. She underscored the need to create a secondary market for CRMs, but also underlined that the EU need to diversify its supply and aggregate its demand as well as a need to boost European investment in the sector.

While we are still awaiting Mario Draghi’s report on the EU’s competitiveness, access to CRMs are also expected to be a central theme here. Speaking on April 16, 2024, Mario Draghi, the former president of the European Central Bank, thematized the urgency of securing Europe’s strategic autonomy in critical raw materials value chains. In a world where global superpowers such as the United States and China are turning to protectionist policies to shore up their CRM supply, the EU, Draghi underlined, needs “a comprehensive strategy covering all stages of the critical mineral supply chain.” 

The Critical Raw Materials Act (CRMA), which entered into force on May 23 of this year, is the EU’s initial attempt to build such a strategic approach. The regulation focuses on measures the EU can implement domestically to increase its raw materials resilience: ramping up extraction at home, increasing circularity and recycling efforts, and fostering innovation in alternative technologies. By 2030, 10% of all the EU’s annual consumption of strategic raw materials is to be extracted domestically and 40% is to be processed within the EU. At least 15% of the EU’s annual consumption is to come from recycled sources. According to observers, these targets set by the EU are widely ambitious and will most likely not be achieved by 2030.

The EU, however, will never be entirely self-sufficient in supplying the critical raw materials it requires and will always rely on CRM imports. Even in the best-case scenario where the CRMA’s goals are reached, 90% of the extraction and 60% of the processing of the EU’s yearly requirements will still occur overseas. Currently, geospatial concentration of supply chains leaves Europe’s critical raw material supply—and with it, Europe’s climate ambitions—vulnerable to supply disruptions, external shocks, and the tactics of trade wars.

For a handful of CRMs, the EU is almost solely dependent on a small number of third countries. For example, 98% of the EU’s supply of borate comes from Turkey and 63% of the world’s cobalt is extracted in the Democratic Republic of Congo (DRC). China’s stranglehold over global CRM extraction and, especially, refinement is a serious concern. For example, 100% of the rare earth elements used in permanent magnets are refined there. As the EU and US attempt to loosen China’s grip on CRM value chains, China is becoming more and more assertive in using its dominant position to defend its control of the market. In 2020, China ranked as the country with the most export restrictions on minerals, and, in 2023, introduced additional restrictions for graphite and for rare-earth mineral processing technology. Even the EU’s recently announced plans to impose tariffs on electric vehicles produced in China—an attempt to curb Chinese dominance at the downstream end of the critical mineral value chain—provoked Chinese authorities to open anti-dumping probes into European pork and French spirits in what was widely seen as a retaliatory response.

To secure a reliable CRM supply, the EU must reduce these dependencies. Thus, the CRMA establishes that, by 2030, not more than 65% of the EU’s annual consumption of each strategic raw material at any stage of the value chain is to be sourced from a single third country. This brief, which builds on Tænketanken EUROPA’s previous works, seeks to unpack the strategies deployed by the EU in pursuit of this diversification target. 

Why trade is not enough

There is an ongoing political discussion both within the Commission, but also among Member States, as to whether the EU can secure its critical mineral supply chains through mere import diversification or whether the EU also needs to build up industrial capacity in third countries. So far, the EU has been pursuing strategies along both these vectors, completing trade and investment agreements to increase its network of preferred trading partners and signing strategic partnerships to create investment opportunities overseas.

Industry forecaster, Benchmark Minerals, estimates that at least 384 new graphite, lithium, nickel, and cobalt mines will have to be opened by 2035 to meet global demand for electric vehicle battery materials alone. To secure true stability of supply, the EU thus cannot rely solely on increasing its number of trading partners but must be proactive in ensuring European engagement in supply chains on competitive terms.

Since mining and processing are capital intensive processes, accompanied by a slew of associated environmental and business risks, attracting investment in mineral projects poses a challenge the EU must overcome. The EU must think beyond its current strategies, which though feasible are not sufficiently innovative, to develop tools that will both incentivize and protect European stakeholder involvement.

Reducing dependencies through development: The EU’s Strategic Partnerships

The EU’s raw materials strategy has emphasized the creation of Strategic Partnerships on Raw Materials Value Chains, which are formalized in memoranda of understanding (MoUs) and pledge to facilitate investment in CRM value chains abroad. The EU has forged 13 such agreements with mineral-rich countries outside of the Union since 2017, with more agreements in the pipeline.

The partnerships aim to promote economic development in cooperating countries in mineral extraction, processing, and related infrastructure, scaling up global CRM output. Being non-legally binding, the MoUs are practical: they are easy to set up, quick to push through the internal machinery of the EU, and they satisfy a political appetite for official statements of cooperation. They are followed by more concrete, though still not legally binding, roadmaps identifying projects and laying out a step-by-step approach to achieving the goals of the partnership, which the EU and its partners agree to design within six months of the Strategic Partnership’s signing.

By opening up opportunities for EU investors to establish a foothold in third countries, the strategic partnerships constitute a means of establishing a European presence in global CRM supply chains. In the MoUs, the EU promises prioritized funding for projects through the EU Global Gateway, the EU’s foreign investment policy initiated in 2021. Global Gateway has earmarked a total of €300 billion to clean energy and infrastructure projects worldwide. Deploying Global Gateway funds and a Team Europe approach, under which the EU pools resources from the EU, Member States, and other actors such as development finance institutions and the European Investment Bank, the EU hopes to stimulate private sector investment in partnering countries. However, investors will need more concrete incentives than the Partnerships alone, not least because the Strategic Partnerships, as non-binding compacts, do not create the clear and enforceable legal guarantees necessary to support investments.

Reducing dependencies through trade policy: Understanding the EU’s exclusive competence FTAs

In addition to forming Strategic Partnerships, the EU has doubled down on efforts to bring pending trade agreements with resource-rich countries across the finish line, in a move to diversify its critical mineral supply by increasing trade privileges in CRM markets worldwide. While FTAs are broad arrangements that cover relations across a range of economic sectors, critical raw materials can be a driving force behind these agreements. All new EU trade agreements since 2015 have contained a dedicated chapter on Energy and Raw Materials.

Trade agreements have limited power to stimulate imports of critical raw materials into the EU because there is little scope for country-specific tariff reductions on CRMs. 92% of EU CRM imports do not pay import duties, whether because of tariffs set at zero or trade agreements already in force. The remaining CRM imports are covered by a tariff ranging from 2-7% for unprocessed and 3-9% for processed goods. As such, there is little scope for significant further reduction. However, the EU’s FTAs can be understood as reflecting a shift away from traditional trade liberalization methods and towards increasing opportunities for EU companies in sourcing SRMs overseas, much like the Strategic Partnerships, although FTAs are legally binding accords.

However, trade agreements might help restrict protectionist CRM policies implemented by mineral exporting countries. Such measures pose a worrying barrier to trade in critical minerals. In newly developed FTA provisions, the EU has included additional rules which aim to address defensive CRM trade strategies adopted by resource-rich countries and to close gaps in existing WTO regulations. Recent FTAs have also sought to open foreign markets to EU investors in the extractive industries of FTA partners, for example by securing preferential access for EU investors to trading opportunities and ensuring non-discriminatory procedures in the authorization of exploration and production licenses. 

