Imagine a world in which China builds every single car.

Unthinkable, right? Think again.

China today has enough capacity to manufacture half of the world’s 80 million vehicles. By 2030, China’s capacity could climb to 75% of the world’s volume, according to Global Data.

This year China will export 6 million vehicles to more than 140 countries worldwide, blowing past Japan for global leadership.

Chinese brands like SAIC’s MG, Chery, Geely’s Volvo and BYD are leading the way, winning in every time zone from Brazil to Thailand, from the UK to Australia.

Call it the coming China car colossus.

All Aboard

Of course, we knew Chinese cars would eventually find their way into global markets.

But what makes things alarming is that Chinese brands are only part of the story. Now global automakers are racing to make China the epicenter for global automotive production, too.

• Tesla shipped 344,000 China-built cars to Canada, Australia, Europe and other markets worldwide last year.

• GM sends tens of thousands of made-in-China Chevys to Mexico and other markets. Chevy’s six best-sellers in Mexico are all built in China

• Ford has exported more than 100,000 trucks and SUVs from China to Southeast Asia, Africa and the Middle East. The made-in-China Lincoln Nautilus is exported to the US, too.

• Stellantis invested $1.7 billion into Leapmotor last year to build Stellantis portfolio brand products for export to worldwide markets.

• Volkswagen, Renault and BMW export huge numbers of made-in-China EVs back to Europe.

• Hyundai and Kia will begin selling 200,000 made-in-China cars in their home market and the global markets.

• Mercedes exports the Smart brand from China to several European markets including Germany.

• Even the ultra-cautious Japanese brands are joining the race. Honda and Nissan will soon start delivering made-in-China products overseas, including (gasp!) to their home market.

This is a problem. Global automakers had set up joint ventures and built massive plants in China to sell to Chinese consumers. With sales of non-Chinese brands there now dropping fast, Americans and Europeans feel that they must convert those plants to ship products to markets worldwide.

Chinese JV partners cannot believe their good fortune: “Look at these easy profits from exporting joint venture products to our partners’ global markets.”

Why is everyone hell-bent on building in China? Simple. Nowhere else can compete when it comes to scale, cost, quality – and subsidies. “We are making record margins on those Chevy exports to Mexico,” one GM executive told me.

Supply Chain Dangers

But there is an even bigger problem with building every car in China: Supply chains.

China has methodically built a monopoly over much of EV production from mining to mineral processing to battery-cell manufacturing. With control of internal combustion engine and as well as EV production, China would dominate a large swath of the industrial inputs crucial to national defense.

Tens of thousands of jobs would disappear. Tax revenues would dive. We would forget how to make things, even the most basic things. The West would be extremely vulnerable.

Does the idea of utter China domination in autos seem extreme? It’s not. Consider solar panels, where China supplies more than 90% of global demand. Or shipbuilding where China production accounts for more than half of global output. Or so many of our home appliances. Ditto.

Without tariffs, made-in-China cars could overwhelm global markets and crush established automakers.

So What

How will Western political leaders respond?

We got a hint of things this week in Paris where French President Macron met with Chinese leader, Xi Jinping: “France welcomes all industrial projects. BYD and the Chinese industry are very welcome in France.” Translation: We are not going to tolerate imports from China much longer.

Getting Chinese automakers to build in your country might be an option. But it is a harder case to make when your own automakers are manufacturing in China for export back to home markets. As a native of Detroit, it is hard to watch the Detroit 3 commit such massive, self-inflicted damage.

An executive at a major American parts supplier recently described the challenge to me in blunt terms: “Will Western nations have a renaissance of manufacturing innovation at home? Or will we watch our auto companies turn into just logos on vehicles built in China?”

It is time for the West to take things in a new direction. Without decisive action, the future of cars – and critical supply chains – may soon become “all China, all of the time.”

Future Cars & Markets

Electrics 

The company is expected to be valued at just $5 billion, down from $20 billion in early 2023. I test drove the Zeekr 001 last autumn at a track in New York and gave the vehicle high marks for performance, handling, fit and finish. Prices in China start at a very attractive $37,000.

Huawei Blows Past Li Auto, NIO. Just when you thought there was no more room for new players in China’s auto industry, enter Huawei. The company targets sales of 600,000 cars in 2024, only its second year of production. For some context, Mazda sold about 360,000 cars in America last year.

VinFast Pivot. VinFast sold 10,000 vehicles in Q1 2024. The company aims to deliver 100,000 for the full year. To get there, VinFast plans to appoint up to 100 dealers in America. The flagship VF 9 is joining the VF 8 in American showrooms this month.

I visited with executives at VinFast headquarters in Hanoi and the VinFast plant in Haiphong last month. I saw significant progress on several fronts: The VF 6 and VF 7 are good looking vehicles that could be mistaken for Hyundais or Kias. The plant managers are zealous about quality in every aspect and detail. And the company is developing new initiatives in Thailand, Indonesia and India. This week VinFast announced pricing of its VF 3 starting under $10,000.

Batteries / Supply Chains

IRA Impact: EVs and Batteries. The Inflation Reduction act has spurred investments in EVs and battery plants in America totaling $188 billion, according to a report by the Environmental Defense Fund. This takes care of the top layer of battery assembly. Now starts the hard work of building battery supply chains. Georgia, Michigan and North Carolina are leading the way.

Advanced Technologies

TSMC Chips and Cultures. Read this fascinating profile of the practical things that get in the way of progress at the TSMC plant in Arizona. TSMC insiders say the key to the company’s success is an intense, military-style work environment. Engineers work 12-hour days, and sometimes weekends too. That is a giant adjustment for most American workers.

New Numbers / Milestones

Lucid Earnings. In its earnings call this week, the Newark-based maker of luxury vehicles revealed new highs in revenues but stubbornly high costs, too. The Lucid Air is extremely good, but how many people in the world have heard of it, or taken a test drive?

BYD: Exports Are The New Priority. BYD exports jumped to 41,000 units in April, almost 200% higher than the 2023 April number.

GM/Detroit Pain in China. GM lost $100 million in the first quarter of 2024, with its market share falling to its lowest level since 2003. Ford has lost a stunning $5 billion in China over the past five years.

Michael Dunne is an entrepreneur, author, and keynote speaker. In 2018, Dunne founded Dunne Insights to deliver world-class advisory services on global electric and autonomous vehicle markets.

To read the full newsletter as it appears on The Dunne Insights Newsletter, click here.

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The bodies are still warm. But the victims are already dead.  

Natural causes? Or was there foul play? 

GM, Ford and Jeep – once darlings of the Chinese consumer – are goners. Sales have collapsed. Profits are heading toward zero. 

In 2023, the Detroit Three sold 3 million fewer cars in China than they did in 2017: 2.3 million vs 5.4 million. That is six straight years of falling sales – and we have not hit bottom yet. 

Jeep’s China joint venture went bankrupt in October 2022, despite operating in the world’s largest SUV market.

Ford is losing buckets of money, operating at just 25% of its plant capacity. 

For years GM made ‘more money than God’ in China, a former executive once told me. Today, the company is grasping at straws. Mary Barra recently told investors that GM would move its products upmarket in China to be “more premium and high end,” including the Cadillac Celestiq, starting at $300,000. 

That’s a roundabout way of saying that GM can no longer compete in most segments of the China market.

Detroit’s China demise came so suddenly that there was talk of summoning Inspector Jacques Clouseau, the internationally famous solver of murder mysteries. Alas, China would not grant Monsieur Clouseau a visa. 

So we are left to piece together clues on our own: How did the Detroit 3 expire so swiftly? And what might the end of Detroit in China tell us about what happens when Chinese automakers enter the US market? 

Complacency & Confusion

Complacency kills. And smugness was no small part of what happened to Detroit in China. 

For decades, they knew nothing but growth and profits. GM, Ford and Jeep – along with their Chinese JV partners – grew convinced of two eternal truths:  First, Chinese consumers would forever prefer foreign car brands like Buick, Chevy and Ford over the Chinese offerings. And second, gasoline-powered vehicles would be dominant until kingdom come. 

As things turned out, they were wrong on both counts.

Bureaucratic confusion also played a role. “Our guys in China can’t make up their minds,” a senior GM executive in Detroit told me in 2018. He was referring to his colleagues working at the Shanghai-GM joint venture. “Last week, it was ‘we should hurry up and get more EVs ready’ for the China market. This week it’s ‘wait, never mind’.” 

When Chinese demand for EVs started its explosive growth in 2020, the Detroit 3 were caught flat-footed and without products. 

The tables turned in what seemed like a blink of an eye. Chinese EV brands were now in the lead. “When a Chinese buyer considers an EV, he thinks Tesla or one of the Chinese brands,” a senior executive from BYD told me in 2021. 

“Ford and GM are seen as old fashioned, out of step with the times.” 