Since 2017, the EU has crafted more agile FTAs—slimmed down agreements designed to fall under exclusive EU competence which can enter into force with only the consent of the EU Council and European Parliament. In this way, the EU has managed to accelerate the exhaustive ratification procedure associated with traditional trade agreements. However, the EU’s newest trade agreements, including the deals with mineral-rich Chile, New Zealand, and Vietnam, are unable to secure full protection and security for EU investors once they are operating in foreign markets: because investment protection counts as an area of shared competence, these FTAs must leave out provisions protecting EU investors against the expropriation of their investments.

Though offering a promising way of expediting FTA ratification, the inability of exclusive competence FTAs to secure investment protection makes these agreements weak supports for the Strategic Partnerships’ investment push. The EU’s current Strategic Partners are predominantly countries where no trade agreement with investor protection articles is in force, whether because negotiations have been on hold, as is the case in the DRC and Zambia, or because ratification is embattled, as is the case with the MERCOSUR country, Argentina.

Investment protection: The missing piece in the EU’s strategy

Neither exclusive EU competence FTAs nor Strategic Partnerships include robust, legal-binding, investment safeguarding measures, which, though controversial, can be crucial prerequisites for investor engagement. It is only with fully-fledged, shared competence trade and investment agreements that the EU has the ability to ensure legally binding investment protection mechanisms, including the shielding of EU investments against discriminatory judicial and administrative procedures and the safeguarding of investors against expropriation or nationalization of their investments. These rules have bite: Investor State Dispute Settlement (ISDS) provisions grant EU investors standing to sue the EU’s trading partners directly. Remedies include financial compensation or restitution of expropriated property. Due to investment risks in many of the EU’s partnering countries, investment protection provides the stability essential for the kind of investment in raw materials value chains that the EU hopes to foster. ISDS procedures, however, are increasingly coming under fire for enabling private companies to sue governments when climate policies or local opposition affects their profits. Should the EU’s trading partners grant EU investors the right to ISDS procedures, they would expose themselves to substantial risk of lawsuits and weaken their leverage to take further measures to protect the environment, as well as protected and indigenous land. As EU-level investor protection measures will not materialize soon, mechanisms for de-risking investment will have to be installed on a project level basis, including guarantees from the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, from national export credit agencies, or the private political risk insurance market. 

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International trade has been a pillar of U.S. foreign and domestic policy for most of the post–World War II era. Policymakers from both major parties have treated strong international economic relationships built on expanding international trade as central to advancing economic growth at home and achieving American goals on international development and security abroad. Secretary of the Treasury Janet Yellen captured the old consensus position well in an April 2023 speech explaining that “our economic power is amplified because we don’t stand alone. America values our close friends and partners in every region of the world, including the Indo-Pacific. In the 21st century, no country in isolation can create a strong and sustainable economy for its people.” Her words echoed those of one of her predecessors, Henry Paulson, who remarked sixteen years earlier on the benefits of open economic exchange that “countries that weren’t afraid of competition, that opened themselves up to trade, competition and trade, investment and finance, benefited, [whereas] the rest of the world, others were left behind. And opening . . . up to this competition leads to innovation, it leads to better jobs, more jobs, it leads to a higher standard of living.”

But in a very different April 2023 speech, U.S. President Joe Biden’s national security adviser, Jake Sullivan, laid out the administration’s case against globalization as it had been pursued in the past and argued for a new economic approach. While acknowledging that international economic cooperation “lifted hundreds of millions of people out of poverty” and “sustained thrilling technological revolutions,” he also argued that it all came at a price. To wit: “A shifting global economy left many working Americans and their communities behind.” The inexorable push for scrapping trade barriers had other costs, too, he continued—among them, the hollowing out of America’s industrial base, inequality that has threatened U.S. democracy, increasing environmental consequences, and geopolitical risks created by dependence on rivals such as China.

According to Sullivan, the Biden administration was forging a new path: not one that entirely rejected trade liberalization, but also not one that embraced traditional free trade agreements or tariff reductions as the main destination. He framed the approach as a middle ground, focused on advancing economic cooperation by pursuing nontrade priorities such as supply chain resilience, secure digital infrastructure, sustainable clean energy transition, and job creation. Sullivan described a new economic model that would be worker-centric, combining industrial policy to support high priority sectors with efforts to harmonize labor and environmental standards and integrate supply chains with close allies and partners—but without offering new market access.

Admittedly, Biden has achieved a measure of success in working toward this vision. Domestically, there were important wins included in the Bipartisan Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act. Appropriated funding is being doled out to boost semiconductor production and spark investment in other cutting-edge technologies. Money in these bills will also support infrastructure development that creates manufacturing jobs and helps to rebuild parts of the industrial base, including those that support national defense.

On the other hand, success abroad has been more limited, even if not absent. The Biden administration has improved coordination with European allies in areas such as green technologies and artificial intelligence, supply chain integration, and critical minerals, for example. In Asia, Biden’s team has advanced the Indo-Pacific Economic Framework (IPEF) with thirteen other participants and reached agreements on issues such as supply chains, clean energy and infrastructure, and tax and anti-corruption efforts.

But there is a larger story. Whatever the intention of these narrow efforts, Biden’s economic approach has resulted in a doubling down on the harder turn away from relatively free trade that began under former president Donald Trump’s administration—a set of outcomes different from what Sullivan’s speech appeared to imply. The promised middle ground has remained elusive. Although Biden’s team has not officially “sworn off” market liberalization, expanded market access appears to have been almost completely shelved as a foreign policy tool—even when it would have significant benefits or could serve as an incentive to push progress toward key security and geopolitical objectives.

Nowhere has this been clearer or more consequential than in Asia—home to many of the fastest-growing economies in the world. Though the administration has signed trade “mini-deals” based on executive orders with Japan and Vietnam in limited sectors and encouraged continued U.S. leadership in private investment, it has relied on the IPEF as the main vector of U.S. economic policy in the region. The IPEF has explicitly excluded market access from negotiations across all four pillars, a decision that has limited its scope and durability. For example, without trade as an incentive, IPEF members have been hesitant to commit to costly reforms related to issues like climate change or worker protection, resulting in a set of agreements that are mostly aspirational and without credible enforcement mechanisms. The evolution of the IPEF’s trade pillar is also telling. Not only did the trade pillar’s draft framework agreement exclude tariff reductions but the United States pulled out of negotiations on this agreement in November 2023, leaving the pillar stalled indefinitely.

Washington’s reliance on the IPEF as its main economic lever in Asia has magnified other risks as well, including lost opportunities to consolidate geopolitical influence and strengthen relationships with allies and partners. Though the United States remains a major economic force in the region, private investment and executive trade agreements cannot replace a more expansive approach to trade in Asia when it comes to integrating the United States more deeply into the region’s multilateral economic networks.

Without a more robust trade agenda, Washington misses out on economic opportunities. For example, the United States has limited leverage to shape the rules for economic exchange in Asia while they are being rewritten to incorporate new global realities like the economic power of India, Japan, and South Korea, the spread of fast-evolving technologies and digital trade, and the pressures of climate change and global migration. Even U.S. security goals in Asia are compromised by American policymakers’ decision to eschew trade policy as a foreign policy tool. U.S. allies and partners, who are heavily dependent on trade with China and lacking many economic alternatives, are limited in how closely they can align with Washington in the security domain for fear of economic retaliation from Beijing.

A different approach to trade in Asia—and globally—can exist in the space between past policies and those of the present, one that would truly represent a middle way between the current approach and the so-called Washington Consensus of old. Such a strategy would amount to a more reflective version of global integration that attends carefully to domestic realities alongside interests abroad while retaining trade as a key foreign policy tool that links the economic and security domains.

The new approach would allow for some heterodoxy in economic policy across regions and sectors and would aim to revitalize the Biden administration’s current industrial policy with a series of trade innovations, such as mini-lateral and sectoral trade agreements with key partners, efforts to integrate key Asian allies more deeply into existing multilateral agreements, or modifications to attach some limited market access to the IPEF. Each expansion of market access would be narrow and tied to clearly defined criteria, but together these moves would be enough to reestablish trade as a foreign policy lever in a crucial region. These trade innovations would not replace government protection for strategic industries, and a substantial and immediate increase in federal spending on government training and assistance for dislocated workers would still be required.

With this type of approach, the United States could better communicate its economic and geopolitical commitment to the region, diversify its economic role in Asia, and position itself to compete more effectively with China, even as it protects key U.S. industries. The United States would still need to manage some risks, of course, including finding the balance between engagement and competition with China, relative and absolute economic gains, and national prosperity and security. Even with these challenges, the pursuit of this true middle ground should be a top priority in Washington.

Economic Integration and Its Discontents

In the early twenty-first century, questions for U.S. policymakers about how best to approach the intertwined issues of cross-border trade, migration, flows of information, and political ties in Asia occur alongside a broader backlash against “globalization.” At a time of major geopolitical upheaval and technological change, policymakers and the public are vigorously debating the merits of domestic policies suitable for an interconnected world. They are exploring new trade and migration rules, reviving strategies for national industrial and technological development, and reflecting on the lessons of globalization for international law and institutions substantially influenced by the United States. Discussions of “reshoring” supply chains and U.S.-China economic “decoupling” or “de-risking” are just a few examples of rising concerns in Washington about cross-border ties.

Despite occasional protestations from policymakers about the need for balance, the debate thus far has been mostly concentrated on the extremes: globalization that pushes for ever more economic cooperation or industrial policy that focuses inward to protect domestic jobs. Often lost in this debate, however, is that both of these approaches have substantial benefits and significant costs. This is true both globally and narrowly in Asia.

The U.S. commitment to comprehensive free trade has always been qualified. Even the World Trade Organization (WTO) embodies a contingent—not absolute—form of free trade. In this conditional form, globalization has had clear advantages for the United States. Most significantly, it has been responsible for tremendous domestic economic growth. The U.S. per capita GDP (in constant 2010 dollars) was about $19,000 in 1960 and $61,000 in 2021 (four times the global average per capita GDP, considerably higher than any other country with a large population)—a feat that would not have been possible without trade and international economic cooperation. Trade with Asia specifically has and continues to provide the United States with significant economic gains. As of 2019, for instance, exports to Association of Southeast Asian Nations (ASEAN) member states alone accounted for over 500,000 jobs in the United States.

Though domestic economic growth has been the primary driver of Washington’s long-running support for free trade, the United States has also profited in other ways from its perch atop a cooperative international economic order. Adam Posen, president of the Peterson Institute for International Economics, argues that “as creator and enforcer of international economic rules,” the United States gained “maximum economic traction while minimizing the need for direct conflict” and “could even occasionally flout the rules, or tweak them in its favor.” International economic integration also allowed for specialization, faster innovation, higher returns on capital investments, economies of scale, and other efficiencies that benefited the American economy and U.S. workers.

The United States has also accrued international influence through economic cooperation. Much U.S. soft power, globally and in Asia, depends on the fact that billions around the world consume the ideas and technologies produced in major metro areas around the United States—metro areas that have evolved into the key pillars of U.S. global leadership in science and medicine, media and culture, education, civic life, and digital technology. Often, they encompass diasporas from South Asia, East Asia, and elsewhere, and depend on constant influxes of new visitors and residents—including students and workers from other states and countries—who bring new ideas and investment. International economic cooperation contributes to this mobility of capital, people, and ideas.

Globalization as it was pursued and implemented over the past several decades, however, has also had costs––some real and some imagined or overstated. Most importantly, the benefits from global trade are rarely evenly distributed and contributed to a sharp drop in U.S. manufacturing jobs over several decades as corporations shifted production to countries with cheaper labor. One National Bureau of Economic Research (NBER) estimate, for instance, finds that between 1980 and 2017—a peak period in globalization—the United States lost 7.5 million manufacturing jobs, with trade being one of several drivers. Not only did this loss of manufacturing erode the U.S. industrial base, it also disproportionately affected workers with only a high school diploma. Many were left dislocated when government-promoted retraining and assistance programs were underfunded and insufficient.

These economic costs may have had political ramifications as well. Some analyses suggest that Trump’s 2016 victory was made possible by voters on the losing end of the inexorable press for trade liberalization, who had voted for former president Barack Obama in 2012 but were won over by Trump’s promise to bring back U.S. manufacturing jobs by reducing trade with China and pulling the United States out of the ambitious Trans-Pacific Partnership (TPP)—which he ultimately did.

That said, questions persist about just how much trade liberalization alone contributed to what Sullivan called the “hollowing out” of U.S. manufacturing or to Trump’s 2016 victory. A 2021 analysis by the Center for Strategic and International Studies, for instance, shows that increasing worker productivity, not trade, accounts for the greatest share of the decline in U.S. manufacturing jobs. This is supported by research from the Ohio State University that found trade was only responsible for a third of manufacturing job losses in that state. Of this total lost to trade, only a relatively smaller percentage can be linked directly to trade with China specifically—estimates of this percentage vary but most fall between 10 and 25 percent. Moreover, there is evidence that negative effects of the “China shock” occurred largely before 2010 and did not persist afterward, suggesting that fear of continued manufacturing job losses to China and elsewhere may be misplaced.

The argument that economic costs from trade drove the societal implications many observers ascribe to cross-border commerce also lacks clear support. Even if trade effects are understood to play some role in rising political tensions within the United States, a close examination of voting trends from the 2016 election recognize cultural factors—rather than purely economic hardship—to be the key factors behind changes in partisan politics.

The economic and political costs of globalization may be somewhat more measured than expected, but unchecked economic integration can raise material national security questions. Many in Congress and the executive agencies caution that too much trade creates dependencies that would turn into vulnerabilities in a conflict. These fears are especially acute, and at least partially justified, when it comes to trade in Asia and with China specifically, given the critical imports that this trade includes, the rising risk of conflict in the region, and what many view as unfair trade practices employed by Beijing. The United States remains heavily dependent on China for some critical minerals, for example, including those necessary for advanced military systems. China’s military-civilian fusion also creates the potential for U.S. exports to China to end up supporting the development of its People’s Liberation Army. And China has shown a willingness to use economic retaliation as a tool of coercion and to manipulate its currency and markets in ways that disadvantage U.S. firms.

These challenges are all reasons that the United States may need to manage trade with China carefully, including restricting certain types of exports and protecting some domestic industries. They are not, however, a reason to entirely give up further trade integration with the rest of Asia or elsewhere. In fact, geopolitical competition makes the development of a strong trade agenda globally, and in Asia especially, more important for the United States, not less. This is true for two reasons.

First, by turning away from market access as a foreign policy tool in Asia, Washington cedes much of the trade domain to Beijing, leaving its partners with fewer economic alternative and undermining U.S. influence in Asia. Second, some additional trade integration with countries across Asia (and outside of it) could help the United States build a more diversified and resilient supply chain and trade network itself, reducing its dependence on China in key sectors. Achieving this outcome would require intentional choices about how and where to increase trade access, but it cannot be achieved when trade liberalization is not an option. Biden’s economic strategy in Asia, and the IPEF in its current form especially, is not up to the job, either at the institutional level or its basic orientation to the role of trade in U.S. foreign policy.