EVs now account for 1 of every 3 new cars sold in China, Tesla is the only non-Chinese brand in the top 10. 

More Than Meets The Eye

Now, hold on a minute. Inspector Clouseau would be disappointed if we simply stopped our investigation there and called it case closed. I can almost hear him teasing us: “Was there not more going on than meets the untrained eye?”

Clouseau knows things. Detroit’s fall was also part of a grand Chinese plan. Detroit automakers had served their purpose, bringing advanced technology and processes to China. Now that China had what it needed, Detroit was being shown the exits. 

I first sensed this larger scheme years ago when I asked the Chinese Minister of Industry whether Detroit’s JVs in China would succeed over the long term. After all, the Chinese themselves describe JVs as precarious arrangements with partners “sleeping in the same bed, dreaming different dreams.”

The global automakers wanted market access. And the Chinese wanted technology.

“Look, despite their different dreams, they are still sleeping together,” he said with a chuckle. The Chinese, he hinted, were biding their time, waiting for the moment when they could emerge independent and triumphant, leaving the joint venture behind. 

Today, the partners sleep in separate beds. The Detroiters are taking their final breaths. And the Chinese side does not appear to be in mourning. 

So What

Are there implications for competition in America? You bet. Complacency can happen here in America, too. The Detroit 3 will continue to dominate the large pickup truck market for years to come. But they have withdrawn from the more affordable segments, convincing themselves that Americans do not want smaller cars anymore. 

This retreat presents the Chinese automakers, the lowest-cost producers on the planet, with a mouth-watering opening. That’s dangerous for Detroit.

Ford, GM and Jeep are dead in China—even if their executives can’t or won’t admit it.

The Detroit 3 still possess vast resources, technology, ingenuity and smart people. But they better start hustling, taking risks, inventing and working harder than their Chinese competitors.

If not, they could face extinction – this time on their home turf.

Future Cars & Markets

Electrics 

Geely’s Crowded Portfolio. Geely’s array of EV brands – Polestar, Volvo, Zeekr and Lotus – are living on top of one another. This is making investors have second thoughts about their value. Lotus shares are down 67% since their market debut two weeks ago.

Xiaomi’s March Launch. The world’s second largest cell phone maker will start selling its SU7 premium sedan on March 28th. Consumers outside of China will need to wait 2-3 years before they can buy one.

Mercedes Welcomes Chinese EVs Into Europe. “Don’t raise tariffs. Go the other way around. Take the tariffs that we have [in the EU] and reduce them.” This is the stance announced this week by Ola Kallenius, CEO of Mercedes-Benz. He says competition is a good thing for Europe. But he just might also be working to preserve Mercedes’ market access to China, its largest market. Oh, and Geely happens to be a major shareholder in Mercedes, too.

Batteries / Supply Chains

Lithium Price Recovery? After falling by a stunning 80% in 2023, there are signs that lithium carbonate prices in China may be recovering. But Goldman Sachs says a recent bounce should not be interpreted as the end of the bear market

Koreans Into LFP. SK On says it is planning to mass produce LFP batteries as soon as 2026. Up until now, the LFP battery business has been totally dominated by Chinese battery makers.

Advanced Technologies

Pony.ai Goes Worldwide. Last week Pony.ai signed an agreement to establish an R&D center in the Grand Duchy of Luxembourg. This comes after forming a joint venture in South Korea and securing a $100 million investment from Saudi Arabia. In 2020, Toyota invested $400 million into Pony.ai through its China joint venture, Guangzhou Toyota.

NIO Humanoids. This is not a simulation. NIO has actually begun testing humanoids sourced from UBTech at its new factory.

New Numbers / Milestones

BYD: Brazil vs Europe. BYD had an underwhelming start in Europe, selling just 16,000 vehicles last year. Cross the Atlantic to Brazil and you find a totally different reality. BYD expects to deliver more than 100,000 cars in South America’s largest market. And the company is now renovating an idled Ford plant.

SAIC MG Fast Ramp in Europe. Europeans bought 239,000 SAIC MG vehicles in 2023, twice the number from the previous year. Competitive pricing and several powertrain options are the key drivers. Familiarity with the MG brand has been a huge asset, too. The MG ZS was Spain’s best-selling car in December, 2023.

VinFast Super Leasing Deal. Dealers in the US started leasing the VF8 at the incredibly attractive price of $249 per month in late January. Within weeks, all existing inventory was sold out. “At $249 a month, VinFast would be losing thousands of dollars a vehicle,” one dealer told me. Let’s watch what VinFast does next with its pricing. VinFast plans to appoint 100 dealers in America by the end of the year.

To read the full newsletter as it appears on The Dunne Insights Newsletter, click here. 

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Raimondo also emphasized the sheer number of electric vehicles that China is exporting. Indeed, China has become a battery electric vehicle (BEV) export behemoth. Europe has become the top destination for Chinese BEV exports, for now, and exports could continue to rise due to cost reductions and synergies with China’s shipbuilding complex. Responding to these dynamics could prove challenging for the United States and Europe, given the competing priorities of decarbonization, economic goals, and the mitigation of security risks.

Working with allies and partners, the United States should adopt a joint, balanced approach to Chinese BEV exports by following pragmatic interim guidance while comprehensively studying the security risks these vehicles could pose. These interim steps should include preventing Chinese-made electric vehicles with sensors from reaching locations sensitive to US and allied security, such as military installations, and restricting them altogether from Guam, Okinawa, and other places relevant to Taiwan and South China Sea-related contingencies. Such interim measures would help keep the United States and its allies secure while the risks that Chinese BEVs ultimately pose are determined.

Chinese BEV exports to Europe are surging

China’s overall BEV exports rose 70 percent in 2023, reaching $34.1 billion. The European Union (EU) is the largest recipient of Chinese BEV exports, accounting for nearly 40 percent of them. Other European countries (Albania, European Free Trade Association members, North Macedonia, Ukraine, and the United Kingdom) held a 15 percent share of Chinese shipments in the same year.

China’s growing BEV shipments to Europe have vastly increased its share of the European market. Chinese manufacturers’ share of the Western European new BEV passenger car market stood at 9.3 percent in the fourth quarter of 2023, an astonishing rise from 2019, when China’s share in the total European BEV market only reached 0.5 percent.

In the Western Hemisphere, China’s exports to Mexico are worth watching carefully, as the country often serves as a backdoor to the US market. Still, Chinese BEV exports to Mexico are minor, totaling only $257 million in 2023, less than Canada, which imported $1.6 billion over the same period. In other words, there is greater risk of BEV trade “leakage” to the United States from Canada than Mexico—at least for now.

What about plug-in hybrids?

The above chart does not include China’s exports of plug-in hybrid electric vehicles (PHEVs), which use batteries to power an electric engine and fuel to power an internal combustion engine. In 2023, China’s exports of PHEVs totaled $4.3 billion, or around just one-eighth of BEV exports that year. Many Chinese plug-in hybrids in 2023 went to Brazil—and to Russia, via both direct and indirect trade. Kyrgyzstan’s reported imports of Chinese plug-in hybrids reached $651 million in 2023, or about 5 percent of its gross domestic product at current prices. While Kyrgyzstan is notionally the third-largest importer of Chinese-made PHEVs, it is a near certainty that some of these shipments were in fact destined for another country, as Central Asian countries, especially Kyrgyzstan, often serve as a waypoint for Chinese exports ultimately bound for Russia.

The United States is a significant purchaser of plug-in hybrids, but it’s not currently purchasing many Chinese-made models either directly or indirectly. Chinese PHEV exports to parties of the United States-Mexico-Canada (USMCA) trade agreement totaled only $132 million in 2023.

The Chinese electric vehicle tsunami hasn’t hit the US—yet

Indeed, Chinese-made electric vehicles haven’t played a sizable role in the US market, at least not yet. China directly shipped just $368 million in BEV exports to the United States in 2023. Conversely, the EU exported nearly $7.4 billion to the United States that year, according to official US trade data.

The United States doesn’t currently import Chinese BEVs at scale largely because it places a 27.5 percent tariff on Chinese-made cars, along with other restrictions. Still, this tariff may not ultimately prevent Chinese autos from reaching the United States.

Chinese BEVs are already significantly less expensive than Western autos. Chinese automaker BYD’s Seagull, for instance, sells for only twenty thousand dollars in Latin America, while China’s electric vehicle producers are currently engaged in a price war with one another. China’s electric vehicle producers are competitive due in part to genuinely impressive innovations; synergies with China’s industrial capacity, including its shipbuilding sector; and economies of scale. But massive subsidies from China’s national, provincial, and even local governments are also an important factor.

Furthermore, Chinese auto exports will soon no longer be constrained by insufficient transoceanic carrier ships. BYD, in tandem with CIMC Raffles of Yantai, launched China’s first car carrier built specifically for the purpose of exporting Chinese-made autos. Earlier this week, thousands of BYD vehicles were unloaded in Germany on the first of eight ships commissioned by the company. The state-run People’s Daily reported earlier this year that a single company, the Chinese shipping giant COSCO, has ordered twenty-four large vehicle carriers.