The Risks of Biden’s Approach to Trade in Asia

The Biden administration’s reluctance to use market access as a foreign policy tool has global ripple effects but the risks are biggest in Asia, both because of the region’s high and growing economic importance across sectors and because it is home to the most important U.S. strategic and economic competitor: China. As a result, when thinking about the future of U.S. trade policy, it makes sense to start in the Indo-Pacific.

The administration’s economic strategy in the region has included a few key pieces: “mini-deals” signed at the executive level to increase bilateral trade in specific sectors with close allies and partners; initiatives to advance regional supply chain cooperation, especially in the defense sector and for technologies like semiconductors; economic incentives to spur private business investment in the region; export controls and industrial policy to protect domestic industry and national security; and, at the center, the IPEF, which is intended to unite these different initiatives.

As conceived by the Biden administration, the IPEF was loosely intended to offset the U.S. decision not to join the TPP and its successor organization, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The IPEF focuses on reducing nontariff barriers to trade, especially harmonizing standards. The IPEF’s largest successes thus far have been in establishing an agreement to support supply chain integration and resilience among the thirteen other participating members and acceptance of a set of standards to advance climate goals and fight corruption.

However, the IPEF’s first set of agreements leave much to be desired. For the most part, they include only nonbinding commitments and high-level ambitions, rather than clear and actionable targets for cooperation. The IPEF’s pillars also remain weakly institutionalized, making it unclear how standards will be monitored or enforced. At this point, it remains uncertain whether the three agreements signed thus far—in the climate, tax and anti-corruption, and supply chain pillars—will advance U.S. economic integration in the region. Moreover, the trade pillar lacks a path forward after the United States pulled out of negotiations, much to the dismay of other participants. The IPEF has also failed to win the confidence of constituents across Asia. A 2024 survey of Southeast Asian states found that respondents appear to be growing more skeptical and critical of the IPEF over time, resent the high cost of achieving U.S.-promoted standards with few benefits in return, and identify China as the economic leader in the region while questioning U.S. staying power and commitment.

Beyond these institutional shortcomings, the IPEF-led approach to trade in Asia and the failure to find a real middle way in the trade domain come with three types of risk, each with potential economic and geopolitical costs. Notably, even if more pronounced in Asia, these challenges are not entirely unique to the region and exist elsewhere as well.

First, by remaining outside of all of Asia’s major trade agreements, the United States is likely to face losses in terms of GDP and domestic economic growth. In this case, much (but not all) of the U.S. economic loss is likely to translate into gains for China. As the United States has moved away from free trade, China has leaned into it. With its involvement in the ASEAN+3, ASEAN+6, bilateral trade agreements, and now the new Regional Comprehensive Economic Partnership (RCEP), China’s trade with Southeast Asia has quadrupled since 2009 (compared to a smaller but still sizeable tripling of its global trade). A study by the United Nations Conference on Trade and Development found further that the RCEP arrangement would reduce U.S. exports to Asia by over $5 billion due to trade diverting away from the United States and toward RCEP partners where tariffs are lower.

Membership in the CPTPP would have placed the United States on more equal footing and offered benefits that far exceed any RCEP-induced losses. By choosing not to join this organization, the United States misses out on billions in economic gains. A 2018 Peterson Institute report found that joining the CPTPP would have resulted in net $131 billion added to U.S. GDP by 2030, while the decision to pull out will result in a $2 billion loss. By expanding market access to Asian partners—at least in some sectors and to some partners—the United States could lay claim to some portion of this windfall. The narrow bilateral executive agreements signed under Biden move in the right direction but are too limited to offset the deficit created by the weakness of other aspects of Biden’s trade and economic strategy.

None of these observations imply that the United States should mirror China’s approach to trade in Asia or elsewhere. After all, the two countries face quite different dynamics when it comes to international trade’s inherent trade-offs. China sees in free trade agreements a way to gain access to new export markets and a solution to its large trade surpluses. The United States, in contrast, often finds itself as what economist and Carnegie Scholar Michael Pettis calls the “absorber of last resort” for its own trade partners, hence its reluctance to sign on to large multilateral trade deals. It is for this reason that a return to the more aggressive embrace of free trade seen in previous decades is not the right approach for the United States today. The Biden administration’s current strategy may go too far in the other direction, however, where a more balanced approach might capture some economic gains while still protecting relevant domestic interests.

Second, Washington’s position outside Asia’s major economic organizations undermines its efforts to increase and consolidate influence with regional allies and partners. At one level, the mechanism for this loss of influence is straightforward. Limits on market access that slow the diffusion of U.S. goods and raise prices on U.S. technology and other products limit U.S. soft power gains and constrain its geopolitical leverage at the same time.

These missed opportunities to garner greater geopolitical sway with regional allies also arise at a deeper level. For countries across Asia, the unwillingness of the United States to join the CPTPP or to offer meaningful expansion of market access through bilateral agreements signals a lack of serious commitment to the region. Many of these states are already skeptical of the durability of the U.S. focus on Asia, seeing it is as a distracted and unreliable partner. The constraints the United States has placed on the IPEF only exacerbate this perception and lead many countries in the region to look elsewhere for economic opportunities. For instance, because its framework agreements are signed at the executive level only, the IPEF lacks the longevity that would promote long-term U.S. investment. The U.S. decision to withdraw from the trade pillar negotiations did further damage to regional perceptions of U.S. credibility.

What’s more, for countries in the region, the more limited U.S. integration into the region’s trade networks and economic groupings is not just an economic concern (though many have chafed under the new U.S. protectionism and unilateralism). Because it leaves them more beholden to an increasingly aggressive Beijing, less U.S. trade engagement in Asia becomes an important security challenge as well—a manifestation of the often-cited link between economic well-being and national security. Countries in Asia seek to diversify their economic partnerships to reduce their dependence on China and would readily welcome more involvement from the United States to increase their resilience and economic options. Under Biden, however, even those who are members of the IPEF have been left disappointed as the United States has refused to extend any sort of market access. Countries across Asia have been left with little choice but to remain dependent on China as its primary trade partner.

These economic pressures can have real security consequences. Countries like Indonesia and Malaysia, for example, tread carefully in territorial disputes with China for fear of upsetting their trade relationships. Even countries for whom the threat from China appears more existential, such as Japan and Vietnam, are pragmatic in their dealings with Beijing to preserve economic ties. Recognizing the liability this economic dependence creates, even allies and partners that support U.S. efforts in Asia’s security domain in principle may be forced to stay on the sidelines of a U.S.-China conflict to protect their economic well-being. This could have serious implications for U.S. efforts to rally a coalition to contain Chinese aggression.

Finally, by forgoing a more robust approach to trade in the region, the United States gives up an opportunity to participate in the writing and updating of Asia’s rules on economic exchange to include things like labor and digital trade standards or climate mitigation. These issues have an outsized effect on the Indo-Pacific region, and sensible responses to all are affected by trade integration and related questions about cross-border flows of investment, technology, and people. For example, years after an American objection to WTO Appellate Body appointments threw a wrench in the gears of the global trade organization, the WTO dispute resolution process remains paralyzed. In the face of this obstacle, other WTO members have developed work-arounds. The EU and key Pacific countries and emerging powers have strung together one interim alternative that Japan just joined, and Europe is pursuing a broader trade settlement with Asian countries extending to subsidies and related issues. By standing aside, American policymakers forfeit their influence over the resulting mechanisms and reinforce the message that the United States is not the one driving Asia’s economic or diplomatic future.

Asia’s climate crisis offers another illustrative example. Its average temperature is rising at about three times the global rate, exacerbated by rapid industrialization. Elevated sea levels threaten coastal areas, putting pressure on farmland and major cities. The mining of critical minerals found in abundance in parts of Southeast Asia—in high demand by the United States and countries around the world—is of particular concern because the processes used to extract these minerals can severely damage surrounding ecosystems. While the increasing trade volumes that result from trade liberalization are not the sole or even the most prominent driver of climate disruption, the increase in economic activity and manufacturing that accompany rising trade do absorb more natural resources and contribute to air and water pollution, making an already bad situation worse. Collective solutions will be needed to balance economic demand and these environmental challenges, but the United States can only shape resulting outcomes if it is a participant in the region’s trade and economic networks.

For policymakers in places like Singapore, Hanoi, Manila, and Jakarta, the long list of looming challenges—including but not limited to climate change—also serves as a reminder that all politics are primarily local and regional. The competition between the United States and China—however important to understand and manage—ought not eclipse the broader range of security and economic questions facing the region as a whole. Addressing these challenges will require some degree of international cooperation and a new set of rules of the road for regional economic exchange that take collective costs into account. Governing the remarkably fast-evolving technologies and the rapid growth of the digital economy will also prove to be part of that story.

To have a say in this process and a seat at this table, the United States must be more active in the region’s expansive web of trade networks. In 2022, these networks accounted for about 40 percent of global exports and imports and trillions of dollars in global commerce. The United States is a country of unique global power and sway. Its unusual history of outsized influence has left an indelible mark on the frameworks for global cooperation and integration, and it was the principal architect of the post–World War II economic order. As that order confronts the reality of forced adaptation, it is not a stretch to think that Washington can and should play a role as those frameworks are updated for the realities of Asia today and contemporary global economic and political challenges. Other countries in the region are not sitting idly by waiting for the United States to engage more seriously on these issues, however. China, South Korea, Japan, India, and others are already building their own rules and standards, sometimes together but often independently.

Achieving an Authentic Middle Way

Even if the United States and China find reliable ways to cooperate on elements of that emerging order—on matters ranging from climate change to AI safety—the two countries have differing values and strategic priorities. The resulting geopolitical competition with China makes the development of a more robust U.S. trade agenda in Asia desirable despite the risks. New military partnerships, investments in allied capabilities, deployments of advanced technologies, and multilateral exercises are necessary but not sufficient for the United States to remain a counterweight able to balance Chinese power in the region. A change in the administration’s trade policy will be required as well. Countries in Asia would benefit from a more active U.S. trade presence but a shift in trade strategy would not be charity project—it would be directly aligned with U.S. interests and could inform efforts to make better use of trade as foreign policy tool in other regions as well.

Whatever course is chosen in Asia and elsewhere will need to balance domestic adjustments (across job types and economic sectors) with the gains from a greater degree of economic cooperation. Addressing these costs will require holistic strategies and more nuanced approaches that, for example, reflect distinctions in the educational opportunities suitable for people at different points in their life, reliably reduce a measure of economic risk, and open new employment and civic opportunities. Policymakers likely already understand these requirements but are also searching for ways to make some degree of trade liberalization more politically palatable and to ensure that promised educational and economic support does not fall through as it has in the past. By better understanding the long-simmering conflicts over global cooperation, policymakers and civil society can further develop the ideas, institutions, and coalitions necessary to create a stable foundation for a more sustainable form of global integration.

Nothing about this challenge means that U.S. policymakers should walk away from once again using market access as a tool to keep American interests relevant in one of the world’s most important regions. The task at hand is to create pathways for the exchange of information, ideas, and culture, while policymakers retain at least a limited set of tools to address imbalances that arise if considerable movements of goods and capital coexist with completely inflexible migration policies. Indeed, policymakers with influence over the international system should always bear in mind the costs of coercive limitations on the movement of ideas, goods, information, and people across borders, even if such constraints are also necessary for national-level experimentation and the functioning of countries as currently configured.

In that vein, the preservation of rules that enable international trade—even as policymakers tolerate somewhat more heterodox economic policies—would benefit the United States and its allies, resulting in trade rules of narrower application to countries’ domestic policies but reliably enforced and written with an eye toward more equitable global development. This would mean, in part, pursuing many pathways to expanded economic cooperation, including some reform of the WTO and the rules governing global, multilateral trade, alongside domestically focused initiatives to compensate and offer viable retraining opportunities to those that are displaced. To this end, U.S. leaders should focus on several promising levers as first steps.

First, policymakers should take a lesson from U.S. advances in Asia’s security domain and turn to mini-laterals—groups of three to five countries focused on a narrow set of issues with shared interests as a way to achieve the gains of cooperation with less risk. Without entirely casting aside the prospect for more ambitious deals, this approach would avoid making the perfect the enemy of the good. The intent would be to work with a limited group of partners in targeted sectors—building off the administration’s mini-deal approach, but with significantly wider participation, more heft, and the consistent message that the goal is to recapture momentum on market access rather than cast aside entirely the prospects for more comprehensive deals.

Regional mechanisms like mini-laterals are far from perfect, but they offer a degree of interconnectedness that can enhance deliberation across borders and make policy responses more appropriately nuanced. Working with just a small group of like-minded partners, the United States would have greater leverage to set and enforce high labor, climate, and other standards. Picking and choosing sectors to focus on would allow the United States to avoid areas of political sensitivity and seize on opportunities to advance other strategic objectives.

Supply chain diplomacy, for instance, can indeed result in progress, as evident in the agreements the United States has recently signed on coproduction and technology with India, Australia, and Japan.

Expanding these areas of growing cooperation into the trade domain and adding new tailored agreements with countries across Southeast Asia should be high on the list of priorities for those guiding U.S. trade policy. Although there is some value in pursuing such deals, as Peter Harrell has argued in Foreign Affairs, “in sectors where interests clearly converge,” it will be important to remember that other countries get a vote, too. They will often prefer more comprehensive agreements that will require U.S. policymakers to take on a measure of responsibility for garnering political support and designing suitable mechanisms to mitigate the impact on affected communities.

Indeed, relying on a mini-lateral approach comes with risks. While reaching agreements with a smaller number of partners can be comparatively easier than achieving the consensus needed for a large multilateral agreement, transaction costs are still involved. Too many of these small, overlapping groups can create a crowded international economic architecture, which can be costly and difficult to manage. Washington will therefore need to be judicious in selecting the partners and sectors where it invests in building new institutions for cooperative economic exchange. The tendency will be to lean toward partners like Japan and South Korea where higher levels of economic development may make agreements with high standards easier to reach. But this may have downsides, too, in that it will constrain pathways to economic integration across other parts of Asia—especially Southeast Asia, where much of the region’s growth potential is located. To guard against this, the United States should aim to diversify its partners and explicitly focus on building mini-lateral agreements with countries who are not already U.S. treaty allies.

The United States will also need to pursue trade reengagement through other channels to achieve the desired diversity in economic cooperation. One option might be to find ways to add some limited market access to a more institutionalized IPEF, tied to strict technology standards, for example, with clear mechanisms for enforcement and monitoring. Bringing close Asian partners like Japan into existing free trade agreements like the United States-Mexico-Canada Agreement (USMCA) if they are willing to adhere to its higher standards and requirements is another option. Ways to expand and leverage existing bilateral agreements, especially with nontraditional partners who are strategically important or show high potential for economic cooperation, should also be explored. The bottom line is that policymakers will need to be creative to find varied opportunities with the right balance of economic gains and domestic safeguards.