China’s shipbuilding sector and industrial capacity should not be underestimated: China’s civilian shipbuilding production stood at 49 percent of the global market share in the first eight months of 2023. Working together and reinforcing each other, Chinese electric vehicle producers and shipbuilders will enable the country to ship more autos abroad—including, potentially, to the United States.

Additionally, Chinese autos might make their way to the United States via investments in third countries, especially Mexico. Not only does Mexico border the United States, but it is also deeply integrated into USMCA supply chains. Case in point: General Motors, Ford, BMW, and Audi are all currently producing electric vehicles in Mexico. China’s BYD is reportedly scouting locations to build production facilities in Mexico, then export the vehicles across the border into the United States in order to avoid tariffs.

Barring a policy response, it is likely only a matter of time before China’s electric vehicles will be well positioned to enter the US market either directly via export or indirectly via re-exports from, or investment in, third countries such as Mexico.

Managing a flood of Chinese-made electric vehicles

Chinese exports pose dilemmas for policymakers on both sides of the Atlantic. Electric vehicles help accelerate decarbonization and may already be more economically competitive than traditional internal combustion engine vehicles. But leaving Western electric vehicle supply chains in the hands of a formidable rival poses obvious economic and strategic risks.

Chinese electric vehicle exports to Europe face increasing pushback on economic and security grounds. The European Commission, citing unfair subsidies, has launched an investigation into whether China’s BEV value chains receive subsidies that are illegal under global trade rules.

Washington, Brussels, and other capitals should engage in a comprehensive and thorough evaluation of the risks of Chinese BEVs to determine where Chinese-made automobiles do—or do not—pose risks. In the meantime, US and allied policymakers should take some interim measures to mitigate these risks.

For starters, Chinese BEVs with sensors should not be allowed near sensitive locations, as the video and imaging capabilities of these electric vehicles could enable real-time, on-the-ground surveillance. Consequently, Taiwan should continue to restrict inbound shipments of mainland Chinese-made electric vehicles, especially those with sensors. Chinese electric vehicles should also not be allowed in Guam and should be restricted around other US and allied military installations.

Chinese manufacturers and China’s foreign ministry may grouse about any restrictions on BEV exports. These objections can largely be dismissed, as the Chinese government has itself imposed restrictions on Teslas. Still, Chinese automakers will find it in their long-term self-interest for Western countries to determine the rules of the road. If Western countries can determine where Chinese BEVs do not pose risks, it would create greater certainty for trade and investment.

Chinese-made electric vehicles pose a thorny dilemma for Washington and Brussels, with complicated trade-offs. Policymakers do not have a lot of time, as Chinese exports appear set to rise sharply amid their domestic price war and a growing transoceanic car carrier fleet. While Washington, Brussels, and other capitals need to comprehensively examine the security risks of Chinese BEV imports, interim risk mitigation measures are appropriate until the totality of the costs and benefits are better understood.

Joseph Webster is a senior fellow in the Global Energy Center and the editor of the China-Russia Report. This article reflects his own personal opinion.

To read the full blog post as it appears on the Atlantic Council website, click here.

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A move by China that could curtail exports of graphite may throw a wrench into the supply chains of electric vehicle and battery makers that rely on highly processed versions of the mineral to help power their fleets of plug-in automobiles.

To read the full article, click here.

To read the full CRS report referenced in the article, click here.

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Amid resounding applause from the European parliament, Commission president Ursula von der Leyen recently announced the initiation of a subsidies investigation into China’s unfair trade practices in the electric vehicle sector.

This was a bold move in light of possible retribution against European car and other companies operating in China. Recalling how Chinese unfair and predatory practices led to the demise of the European solar industry, von der Leyen stressed the urgency for Europe to pre-empt a similar fate in the auto sector.

The EU’s move will hopefully lead US policymakers to evaluate their own policy tools and develop a proactive response.

Over the past decade, the Chinese EV industry has benefited from massive state subsidies and other government support. This paved the way for the country to become the largest global vehicle exporter this year, surpassing Germany and Japan. “New energy vehicles and equipment” was one of the 10 technology sectors targeted for global leadership in Beijing’s Made in China 2025 policy.

Moreover, China has strategically secured critical mineral deposits around the world needed for battery production, such as lithium. That means for several years Beijing has been able to dictate that EVs use Chinese-made batteries, which account for up to 60 per cent of the value of a car. While China has the world’s largest domestic automotive market at some 26mn vehicles, its EV companies are producing way more than the domestic market can consume — an excess of as much as 10mn a year, according to some estimates.

In many respects, the EV playbook looks similar to those followed by Beijing in developing its solar, steel and aluminium sectors. In those industries, massive subsidies led to overproduction and excess supply, saturating global markets and crippling international competitors. The oversupply of EVs has already found its way to Europe and many other corners of the world.

So far, the US has been spared an influx of Chinese cars due to a number of factors. First, the American tariff of 27.5 per cent (a 2.5 per cent toll on all auto imports plus the 25 per cent China import-specific one) is relatively high. Second, Chinese vehicles are ineligible for consumer EV tax credits under the Inflation Reduction Act, disadvantaging them in the US market. Third, geopolitical tensions are likely to have steered Chinese auto manufacturers away from the American market.

But there is no guarantee that this situation will continue, particularly as Chinese companies face rising pressure to offload their excess production. As a result, it’s in the US interest to act early.

The Biden administration has a number of tools at hand to do this. Like Europe, it can initiate a subsidies investigation under the US countervailing duty law, and even couple it with an antidumping probe if it can show that Chinese car companies are charging unfairly low prices. The challenge here would be demonstrating — as required by statute — that the domestic industry was injured by imports from China when the volume of Chinese cars imported so far has been negligible.

An alternative could be a new investigation under Section 301 of the Trade Act focused exclusively on Chinese unfair practices in the automotive and battery sectors, but this would take time. The administration could also consider initiating cases on national security grounds or over safeguards, but such remedies would not be China-specific and could result in contentious disputes with allies and partners.

Rather than begin lengthy trade investigations, the Biden administration has another mechanism at its disposal. It could adjust the vehicle levy as part of the trade representative’s ongoing, mandated Section 301 review of the wider China tariffs imposed by former president Donald Trump.

This review, which is due to be completed by the end of the year, could enable the US to raise the 27.5 per cent duty to a level that would, with more certainty, shield the American market from an onslaught of Chinese EVs.

Importantly, this could be done as part of an overall rebalancing of the tariffs, paving the way for the US to reduce tariffs on other consumer and industrial goods that are hurting America’s interests more than China’s.

Trade representative Katherine Tai has repeatedly said the US needs to use its trade tools in a strategic manner. This is the perfect opportunity to put this policy objective into practice.

The writer is vice-president of the Asia Society Policy Institute

To read the full opinion, click here.

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There was a time when cars manufactured in China were ridiculously unsafe. They tended to crumple in a collision like they were made of cardboard. But over the past 20 years, the Chinese have learned a lot from the American and European car companies that started manufacturing in China, thanks to local rules that require foreign companies to partner with a Chinese company.

That requirement has sparked a transfer of information and technology unlike any in modern history. Today the Chinese are making cars that are as good or better than those from companies like Mercedes, Ford, Volkswagen, or GM, and the Chinese new car market dwarfs all others. Last year, there were 27 million new cars sold in China, 13.75 million cars and light trucks sold in the US, and 9.25 million cars sold in the EU.

Now the Chinese automakers are ready to start exporting cars to foreign markets, but are finding Europe much more welcoming of Chinese made cars than the US, which has been having an on again, off again trade war with China since a former failed president bragged that trade wars were easy to win.

Tariffs play a major role here. The EU import duty on foreign made cars is 10%, and all cars — foreign and domestic — are eligible for EV purchase incentives. In the US, the import duty is 27.5% and only cars that follow stringent rules regarding the sourcing of battery materials and components are eligible for federal EV incentives. In addition, cars must have their final assembly point in the US, Canada, or Mexico.

Some political leaders in the EU are beginning to question whether lax import rules will lead to a swarm of Chinese cars coming to the Continent that overwhelms domestic manufacturers. The latest offering from Volvo — which is owned by Geely, a Chinese company — is instructive. The new Volvo EX30 is a world class electric car, albeit a smallish one, and its price of just $34,995 in the US is a shot across the bow of every other car company.

5.4 million battery-electric vehicles were sold in China last year, which is two-thirds of all EV sales in the world. China also controls 76% of global battery cell production capacity and has a dominant position in every aspect supply chain for raw materials used to manufacture all those batteries. That offers the country’s carmakers a strategic advantage and the ability to build EVs at prices that few can match.