Alongside the pursuit of a modest and controlled market liberalization abroad, Washington must also carefully attend to associated domestic costs. It can do this in two ways. The first is to continue to rely on industrial policy to protect sectors of high strategic importance to the United States. As under the Biden administration thus far, this would likely include semiconductors, green technologies, and several others. That said, policymakers should develop far clearer metrics or criteria to determine which sectors require protection and subsidies to support U.S. interests. This list would likely be somewhat shorter than the set of industries that receive this type of support today. Second, policymakers will need to redouble their efforts to compensate and retrain workers who suffer due to trade’s distributional effects. This is an area where governments have fallen short in the past, and more robust commitment and better outcomes will be essential to the success of any reengagement with trade. Significant federal funding and coordination will be required and should be allocated. Moreover, programs would need to be aimed at more diverse audiences with more flexible types of assistance.

For U.S. policymakers, engaging with a more ambitious trade agenda can contribute to greater security and shared growth across Asia and in the United States. Policymakers can advance that agenda without ignoring the potential for trade-related economic displacement to affect communities in the United States—a challenge that persists even if many of our most dynamic regions grow stronger because of economic relationships with Asia. With the right carve-outs and attention to supply chain resilience as well as the situation of Asian trading partners, a more vigorous trade agenda can also fit with American national security goals and reasonable domestic needs. Congress and the executive have multiple tools to meet the moment without neglecting the role of market access in strategy and standard-setting: from savvy use of existing bilateral trade relationships to new mini-lateral groups that can expand trade across sectors, market-oriented reforms to the IPEF, and efforts to piggyback off existing free trade agreements such as the USMCA. Greater attention to workers and communities adjusting to new economic realities is also likely a sensible response. So, too, is the targeted use of industrial policy alongside carefully calibrated efforts to reform multilateral trade rules to make international trade more compatible with domestic needs. Closing off any serious near-term prospect for greater access to the American market is not.

Jennifer Kavanagh was a senior fellow in the American Statecraft Program at the Carnegie Endowment for International Peace. Mariano-Florentino (Tino) Cuéllar is the tenth president of the Carnegie Endowment for International Peace

To read the full paper published by the Carnegie Endowment for International Peace, click here.

To read the full paper, click here.

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Introduction and summary

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The EU’s anti-subsidy probe

In the biggest EU trade case against China ever, the Commission initiated an anti-subsidy investigation into EV imports from China in October 2023. Should it determine that China-based producers have benefited from subsidies in ways that harm EU-based manufacturers, it could place provisional countervailing duties on China-origin EV imports anytime from now until July 3, and final duties by early November. In March 2024, the Commission asked European customs authorities to track imports of EVs from China, a signal that it could impose provisional duties in the near future.

The EV probe stands out for several reasons. First, the Commission initiated the investigation ex officio, without a formal complaint from industry, which is a rarity in such cases. Second, there is a divide within Europe’s car industry—which accounts for 7% of the EU’s GDP and 8.5% of its manufacturing employment—on the desirability of the probe. German carmakers, which are heavily reliant on the Chinese market, oppose it out of fear that Beijing could retaliate against them, while French counterparts, which are far less exposed to China, support it. Third, the probe is based on the threat that cheap EV imports from China could cause damage to European manufacturers in the future, rather than an assessment that this damage is already taking place. Finally, the probe is perhaps the most political case of its kind in recent memory. Commission President Ursula von der Leyen chose to announce it in her annual state of the union speech last September. And the Commission has focused its investigation on three China-based carmakers—BYD, Geely, and SAIC—rather than western carmakers like Tesla, which exports more EVs from China to the EU than any other producer.

EU imports of EVs from China ballooned from $1.6 billion in 2020 to $11.5 billion in 2023, accounting for 37% of all EV imports in the bloc. While the market share of China-produced EV models in the European market has only increased slightly to 19%, the share of Chinese and Chinese-owned brands has increased substantially in the last two years. This suggests that Chinese companies are gaining momentum in the European market. BYD has said that it is aiming to secure a 5% share of EV sales in Europe by 2026 and to be among the top five automotive companies in Europe in the medium term.

Based on an analysis of previous instances of countervailing duties (CVDs) imposed by the EU on Chinese imports and on conversations with experts, we expect the Commission to consider duties on Chinese EVs in the 15-30% range. This is based on the following factors:

• The average of the highest duty level imposed in previous anti-subsidy cases against China stands at 24.4%. In rare instances, CVDs have been as high as 40-50%, however these were concentrated on industries with a high degree of direct state-ownership, such as steel, and focused on non-cooperating Chinese entities. In contrast, the EV sector is primarily privately owned in China.
• The three companies (BYD, Geely, and SAIC) that the Commission has chosen to focus on in its investigation have signaled their willingness to cooperate. This means that they are providing information to the Commission. For non-cooperating firms the Commission estimates duties based on public information, which in the past has resulted in higher duties.

The Commission will calculate individual duties for BYD, Geely, and SAIC, while other exporters such as Tesla will receive a duty based on the weighted average of the duties imposed on the Chinese brands that the Commission deems to have cooperated. Theoretically, the Commission could also opt to impose other remedies, for instance a minimum import price or fixed price, but given the highly complex nature of modern EVs, this is an unlikely and unpractical prospect.

Price analysis of China-based exporters

Currently, the electric vehicle markets in Europe and China are characterized by major price discrepancies which have encouraged producers to export their cars from China to Europe. Intense competition in a saturated Chinese market has led to a price war there and forced manufacturers to boost efficiencies in the pursuit of ever-lower production costs. Volkswagen’s ID.4 model, for example, sells for nearly 50% more in Europe than it does in China. For Chinese producers like BYD, the price gulf is even larger, as they try to compensate for the profit squeeze in China by charging higher prices for their products in the EU. But with exports picking up, some of these price differences are likely to erode over time. Increasingly, Chinese and foreign manufacturers are taking advantage of China’s cheaper labor and energy prices, its more developed battery ecosystem and government subsidies to produce in China for the European and third markets.

Should the EU impose countervailing duties on Chinese EV imports, it would seriously affect incentives for China-based producers to export to Europe. Our price analysis reveals that exports to the EU by China-based producers are very profitable. BYD makes around €14,300 in profit on each SEAL U model sold in the EU, compared to €1,300 on units sold in China. This means that BYD earns €13,000 more on every Seal U model sold in the EU (the “EU premium”). Our analysis is based on the suggested retail prices (MSRPs) of the various manufacturers in China and Germany, and calculates profits after shipping, tariffs, distribution and VAT.

It should be noted that BYD’s relatively low sales numbers in Europe suggest that the prices it is charging in the European market may be too high, especially in light of the fact that it is still a relatively unknown brand. With such a high EU premium, however, the company has ample space to adjust pricing.

In order to substantially reduce the incentive for BYD to export models like the SEAL U to the EU, duties would need to be set at a level that erases the €13,000 premium that the company currently enjoys in Europe. This would bring profit margins in the EU in line with those that BYD enjoys in China. In reality, this is not the goal of the anti-subsidy investigation. It is not meant to render EVs produced in China and sold on the EU market unprofitable, but rather determine whether China’s export competitiveness is based on subsidies. Even if duties were set at a high enough level to erase the EU premium, BYD might decide that exporting to Europe makes sense, given slowing demand and competitive pressures in the Chinese market. One cannot dismiss the possibility that Chinese EV producers would be willing to forgo profits in the short-term and sell at a loss in order to gain market share in the world’s second biggest EV market.

A 30% duty imposed on BYD for the Seal U would fall far short of leveling the playing field between the EU and China as far as the company’s profits on the car are concerned. According to our calculations, a 30% duty would still leave the company with a 15% (€4,700) EU premium in relation to its China profits, meaning that exports to Europe would remain highly attractive. Moreover, duties at this level would provide BYD with space to lower its prices in order to gain market share in Europe. Our analysis of several other models sold in China and Germany indicates that even after a 30% duty, many Chinese EV models would still enjoy a strong EU profit premium.

In short, much steeper duties of around 45%, or even 55% for fiercely competitive producers like BYD, would probably be necessary in order to render exports to the European market unappealing on commercial grounds.

Duties at the 15-30% level could, however, wipe out the business model for foreign players like BMW or Tesla, which are using China as a base for exporting to Europe. For BMW’s iX3 SUV, for example, the EU premium (after accounting for related costs such as shipping) is only 9%, meaning that if duties are above 9%, the company would make less money on sales in Europe than in China. This also means that duties set at the higher end of our range could undermine plans by companies such as BMW, Honda and Volkswagen to expand the use of China as an export hub for the EU market going forward.

The price gap between foreign and Chinese producers is likely due to two main factors: Chinese producers receive more subsidies than foreign producers, although both benefit from Chinese government support, and Chinese companies are more vertically integrated and can procure products at lower prices than their foreign competitors.

Chinese producers will likely need to export

While duties would make exporting to the EU less attractive, several factors suggest that China’s EV export push will continue to gain momentum in the coming years:

Slowing growth and tighter profit margins at home: While China’s new energy vehicle (NEV) market has expanded rapidly, with sales surging by 97% in 2022 and 38% in 2023, growth is expected to decelerate significantly due to the higher base and China’s economic slowdown. Cui Dongshu, the Secretary General of China’s passenger vehicle association, forecasts that NEV sales growth will drop to 22% in 2024. Moreover, intense competition has led to a price war, resulting in profit margins in the auto sector plummeting from 8.7% in 2015 to 4.3% in 2023. Both of these trends are making exports much more appealing to China-based producers.

New production capacity coming online: Bolstered by robust profits and government backing, Chinese EV manufacturers have made substantial investments in new production facilities. This additional capacity will hit the market soon. BYD’s new plants illustrate this: By 2026, BYD’s production capacity in China will reach 6.55 million EVs up from 2.9 million at the end of 2023. To fully utilize all this capacity BYD would need to more than double its domestic EV sales—a challenging feat given the anticipated slowdown in China’s overall EV sales. Even to maintain capacity utilization at 80%, BYD would need to increase domestic sales by 81% by 2026.

New shipping capacity coming online: China’s EV exports have been hindered by a scarcity of affordable car shipping vessels. In 2023, charter prices for such carriers skyrocketed by 700% compared to 2019, exacerbated by Houthi attacks in the Red Sea, further straining shipping capacity and inflating costs. However, Chinese carmakers and shipping companies have responded by placing orders for numerous new ships. Based on these orders, they will have capacity to ship an estimated 560,000 cars annually to Europe in 2025, based on six trips a year (in 2023 the EU imported 472,000 EVs from China). Capacity could surge to as much as 1.7 million cars in 2026. In the unlikely case that all ships were used for transporting cars to Europe, the volumes exported from China would likely be enough to capture 50% of the EU’s EV market. Notably, the decision to purchase rather than rent car-carrying ships underscores the long-term goal of Chinese EV producers to export large quantities of cars.

Lack of other attractive export markets: The EU, the world’s second biggest EV market, is likely to remain the primary destination for China-made EVs. With its plans for a de facto ban on internal combustion engine (ICE) vehicles from 2035, and various support mechanisms in place, the EU presents a highly attractive market—especially compared to the US, which already has high tariffs on Chinese EVs in place and is planning further measures to restrict Chinese carmakers. Exports to other markets will be challenging for other reasons: either they are smaller, lag behind in EV adoption or will be served by local production, often because of local content requirements (ASEAN, Brazil, India and Mexico).

Ambitious targets for the European market: BYD has set an ambitious goal to capture a 5% market share in Europe even before its Hungary plant commences operations in 2026. This would entail selling approximately 130,000 EVs in Europe in 2025, a massive increase from the 16,000 sold in 2023. Looking ahead to 2030, the company aims to account for 10% of Europe’s EV market, corresponding to an estimated 920,000 vehicles, with a portion produced in its Hungary plant and the majority likely imported from China. These targets are consistent with those communicated by Shenzhen’s municipal government, where BYD is headquartered. The city wants to increase NEV exports from 71,000 in 2023 (January to November) to 400,000 in 2024 and to 600,000 in 2025. It released a 24-point plan to achieve these goals in November 2023. Similarly, SAIC-owned MG, having sold nearly 232,000 vehicles in Europe last year, plans to sell more than 300,000 cars this year.

EU officials might consider additional tools

If duties fail to slow Chinese exporters, at a time when China continues to incentivize firms to export, the Commission may feel the need to explore alternative measures. Competition Commissioner Margrethe Vestager floated this idea in a speech at Princeton University in April, calling for the introduction of “trustworthiness” criteria at G7 level based on factors like environmental footprint, labor rights, cybersecurity, and data security. A range of options are on the table:

Cybersecurity: The EU could attempt to tighten cybersecurity requirements to restrict market access for Chinese EV producers. Similar to the 5G Toolbox it published in January 2020, the EU could establish policy guidelines for member states that designate Chinese EVs as a cybersecurity risk due to the integration of cameras and sensors in cars and Beijing’s close oversight of China-based producers. Although most EVs will be privately purchased, member states could also decide to include “trustworthiness” criteria in public tender documents.

This approach would, however, face numerous obstacles, as the uneven implementation of the 5G Toolbox illustrates. National security remains primarily a member state prerogative, and convincing all members that Chinese EVs pose a national security risk will be challenging, particularly as some fear retaliation against their own products in China. A fragmented solution that restricts Chinese EVs in some countries but not others, would be problematic given the Schengen Zone’s open borders. Unlike 5G, where the costs to replace untrusted equipment would be shouldered by telecommunications operators, cybersecurity-related restrictions on connected vehicles would directly affect consumers.

Moreover, the notion that cybersecurity measures would serve as a panacea is tempered by the availability of Chinese smartphones in the EU, which arguably pose a greater risk but enjoy substantial market share with Xiaomi and Huawei ranking as the third and fourth biggest smartphone brands in 2023. While some member states, such as Belgium and Lithuania, have expressed cybersecurity-related concerns about Chinese phones, others disagree. With the automotive industry, the economic stakes are considerably higher.

Conditioning EV purchasing subsidies: Many European member states offer purchasing incentives to spur the adoption of electric vehicles. Member states could follow the lead of France and tweak regulations to restrict Chinese-made EVs based on sustainability criteria. This would place Chinese EVs at a severe competitive disadvantage. However, member states would have to act fast as most subsidy schemes are already on their way to being phased out. Additionally, if countries use environmental standards to penalize Chinese exporters as France is doing, Chinese companies could limit the damage by decarbonizing their production.