China & Europe Collide

That’s a potential headache for European automakers. The EU proposes to ban cars with conventional engines by 2035. Who is going to supply customers with affordable cars when that happens? The Chinese, says Politico. Last quarter, for the first time in history, China surpassed Japan to become the world’s leading auto exporter, according to China’s General Administration of Customs. “The quality and value for Chinese cars has improved by leaps and bounds, especially in the last three years,” said Michael Dunne, an independent automotive consultant active in the US and China.

Chinese exports were only 3.5% of European auto sales last year, according to S&P Global. But Transport & Environment estimates that Chinese companies could make up 18% of the EV market in Europe by 2025. Germany’s national statistics office said in May that imports of electric vehicles from both Chinese companies, including companies like Volkswagen who import cars manufactured in China to Europe, represented 28% of all its EV imports in this year’s first quarter — three times more than during the same period in 2022.

“They are leveraging their specific product know how over incumbent European brands that employ a lot of people to make engines,” one senior automotive manager told Politico. To match that kind of efficiency, “VW would have to lay off half of its staff.”

The risk to Europe’s economy is extreme, Politico says. Cars are the continent’s largest industry and biggest employer and account for 10% of manufacturing activity. Until now, car exports from Europe have generated a trade surplus of between €70 billion and €110 billion every year over the past decade for the European economy, but there is a real danger that surplus could diminish or even disappear as Chinese electric cars go from a trickle to a flood.

The prospect of that trade surplus evaporating is leading to growing pressure on the European Commission to boost tariffs on foreign cars. Automakers in France want higher trade barriers, but the big German manufacturers, which are reliant on sales of their cars in China, worry that protectionist tariffs could bring retaliation from Beijing.

William Todts, the head of Transport & Environment, wants as many people as possible to switch to EVs, but not if it destroys the continent’s most important industry. “The goal is not to obstruct ambitious car and battery makers: the world sorely needs them. It’s to ensure intense but fair competition,” he wrote recently, adding that if the EU doesn’t act to block unfair competition from both China and the US, “Europe may well be on course to become a dumping ground for subsidized Sino-U.S. EVs and batteries.”

America Fears China

The generous incentives for electric cars and trucks baked into the Inflation Reduction Act are designed primarily to blunt the ability of Chinese companies to flood America with cheap electric cars. It is also intended to boost domestic (read non-Chinese) sourcing of battery materials.

The political winds in America are dramatically anti-China at the moment. “Mention the word ‘China’ to a member of the House or Senate, Democrat or Republican, the executive branch, they will give you the same look and say, ‘No, not welcome here,’” said Michael Dunne.

An example of the anti-China sentiment can be found in the experience of Microvast, a Texas company that won a tentative $200 million grant from the Biden administration to build a battery component factory in Tennessee. The government said the goal of the award was “bolstering domestic supply chains for lithium ion batteries and creating well paying jobs in the United States.”

Last month, the Energy Department announced with little explanation that it would not award the money after all. The proposed grant had drawn ferocious criticism from congressional Republicans because of the company’s ties to China, including a Microvast subsidiary there.

Ford got similar pushback in February when it said it would work with CATL, the largest battery maker in the world and one that is based in China. Ford insists it is just licensing the technology and that CATL will have no role in the factory. Ford CEO Jim Farley told a financial conference earlier this year, “They have some of the best battery technology. If localizing their technology in the U.S. gets caught up in politics, the customer is really going to get screwed.”

Gotion, another battery company based in China, is experiencing its own set of problems as it tries to establish a battery factory in northern Michigan. Despite the prospect of good paying jobs in an area that desperately needs them, the reception from the locals has been hostile, and that is putting it mildly.

The Takeaway

One solution Chinese companies could try is to build factories in America. After all, that is one of the things the IRA is meant to encourage. Doing so is what helped Japanese companies become successful in the US market. Today Japanese companies are firmly embedded in the US economy, and no one gives it a second thought. If China finds building US factories is too fraught, it could try establishing factories in Mexico to avoid the burden of the US import duty. (To be fair, China has had an import duty of 25% on all cars imported from the US for many years, so it’s not like the US tariff is out of line.)

A utopian would look at the enormous challenges the Earth faces as average temperatures continue their uphill climb and perhaps adopt the wisdom of Rodney King, who so famously said, “Can’t we all just get along?” The obvious answer is obviously no, we cannot. For many years, the US reveled in the fact that low paid minions around the world were keeping the shelves at Walmart stocked with inexpensive goods, but now the wheel has turned and “globalization” has lost much of its allure, and the shoe is on the other foot, so to speak.

How the world handles the challenge of low cost electric cars from China will be indicative of how it deals with more pressing problems. Looking at the current situation, it’s hard to be overly optimistic that humans will be able to put aside their parochial interests for the common good. Perhaps the next species to have mastery over the Earth will be better at pursuing cooperation instead of “winner take all” competition.

The Earth doesn’t care where electric vehicles come from, but humans do. ‘Tis a conundrum for sure.

Steve writes about the interface between technology and sustainability from his home in Florida or anywhere else The Force may lead him. He is proud to be “woke” and doesn’t really give a damn why the glass broke. He believes passionately in what Socrates said 3000 years ago: “The secret to change is to focus all of your energy not on fighting the old but on building the new.”

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On both sides of the Atlantic, the push to move beyond the internal combustion engine is creating a giant strategic opportunity for China, whose carmakers already dominate global markets for batteries and clean-energy technology.

From there, the responses of policymakers diverge, as U.S. protectionism contrasts with the European Union’s low tariffs and generous national subsidies for battery-powered imports. But in both Washington and Brussels, the threat of China taking over yet another industry is becoming an issue governments cannot ignore — and it’s shaping debates about jobs, trade and the fight against climate change.

“The U.S. has not outright hung up a ‘Do Not Invest’ sign, but we have made it clear we are anxious about Chinese car companies,” said Scott Kennedy, an expert in Chinese economic policy at Washington’s Center for Strategic and International Studies. “Europe has been much less interventionist and more supportive.”

The U.S. imposes a stiff 27.5 percent tariff for Chinese-made cars — put in place during Donald Trump’s presidency — and has buttressed that with the protectionist tax credits of President Joe Biden’s Inflation Reduction Act, which put a premium on car and battery production in North America. In addition, hostility toward Beijing from leaders in both political parties would make it difficult for Chinese carmakers to penetrate the U.S. market, at least openly.

Meanwhile, Europe’s moves have, intentionally or not, provided a strategic opening for China’s start-up car brands. The bloc’s tariffs on imported cars are only 10 percent, and European national subsidies for electric vehicles apply to imports as well as domestically made cars and trucks.

The attraction of the European market for electric vehicle makers is magnified by the EU’s recent decision to ban the sale of new combustion engine cars starting in 2035 — a decision the U.K. has also followed.

That’s why it’s possible to see a BYD-branded car in Dusseldorf, but unlikely in Dallas. BYD, a maker of both clean cars and the battery cells that power them, sold nearly 2 million cars last year (way more than Tesla). It’s one of many Chinese brands moving into the European market.

“Europe’s [electric vehicle] market is comparatively far more open than those of China and the U.S., where national or regional assembly is a prerequisite to qualify for purchase subsidies and import duties on foreign vehicles are higher,” said a recent report by the Allianz insurance company on the threat Chinese carmakers pose to the EU.

The Chinese challenge

The reputation of China’s carmakers has rapidly shifted, from being seen as making low-quality knock-offs to becoming a true rival for Western brands. Its domestic market dwarfs any other, selling 27 million cars last year, compared with 13.75 million cars and light trucks in the U.S. and 9.25 million cars in the EU.

The country’s lead in electric vehicles is even more pronounced.

Last year, 5.4 million battery electric vehicles — two-thirds of the world total — were registered in China. It also controls some 76 percent of global battery cell production capacity, and has a fierce grip on the raw materials used to make them. That offers the country’s carmakers a strategic advantage and the ability to build EVs at a cost-slashing scale.

And it has already grabbed a foothold in the U.S. market, despite Washington’s trade barriers: The Chinese carmaker Geely owns the Swedish automobile manufacturer Volvo and its luxury EV affiliate Polestar, which is building a factory in South Carolina.

Ford CEO Jim Farley has no illusions about what China means for his industry.

“We see the Chinese as the main competitor, not GM or Toyota,” Farley said at a finance summit hosted by the investment bank Morgan Stanley. “The Chinese are going to be the powerhouse, I think.”

The fact that Ford — with auto plants in the U.S., Europe and China — is not preoccupied with Toyota (the world’s largest automaker) or General Motors (its leading domestic rival) is a clear signal of how the carmaker assesses the threat from Chinese mass market EVs.

Several trends back up Farley’s assessment.

Last quarter, for the first time in history, China surpassed Japan to become the world’s leading auto exporter, according to China’s General Administration of Customs.