Forced labor regulation: A new EU measure banning products made with forced labor could be used to restrict the import of Made in China EVs. A recent report by Human Rights Watch found that many big OEMs including BYD, Tesla and Volkswagen could be procuring aluminum produced with forced labor. US authorities recently impounded cars produced by Volkswagen Group over allegations that they violated the Uyghur Forced Labor Prevention Act. The long lead time that is foreseen for implementation of the EU’s forced labor ban illustrates the limits of using this tool as a near- or medium-term solution for restricting imports.

Reviewing subsidies in procurement and investments: The EU’s new foreign subsidy regulation facilitates the review of large procurement contracts exceeding €250 million. However, it’s unlikely that many EV contracts will surpass this threshold. For instance, BYD secured a contract in December to supply 640 EVs for Austria’s federal government, likely for around €20 million considering MSRPs. Still, the use of EU funds, like REPowerEU, to support BYD in Hungary has prompted concerns that could lead to policy adjustments going forward.

Scaling back Europe’s EV ambitions: In 2022, the EU effectively instituted an internal combustion engine ban by implementing progressively stricter fleet emission targets, compelling manufacturers to elevate the proportion of EVs or incur penalties. Nonetheless, confronted with the considerable expenses associated with the EV transition and the surge in Chinese competition, certain segments of the European automotive industry and conservative parties across Europe have voiced opposition to the target. A review of the 2035 target, slated for 2026, presents an opportunity to recalibrate objectives, potentially buying ICE-focused European incumbents time and curbing the competitiveness of Chinese EV producers.

A more drastic review of WTO rules: In her Princeton speech in April 2024, Vestager voiced the view that the EU needs a more comprehensive approach to tackling Chinese distortions. One such way would be to raise tariffs on China across the board. This is highly unlikely for now, but could gain momentum if the US moves first. The Select Committee on China in the House of Representatives has called for the removal of Permanent Normal Trade Relations status for China, which would increase tariffs for Chinese goods across the board.

What to watch

We expect the Commission to place provisional duties on Chinese EV imports by early July. Going ahead we are also watching for:

Member state pushback: Before the imposition of final duties (by early November 2024) EU member states could try to block the EU’s case in the Trade Defence Instruments Committee. This would require a qualified majority of member states to vote against duties, something that has never been achieved before in an EU anti-subsidy investigation. German politicians and carmakers have signaled that they do not support the case. France, on the other hand, has made clear that it sees the need for EU action. Whether Berlin would risk a fight over the EV case is unclear. But we have seen Germany’s divided coalition government stand in the way of EU measures that were well advanced in recent months, notably refusing to support sustainability due diligence legislation.

Chinese retaliation: In January 2024, China launched an anti-dumping probe into brandy imports from the EU. The move was widely seen as a retaliatory move aimed at France, which was a vocal supporter of the EU’s trade case against Chinese EV imports. Should the EU impose duties, China is likely to do the same on brandy imports. It could also take other steps, for example responding in kind against EU automakers, tightening the regulatory screws on other European companies with a presence in China, or restricting the supply of critical minerals to Europe’s fledgling battery sector. Beijing, which is keen to avoid a tit-for-tat trade conflict with Europe that could further impeded its access to the European market, may wait until final duties are imposed before responding.

Following up with an anti-dumping probe: The EU chose to launch an anti-subsidy investigation into EVs rather than opt for an anti-dumping probe, which would have allowed it to impose higher tariffs. The decision to go down this path was likely driven by the fact that anti-dumping cases have a higher burden of proof and because Chinese producers have not priced their products extremely cheaply in Europe. Should Chinese EV exporters absorb the countervailing duties and subsequently lower their prices to gain market share in the EU, the Commission could follow up with an anti-dumping case at some point in the future.

Chinese EV sales figures in Europe: In recent months, Chinese EV exports to the EU have declined against a backdrop of high shipping costs, policy uncertainty, and major changes to EV purchasing subsidies in France and Germany. A continued decline in Chinese EV sales could reduce the political momentum for additional policy measures beyond the EV duties that are expected before the summer. A renewed surge of Chinese EV exports, by contrast, would increase the likelihood that new tools, including the measures floated by Vestager in her April speech, would be considered.

Chinese EV investment: In contrast to the US, the EU has remained open to Chinese investments in the EV sector. In December 2023, BYD announced plans to build a factory in Hungary. In April 2024, Chery signed a JV deal with Spanish EV Motors to produce cars in Catalonia. Were more Chinese brands to announce plans to invest in local production facilities in Europe, this could alleviate pressures in the bilateral trade relationship. It is also possible, however, that Chinese brands could come under scrutiny if they are producing cars that undercut European rivals. This could trigger cases under the EU’s Foreign Subsidies Regulation. Chinese brands could also face a backlash within Europe if their production facilities remain concentrated in China-friendly countries like Hungary, the country that has attracted the majority of EV-related investments by Chinese firms so far.

To read the full report as published by the Rhodium Group, click here.

To read the full report, click here.

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The US is mulling an end to the de minimis provision that allows shipments valued under US$800 to enter the world’s largest consumer market, a move largely aimed at Chinese exports. Such a move would escalate a raft of trade controls Washington has already placed against China, including controls on semiconductor technology and outbound investment.

In many ways, a key piece of legislation impelling the momentum is the US Uyghur Forced Labor Prevention Act (UFLPA). Passed in late 2021, the ambition of the UFLPA is far more comprehensive than the “small yard, high fence” scope of containment policies, as it seeks to restrict imports in toto from an entire region inextricably linked to global supply chains. Growing political pressure and technical know-how within the retooled oversight agencies portend much more robust UFLPA enforcement across a growing category of goods.

This is likely to be one of the more conspicuous developments in the US’ international trade posture in 2024. The Biden administration signaled last week that it may escalate controls on China’s access to sophisticated semiconductor technologies, as Commerce Secretary Gina Raimondo vowed “we will do whatever it takes.” Alongside these tech controls, Washington has existing policy weapons it could use to target the extent to which Xinjiang is embedded in global supply chains, including in strategic industries suffused with Chinese overcapacity. Early signs of enhanced enforcement action suggest a particular focus on the automotive sector.

Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.

To read the full article published by the Hinrich Foundation, click here.

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The WTO’s Environmental Database (EDB), available via the WTO website, shows that WTO members, from all regions and stages of development, are increasingly using trade-related policies as part of their climate action toolbox. From 2009 to 2021, members notified to the WTO more than 5,000 measures with climate-related objectives. About 40 per cent were notified by developing members. WTO bodies and notification tools offer extensive opportunities, therefore, for governments to exchange views and experiences, learn from each other and develop best practices on a range of trade-related policy tools that can contribute to effective climate action.

Following the publication of the WTO Secretariat’s 2022 World Trade Report, which focused on the complex relationship between trade and climate change, Trade Policy Tools for Climate Action seeks to highlight key trade-related policies being used, or that could be used, by governments to mitigate the effects of climate change or to adapt to its consequences.

The policy tools set out in this publication are simply intended to be a source of information and possible inspiration, amongst others, for policymakers to draw on in pursuit of their domestic climate mitigation and adaptation plans. They are purely voluntary in nature, and the publication does not seek to evaluate what the most appropriate or efficient policy tools might be for governments, individually or collectively.

As a contribution to the discussions at COP28, taking place in late 2023, on how trade can be a key part of the solution to the climate crisis, the aim of this publication by the WTO Secretariat is to provide information that will assist the debate going forward.

To access the summary, as well as a chapter directory posted by the WTO, click here.

To read the full publication, click here.

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