‘The quality and value for Chinese cars has improved by leaps and bounds, especially in the last three years,” said Michael Dunne, an independent automotive consultant active in the U.S. and China.

At April’s Shanghai auto show, Chinese EVs made global headlines, from the high end — the glitzy HiPhi Y SUV — to the low, like BYD’s Seagull, a hatchback with a minuscule $11,400 price tag.

“It reminded me of the heydays of the Tokyo auto show in the ‘80s,” said Joe Langley, an auto forecaster and analyst with S&P Global Mobility. He spoke of the era when Japanese automakers remade the global automotive order by producing small, reliable cars like the Toyota Corolla and the Honda Civic.

China’s potential for disruption is perhaps even greater — especially in Europe.

Europe’s friendly shore

The EU’s 2035 clean car mandate — echoed in the U.K. — is the opening Chinese brands needed. Sales are also driven by comparatively generous purchase premiums in some richer countries like France, Germany and the Netherlands.

Chinese firms plowed $24 billion into the EV ecosystem in Europe last year — representing more than half of all of China’s direct investment into the Continent, according to a report by the global consultancy Rhodium.

“Europe has few major battery firms of its own and is still very open to Chinese investment in the industry,” the report said.

China’s auto exports are still tiny, representing around 3.5 percent of European auto sales last year, according to S&P. But Transport & Environment, a green NGO, reckons that Chinese firms could grab from 9 percent to 18 percent of the all-electric car market by 2025.

Germany’s national statistics office said in May that imports of China-made electric vehicles (from both domestic brands and Western carmakers like Volkswagen building in China) represented 28 percent of all its EV imports in this year’s first quarter. That’s three times higher than the same period in 2022.

China’s advantage is twofold. Its EV producers don’t carry European automakers’ legacy costs of transitioning away from combustion engines. And with its vast domestic market, China has cracked the code on inexpensive production of battery cells — the main cost of an EV.

“They are leveraging their specific product know-how over incumbent European brands that employ a lot of people to make engines,” said one senior automotive manager granted anonymity as they are not cleared to talk publicly. To match that kind of efficiency, “VW would have to lay off half of its staff.”

The risk to Europe’s economy is extreme. Cars are the Continent’s largest industry and biggest employer and account for 10 percent of manufacturing activity.

Car exports have generated a trade surplus of between €70 billion and €110 billion every year over the past decade for the European economy, the Allianz report said.

The prospect of that trade surplus evaporating is leading to growing pressure on the European Commission — the executive branch of the EU that’s responsible for trade policy for its 27 member countries — to boost tariffs on foreign cars.

That’s creating divisions within the bloc. For example, French-backed carmakers are seeking a higher protective barrier, while German ones — reliant on car sales in China and worried about Beijing’s retaliation — hold their tongues.

The American moat

The outlook for China’s EV makers in North America is drastically different.

The tariff makes U.S. market access almost three times more expensive for China-built vehicles than the EU.

And suspicion of China is so pervasive among both Republicans and Democrats that it is spilling over into related areas of policy. The specter of Chinese imports is one argument that U.S. carmakers are using to caution the U.S. government against creating EU-style clean car sales regulations.

“If U.S. regulators and policymakers move too fast on EV mandates over the next several years, I predict China gains a stronger foothold in America’s EV battery supply chain and eventually our automotive market,” said John Bozzella, America’s chief car lobbyist at the Alliance for Automotive Innovation.

Republican lawmakers in Washington have struck similar notes, seeing an opportunity to use the president’s climate goals against him. “Joe Biden’s obsession with electric vehicles … is turning over American power and money to China,“ Republican Senator John Barrasso said on the Senate floor in February.

But Biden is making his own efforts to blunt China’s influence over the U.S. auto industry, one of the aims of the Inflation Reduction Act he signed last year. The bill’s stringent sourcing rules include specific prohibitions on tax incentives for electric vehicles made outside North America.

An obvious solution for China’s automakers would be to set up factories on North American soil. That’s already happening in Europe and some Chinese car companies, along with battery-makers, have explored that option for the Americas.

Polestar’s South Carolina factory aims to produce all-electric SUVs for the North American market — and the company notes that means they qualify for the IRA tax credit.

The bar is higher for Chinese car companies without a protective Swedish name.

“Mention the word ‘China’ to a member of the House or Senate, Democrat or Republican, the executive branch, they will give you the same look and say, ‘No, not welcome here,’” said Dunne.

The new instinct for many lawmakers in Washington is to jump at even the appearance of Chinese influence — a choice that paradoxically could hinder the development of a U.S. battery supply chain, a chief goal of the landmark climate law that Congress passed last year.

The most recent casualty of anti-China sentiment is Microvast, a Texas company that won a tentative $200 million grant from the Biden administration to build a battery component factory in Tennessee. The government said the goal of the award was “bolstering domestic supply chains for lithium-ion batteries and creating well paying jobs in the United States.”

But last month, Biden’s Energy Department announced with little explanation that it would not award the money after all. The proposed grant had drawn ferocious criticism from congressional Republicans because of the company’s ties to China, including a Microvast subsidiary there.

Ford got similar pushback in February when it said it would work with CATL, a giant Chinese battery-maker, to build a battery plant in Michigan. Ford insists it is just licensing the technology, and that CATL will have no role in the factory.

Farley, Ford’s CEO, delicately objected to the criticism in his appearance last month at the Morgan Stanley conference. Like other automakers, Ford is working hard to deliver the features Americans demand in an EV, like longer range. Chinese companies may be best suited to deliver those advantages.

“They have some of the best battery technology,” Farley said of the Chinese. “If localizing their technology in the U.S. gets caught up in politics, you know, the customer is really going to get screwed.”

Similar concerns exist in Europe.

William Todts, the head of Transport & Environment, wants as many people as possible to switch to EVs, but not while gutting the Continent’s most important industry.

“The goal is not to obstruct ambitious car and battery makers: the world sorely needs them. It’s to ensure intense but fair competition,” he wrote in a policy paper, adding that if the EU doesn’t act to block unfair competition from both China and the U.S., “Europe may well be on course to become a dumping ground for subsidized Sino-U.S. EVs and batteries.”

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They say President Joe Biden’s strategy imperils U.S. jobs and represents a potentially illegal end-run around Congress.

Critics are calling on Biden to halt mineral negotiations with the European Union and other nations while also slamming a recent mineral deal with Japan. The Biden administration insists that its strategy to boost supply chains among allied nations is the most potent counter to Chinese dominance over global minerals.

At issue is whether Biden should prioritize domestic mineral production and ensure producers in the United States — not manufacturers in foreign countries — reap the benefits of a coveted EV tax credit, known as 30D. The credit was included in last year’s Inflation Reduction Act.

Now, the Treasury Department is in the hot seat as it prepares to screen new trade deals and determine whether the pacts allow access to $3,750 in U.S. tax credits for EVs produced with minerals extracted or processed in partner countries. The mineral negotiations represent a marquee example of the threat Biden’s clean energy pursuit poses to other key administration policy priorities, most notably the rapid expansion of domestic manufacturing.

“They have three goals here,” Bill Reinsch, a trade expert at the Center for Strategic and International Studies, said of the Biden administration. “One is to facilitate the transition to green technology. The second one is to enhance domestic manufacturing and jobs. And the third is to do it in a way consistent with trade law and international trade rules. They can’t do all of those at the same time.”

Minerals such as lithium and cobalt are essential for today’s fleet of EVs. And experts agree that mineral production and refinement will likely form the backbone of the clean energy economy in the future and the millions of jobs that come with it. Minerals are also necessary for a long list of medical devices, smartphones and other staple products.

Meanwhile, compliance with the U.S. EV credit is based on mineral and manufacturing sourcing mandates designed to counter China by strengthening supply chains in the United States and nations with which the U.S. has trade agreements.

But critics are digging in for a fight. They’re challenging the Treasury Department’s loose interpretation of a “free-trade agreement” in the Inflation Reduction Act’s text.

“There’s enough noise to suggest Treasury is going to face some significant challenges in using this broad brush to redefine what trade agreements actually are, from a legal and constitutional standpoint,” Rich Nolan, president of the National Mining Association, a U.S. lobbying group, said in an interview.

Nolan said the mining group is “pushing the administration to bring those tax incentives home, so that those materials come from U.S. mines, from mining communities mined by American miners.”

A U.S. Geological Survey study released in January found that the United States is 100 percent import-reliant on 15 critical minerals, including minerals used in EVs like graphite and manganese. The U.S. remains more than 95 percent import-reliant on rare earths and titanium, while American companies import more than a quarter of lithium used in manufacturing, according to the study.

Another recent assessment from Securing America’s Future Energy, which promotes domestic energy production, laid out the Chinese dominance of global minerals in stark terms.

“Chinese-owned companies have strategically purchased stakes in major mineral deposits around the world, control anywhere from 60 to 100 percent of processing (depending on the mineral), and produce upwards of 70 to 90 percent of the world’s battery components,” the group said in a March report.

Talks ‘in the pipeline’

In March, Biden and European Commission President Ursula von der Leyen launched negotiations over a “targeted critical minerals agreement” that will “count toward requirements for clean vehicles in the Section 30D clean vehicle tax credit.”

The announcement came amid claims from various world leaders that the Inflation Reduction Act’s incentives violate World Trade Organization rules against subsidies that promote domestic products over imports.

The Office of the United States Trade Representative, which leads U.S. trade negotiations, said the E.U. talks are ongoing.

“We will continue to work with our EU allies to boost mineral production and expand access to sources of critical minerals while diversifying global supply chains,” said USTR spokesperson Sam Michel. The Swedish ambassador to the U.S., Karin Olofsdotter, recently told E&E News that a transatlantic pact is “in the pipeline.”

The Japanese deal, announced two weeks after the E.U. talks launched, “affirms” the two countries’ “obligation not to impose prohibitions or restrictions” on bilateral trade relations.

Now, Indonesia, Argentina, and the Philippines are signaling interest in similar deals. Even South Korea, which already shares a trade deal with the United States that was passed by Congress in 2011, is aiming for more mineral concessions.

“President Biden and I welcomed the expansion of our [bilateral] mutual investment in advanced technology, including semiconductors, electric vehicles and batteries,” South Korean President Yoon Suk Yeol said during a recent event at the White House, according to a translator. “President Biden has said that no special support and considerations will be spared for Korean companies’ investment.”

Congressional complaints

U.S. lawmakers say they’ve been kept on the sidelines.

Rep. Adrian Smith (R-Neb.), the chair of the House Ways and Means Trade subcommittee and the co-chair of the U.S.-Japan Congressional Caucus, said the Biden administration has not briefed him on any mineral trade negotiations.

“This is basically a workaround. And I don’t think it’s sustainable long-term,” Smith told E&E News. “I think there will be attempts to assert legislative prerogative.”

Never far from the spotlight on Capitol Hill, Senate Energy and Natural Resources Chair Joe Manchin (D-W.Va.) has regularly blasted the Biden administration’s implementation of the Inflation Reduction Act, saying recently he would “vote to repeal my own bill.”

Manchin has also threatened a lawsuit. Still, legal experts say it’ll be a tough case to make because of challenges in meeting legal standing. The moderate Democrat is now set to face off against West Virginia Gov. Jim Justice next year to retain his seat in a state Biden lost by nearly 40 points in 2020.

The Inflation Reduction Act text says that EVs qualify for half of the $7,500 credit if the minerals used in the models are “extracted or processed” in the U.S. or “in any country with which the United States has a free trade agreement.”

Meanwhile, the proposed Treasury guidance for the 30D credit gives access to 20 foreign countries with which the U.S. has traditional free trade agreements passed by Congress, along with “additional countries that the [Treasury] Secretary identifies,” such as Japan.

Reinsch, the long-time Washington trade expert, predicted the fight over the definition of a free-trade agreement will likely be settled in court.

“Since the term is undefined in the [Inflation Reduction Act], that’ll probably be resolved by litigation. This is America. Anybody can sue anybody for anything,” he said. “There’s no legislative history here to provide any guidance. And the term is not defined in the statute. So it ends up with judges.”

The two top Democratic trade lawmakers in Congress called the Japanese deal “unacceptable,” arguing the administration “does not have the authority to unilaterally enter into free trade agreements.”

“Even among allies, the United States should only enter into agreements that account for the realities of an industry, learn from past agreements, and raise standards,” Rep. Richard Neal (D-Mass.) and Sen. Ron Wyden (D-Ore.) said in late March, the day the Office of the U.S. Trade Representative announced the deal with Japan. “Agreements should be developed transparently and made available to the public for meaningful review well before signing — not after the ink is already dry.”

An aide for Wyden’s Senate Finance Committee, who was granted anonymity because the person is not authorized to speak publicly on the issue, said the Biden administration last briefed the committee on mineral trade talks in “early March.”

The congressional complaints are echoed in environmental and labor circles.

Ben Beachy, vice president of manufacturing and industrial policy at the BlueGreen Alliance, touted domestic manufacturing as the best solution to curb the U.S. climate footprint.

“The onshoring of EV manufacturing will help to cut the climate pollution that, ironically, is often baked into imports of EV components,” Beachy said. “That’s because overseas corporations tend to be more emissions intensive than U.S. factories in producing the aluminum, steel and other materials that go into EVs.”

He said the Japanese deal should “not be repeated” with the E.U. or other countries.

A recent BlueGreen Alliance study found that the Inflation Reduction Act has spurred new domestic manufacturing projects that will create 900,000 jobs. The law sparked a wave of new battery plant announcements. And the Department of Energy recently extended a $2 billion loan to a battery recycling plant in Nevada.

But the mineral negotiations are not the first time the Biden administration has struggled to balance climate and domestic manufacturing priorities.

In April, the Republican-controlled House of Representatives voted to repeal a Biden administration pause on solar tariffs from four Southeast Asian countries where the administration itself determined China is processing solar products in circumvention of U.S. tariffs. And despite a veto threat, the Senate passed the measure Wednesday with nine Democrats in support.

Biden administration officials say the pause was necessary to maintain high levels of solar deployment in the United States.

‘Immediate action today’

For months, top Biden administration officials have urged allied nations to band together with the U.S. to develop collaborative mineral supply chains.

“When we look at critical minerals and we look at solar panels and wind turbines and electric vehicles and batteries, there is already now an effort by some to narrow the control of that supply chain into one or a handful of countries,” Amos Hochstein, deputy assistant to the president and senior adviser for energy and investment, said in a March speech in Washington.

“We have to take immediate action today to work as a global community with our allies and to make sure that that market changes fundamentally,” he said. At the time of the speech, Hochstein was the State Department’s special presidential coordinator for global infrastructure and energy security.

David Turk, deputy secretary at the Department of Energy, told E&E News recently that the effort to boost allied mineral supply chains globally should be a “full interagency” strategy, pointing to expertise at DOE and assistance tools at agencies such as the U.S. International Development Finance Corp. and the U.S. Agency for International Development (USAID).

“We have our national labs, [and] we’re bringing some of that expertise to the table,” said Turk. “We’ve been having a lot of good conversations, including with [the White House]” and the Treasury Department.

Last year, the U.S. Trade and Development Agency helped to finance a mineral processing facility in the Philippines. And on May 1, following a summit at the White House with Philippine President Ferdinand Marcos Jr., Biden announced a new package of assistance to the Philippine mineral sector, including $5 million in USAID funds to boost mineral processing and EV component manufacturing in the country.

Turk said he’s looking for “good, forward-leaning language” on minerals in the upcoming G-7 nations summit in Japan.

The U.S. is home to some of the largest mineral reserves globally. And the U.S. mining sector continues to push the Biden administration to open up key mineral reserves in Minnesota, Arizona and Alaska.

But even where the administration is putting its weight behind mine proposals, judges are raising objections.

Mining experts say a 2019 judicial decision, which halted the Rosemont copper mine in Arizona, is complicating the approval mining permits by requiring companies to prove the existence of valuable minerals even at the locations mining companies want to dump mine waste.

House Republicans included language in their lead energy and permitting package to allow a company to “use, occupy, and conduct operations on public land, with or without the discovery of a valuable mineral deposit.”

Backing Biden

Proponents of EV deployment in the United States are putting their weight behind the Treasury Department’s liberal interpretation of trade agreements.

“We’re certainly supportive of expanding negotiations. We want to make sure we have the largest reach of eligibility possible for the clean vehicle credit,” said Leilani Gonzalez, policy director for the Zero Emission Transportation Association, an EV deployment advocacy group.

She added that with countries still in the middle of developing mineral supply chains, the question to answer is whether they can meet the requirements that the Department of Treasury has laid out.

Abigail Wulf, director of the Center for Critical Minerals Strategy at Securing America’s Future Energy, the pro-domestic-energy organization, also called for a “broadened” definition of trade deals.

“We think it’s a good thing to expand the tent when it comes to trade agreement countries,” said Wulf. “Simultaneously, while we’re letting down those draw bridges, we need to be making sure that the U.S. and others are building high enough walls around the Chinese Communist Party.”

The Inflation Reduction Act disqualifies vehicles from the 30D credit if the EVs contain minerals or battery components from a foreign entity of concern. While experts expect Chinese entities to fit that definition, the foreign entity of concern portion of the 30D credit doesn’t take effect until 2024.

On top of her support for the mineral negotiations, Wulf urged the Biden administration to pass traditional trade pacts with congressional support and enforceable labor and environmental standards. The United States last closed an enforceable trade deal with Mexico and Canada in 2020.

Still, Wulf said the administration is showing little appetite for that route.

“The problem with these trade agreements that aren’t ratified by Congress is that they aren’t actually enforceable,” Wulf said.

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Is BYD, the Chinese electric vehicle giant, turning into a shipping company?

As it aggressively pushes into markets overseas, BYD has ordered at least six massive car carriers, ships that can transport thousands of cars at a time. In part, BYD’s move reflects a keen frustration of the Chinese auto industry. Over the past two years, just as China’s vehicle exports boomed, pandemic-related supply chain snarls led to acute shortages of space on cargo ships.

Now, BYD appears to be maneuvering not only to ship its own products but also to offer global shipping services to other car manufacturers. Think car company meets ship owner meets shipping logistics provider, all rolled into one.

BYD has made no public statements about its foray into shipping. But a recent update to information about the company on Tianyancha, China’s database of companies, offers some clues.

According to a time-stamped update last month, BYD Auto Industry, a subsidiary of the broader BYD group, expanded a paragraph on the scope of its commercial activities. The section now lists activities not usually associated with a car manufacturer: ocean carrier operations, freight forwarding, international shipping agency services, and port cargo handling. (BYD did not respond to a request for comment from Quartz.)

The Tianyancha update suggests that BYD is looking to establish a foothold in global shipping. And it represents yet another push by the company to establish its dominance up and down the automotive supply chain.

“The most vertically integrated company”

BYD has honed its vertical integration strategy for years, having started out as a mobile phone battery maker before manufacturing other electronics, auto components, and finally electric vehicles. That playbook has served it well in the competitive EV field.

“[BYD] has mastered the core technologies of the whole industrial chain of new energy vehicles, such as batteries, motors and electronic controls,” Wang Chuanfu, BYD’s chairman, once told Forbes.

Already, BYD is looking to buy lithium mines in Africa and has secured a contract for lithium extraction in Chile, since lithium is integral to EV batteries. BYD has become a leading producer of EV batteries, even supplying competitors like Tesla and Toyota, and is expanding its battery production capacity from about 285 Gigawatt hours (GWh) in 2022 to an estimated 445 GWh by the end of this year.

“BYD is probably the most vertically integrated [car] company,” said Lei Xing, a US-based auto analyst and co-host of the podcast China EVs and More. “There’s nowhere else to turn to vertically integrate more than to [buy] your own ships… And it’s not out of the question that BYD becomes a provider that they can ship for other people, competitors.”

Not enough ships for China’s car exports

BYD isn’t the only Chinese car maker that’s getting into the shipping business.

Last July, SAIC Motor, the state-owned automaker, partnered with the Chinese shipping giant COSCO and the port operator Shanghai International Port Group to set up Guangzhou Yuanhai Car Carrier Transportation, described as a “vehicle supply chain” company.

For China, expanding its homegrown vehicle shipping capacity is seen as critical to growing the global footprint of its automotive industry.

“International [marine] transportation is facing the urgent situation of insufficient capacity, unstable capacity, and poorly connected logistics information, becoming a stumbling block for the globalization” of Chinese car makers, noted China Automotive News in a November article.

The urgency of reliable shipping has become particularly acute as Chinese car exports have skyrocketed over the past two years. According to Chinese customs statistics, the value of vehicle exports in the third quarter of 2022 was $12.7 billion, more than five times higher than the same period in 2020.

Yet over the same period, growth in the global capacity of car carrier vessels lagged far behind, according to data from shipping services provider Clarksons, as cited by Bloomberg.

Of the roughly 750 car carriers in operation worldwide, China currently only operates a fleet of 10 such ships capable of long-haul maritime journeys, according to the automotive logistics firm Changjiu Logistics.

As a result, Chinese carmakers struggled to find space on vessels to send their vehicles to overseas markets. As an article last month by the state news agency Xinhua put it: “As auto exports soar, even a single shipping space on car carriers is hard to find.” Companies that did snag such spots on ships reported paying vastly inflated prices. BYD’s ambition to own and run ships is a bid to better control the vagaries of the supply chain.

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A package of highly restrictive export controls released in early October by the U.S. shook the Chinese and global semiconductor industries. But gauging the impact on both China’s semiconductor aspirations and the collateral damage to the global industry of the U.S. Commerce Department’s Bureau of Industry and Security’s new rules will take time.

Many in key parts of the semiconductor industry were taken by surprise by the lack of any comment period or phase in of the requirements, and by the U.S. persons controls, which led to a panic on social media on both sides of the Pacific among engineers who work or have worked in both China and America. Many have criticized what they see as the lack of a coherent roll out plan that was sensitive to industry realities. The new rules also include specific restrictions on technologies that are not considered leading edge, where there does not seem to be a real national security justification.

It took more than two years for the full impact to register on Huawei of the May 2019 Entity List action and the May 2020 extension of U.S. export controls extraterritorially, essentially crushing the firm’s consumer business, and undermining all of its major business lines. In this case, the biggest impact was created by the so-called foreign direct product rule (FDPR), which cut Huawei off from the manufacturing base for advanced semiconductors for all of its product lines. But Huawei was a single company, while the new rule will impact dozens of firms across the semiconductor industry.

China’s Ministry of Industry and Information Technology (MIIT) has held a series of emergency meetings on the rules over the past week, and some Chinese participants warned that the rules threaten the entire industry. Memory leader YMTC 长江存储 apparently warned that its operations were in jeopardy, though the firm has denied it was summoned to such as meeting, adding to the confusion.

How to unpack these rapid developments? The situation is evolving rapidly and some of the media reporting and speculation on Chinese social media has almost certainly overstated the impact, but it is probably too early to assess the full impact on both the domestic Chinese semiconductor industry, and U.S. and foreign semiconductor firms that are closely integrated into China’s semiconductor supply chains.

Cutting off access to new technology

The intent of the new Commerce Department controls appears to be to try to place strong limits on China’s ability to develop indigenous capabilities to support advanced computing, meaning artificial intelligence (AI) and supercomputing, while at the same time limiting the impact on mature semiconductor production, supply chains, and U.S. companies. It will be critical to watch how the rule implementation and industry reaction evolve as the Commerce Department attempts to thread this needle.

The new Commerce Department package has two major elements:

• Restricting Chinese company access to advanced graphics processing units (GPUs) produced by U.S. market leaders Nvidia and AMD, which are widely used by primarily Chinese commercial companies and research institutes. The GPU portion is also part of a broader set of restrictions on most inputs to high performance computers and supercomputers. The full impact of this ban, if it is carried out (presumably) with a denial of licenses for all end users in China, will be profound and is dealt with in depth here and here.
• The second major portion of the package are new controls placed both on technologies and U.S. persons supporting production of specific types of semiconductors at China-based facilities, both Chinese and foreign owned. The U.S. persons provisions are unprecedented, and as we will see, probably the most important element of the new package, though many questions remain about how it will be implemented.

Since the new rule was released, there has been much discussion, some of it uniformed, about what the rules require or don’t, including claims that the Biden Administration has forced all U.S. persons working on semiconductors in China to choose to resign. These claims are not accurate, but the evolving situation is complex, and people are reacting to how they think the rules will be enforced and what this implies for the future of the industry they are working in.

The technology and personnel controls apply to specific technology nodes for both logic chips — think CPUs and GPUs — and memory chips. The thresholds established in the new rule appear designed to freeze China’s domestic capabilities at nodes determined by the U.S. government:

• 16/14 nanometres (nm) for logic;
• 128 layer for NAND memory;
• 18 nm half-pitch for DRAM memory.

The levels are also designed to target specific Chinese companies:

• SMIC 中芯国际 for logic;
• YMTC for NAND;
• CXMT 长鑫存储 for DRAM.

All of these companies are already manufacturing semiconductors at or above the technology levels specific in the new rule.

The rule is designed cleverly to cut off the companies’ ability to move up the technology added value chain by restricting them from acquiring new equipment. The new controls add 11 new types of production equipment under a new Export Control Classification Number (ECCN) that covers a complex mix of capabilities required for advanced node production. It also applies to specially designed parts and components for such equipment, and software and technology for their development or production. Perhaps most significantly, the new rules also endanger the current operations of Chinese semiconductor firms producing at the targeted technology levels by requiring the U.S. persons supporting the companies’ operations at these technology levels to obtain a license. Why is this important? It is one thing to cut off acquisition of new equipment — SMIC, for example, has been unable to acquire advanced lithography gear for more than two years — and completely another to target the firm’s existing operations via the ongoing support they receive from toolmakers.

What exactly is a U.S. person?

The crux of the matter is how modern semiconductor foundries operate. Every company in the industry operating globally uses U.S. tools in the manufacturing process, and these tools require constant maintenance and support. The reaction of all the U.S. tool makers to the new rule taking effect October 12 has been to pull all support personnel from virtually all Chinese foundries they were supporting. This includes (at the very least) YMTC, CXMT, and SMIC. Over the past week there have been chaotic meetings among the tool makers, most notably Applied Materials, Lam Research, KLA Tencor, and others, with customers, U.S. government officials, and their internal legal and government affairs teams, attempting to determine their obligations under the new rules. Some U.S. tool makers have already released estimates of the impact of the restrictions in 2023. Lam Research, for example, on an earnings call last week estimated losses in 2023 at up to $2.5 billion for 2023.

Some of the confusion arises from the wording of the rule, in the sometimes arcane language of the Export Administration Regulations (EAR). The key new U.S. persons rule, for example, includes confusingly written directives such as this:

In addition, new EAR sections 744.6(c)(2)(iv), (v), and (vi) require a license from the Commerce Department for a U.S. person to (i) ship, transmit, or transfer to or within China; (ii) facilitate such shipments, transmissions, or transfers; or (iii) service any item not subject to the EAR (i.e., a foreign-made commodity, software, or technology) that is also described in an Export Control Classification Number on the Commerce Control List in Product Groups B, C, D, or E of Category 3 that the U.S. person knows will be used in the development or production of integrated circuits at any semiconductor production facility in China, but the person does NOT know whether such semiconductor production facility fabricates integrated circuits are one of the covered types of advanced node logic, NAND, or DRAM.

Since “U.S. person” includes not only citizens and green card holders but also “Any person in the United States,” their application is broad. And the rules appear fairly explicit, in some ways, noting that there will be a presumption of denial (Commerce Department parlance for a very low probability that a license will be approved if applied for) for a U.S. person, individual or corporation, for anyone providing support of any kind to Chinese firm producing at the specified technology levels.

But this is where it becomes complicated. There are dozens of other Chinese semiconductor manufacturing operations, both currently producing commercial products, or under construction. Some of these Chinese firms are also potentially operating within the forbidden zone of technology development, but critically, the Commerce Department rule specifies only a technology level, not specific facilities. So if, for example, a particular facility is doing any work within the forbidden technology zone, it potentially taints the entire operation. In an abundance of caution, U.S. tool makers appear to be deciding to at least temporarily halt all support in China, potentially putting China’s entire semiconductor industry operations on hold. YMTC has asked all of its U.S. persons to leave as it grapples with how to comply with the rule.

The new rules specifying technology and U.S. person controls did not come with an accompanying list of specific facilities that would be covered, unlike the Entity List or other U.S. lists of offending companies, which contain specific names or multiple names, addresses, and zip codes, eliminating any doubt about who is affected or not. In this case, the lack of a publicly available list of targeted Chinese facilities — and there are many — has created a fireball of confusion, with effects that remain unclear. So far, the Commerce Department has not issued any clarifications, and one official explicitly said the department would not issue such a list. Since the rule appears pitched at the “facility” level, companies should probably assume that U.S. persons working at a facility doing any work on the targeted nodes would be covered.

In addition, the U.S. persons rule impacts a wide range of individuals working in China: Tool maker personnel working at customer sites, executives working at Chinese semiconductor firms, and persons working at foreign semiconductor firms operating in China. The latter are primarily SK Hynix, Samsung, and TSMC, all of which appear to have gotten a one year reprieve from the provisions of the rule, with licensing applications being considered on a case by case basis. This, of course, is not much of a reprieve, given the five to ten year timeline most firms use for technology development. For U.S. persons working at any of the covered facilities, their career prospects look to be now caught up in the churn of U.S.-China tech competition, and many have apparently resigned or are considering doing so. A mass exodus of U.S. executives and technicians from Chinese facilities would be a major brain drain putting further pressure on companies already attempting to cope with the loss of technical support and access to hardware and software upgrades. But it is not clear yet that this will happen.

Short-term pain but long-term gain for China’s semiconductor industry?

Chinese firms like YMTC, CXMT, and SMIC were not likely taken fully by surprise by the new rules, though it is likely the U.S. persons piece caught them off guard. These firms have likely all stockpiled certain spare parts for tools in anticipation of a cutoff of hardware, much as Huawei did with advanced semiconductors produced at TSMC before the September 2020 cutoff of TSMC’s ability to support the firm. But the U.S. persons restrictions mean that stockpiling alone may not be sufficient to allow the firms to continue to operate some production lines. Semiconductor manufacturing equipment such as lithography, etching, deposition, process control, and metrology requires constant maintenance, and typically comes with long-term maintenance contracts. One industry executive I spoke with estimated that a company like YMTC could only continue operation for at most three months without software and other updates from tool makers. U.S. tool makers are continuing to digest the new rules and determine which facilities are covered.

The combination of U.S. tool makers pulling personnel, and spare parts and software updates being withheld, and the likelihood that this uncertainty will continue for some time, throws into doubt the future operation of many facilities operated by Chinese national champions SMIC, YMTC, and CXMT. In addition, literally overnight, the U.S. export control package put all semiconductor companies in China in danger by putting a major cloud over their future development and ability to continue to attract investment. Even companies operating at more mature nodes face uncertainty, as there is now a clear glass ceiling to any future upgrade plans. Apple this week announced it was dropping YMTC as a memory supplier, a quick reaction driven by Congressional concern and the reality that the firm is now under a major cloud and is unlikely to be able to continue to innovate at more advanced nodes and keep pace with Apple requirements.

Foreign firms with major manufacturing operations may get a short reprieve, but the writing is on the wall in terms of their long-term ability to continue to use China-based operations as part of their global business model. SK Hynix, which operates a major DRAM facility in Wuxi, was already barred from upgrading the multibillion facility to use extreme ultraviolet lithography gear, controlled on a country basis by the Wassenaar Arrangement. In the highly competitive world of memory, not being able to keep pace with technology development means a rapid decline of market share. Though China-based facilities, including those of SK Hynix and Samsung and others operated by SK Hynix and Solidigm, Intel’s former memory/storage unit in Dalian, and TSMC fabs in Shanghai and Nanjing will remain players in their respective market segments, over time, their inability to move up the value chain will impact their business models and long-term commitment to manufacturing in China. TSMC, for example, is also caught in the GPU focused part of the rule, and late last week suspended foundry services support for GPU major Biren Technology 壁仞科技, another major hit to the Chinese tech industry.

Does Beijing have bigger fire power than rare earths?

Prospects for the U.S. to get key players such as Japan and the Netherlands on board appear dim at present. With the new controls targeting logic chips at 16/14 nm, there is concern that the U.S. is not just targeting leading edge semiconductors, but also more mature nodes that are big revenue generators for tool makers. It’s very likely that the companies most impacted — including YMTC, CXMT, and SMIC — will turn to Japanese suppliers and ASML of the Netherlands to continue supporting production at 16/14 nm. They also have the potential of using existing equipment to go to the more advanced 7nm chips, as SMIC has already done.

The new rules will accelerate a process that started during the Trump era of extending export controls extraterritorially, which compels companies to make designs that are not dependent on U.S. technology to reduce future risks to supply chains. All of this could ironically have the effect of being a short-term pain for China’s semiconductor industry, but a long-term gain, as foreign suppliers adjust to the rules and find ways around some of the controls.

For now, with the global semiconductor industry already reeling from global recession and supply chain disruptions, the Commerce Department moves come at a very difficult time, and the rolling collateral damage of taking out a number of producers in the short term and a large raft of entrants remains unclear. The impact on U.S. tool makers is sure to be substantial, given that China is the most active market for new semiconductor fabs and the big players derive substantial revenue from the China market.

Finally, U.S. officials plan to take the new restrictions to the Wassenaar Agreement in 2023 for broader multilateral approval. This will include the personnel restrictions, and could require other countries to include controls on their citizens working to support development of the covered technologies. Already, Dutch lithography giant ASML has ordered its U.S employees to cease serving China-based customers pending a review, though the number of such individuals is likely low and the firm has also likely ordered its China-based U.S. persons to similarly stand down. ASML in particular has a large exposure in China, including a mix of Dutch, U.S., European, and Chinese employees. ASML has remained bullish on China despite controls on advanced lithography equipment, noting that “China’s semiconductor scene is growing at an unrivaled rate.” ASML and some other tool makers have made initial statements suggesting the impact of the new rule on their overall business will be low, but noting that the effect of the overall controls could mean the hit to their business in China is larger as Chinese fabs are unable to put together production lines without other U.S. tools.

Sorting out who can continue to work on which projects in China will be complex for both U.S., European and Japanese firms going forward, and in an industry with long time horizons, companies will also have to determine the long term risks of allowing workers to support Chinese customers who may eventually want to work on controlled technology, adding further complexity and downsides for Chinese firms.

Finally, the big wild card here will be how Beijing chooses to react once officials have digested the short and long-term impacts of the overall package of controls. Beijing has typically been very reluctant to take strong actions targeting U.S. company operations in China via tools such as the Unreliable Entity List and the Anti-Foreign Sanctions Law. However, with the new restrictions targeting key parts of the Chinese technology sector such as AI and supercomputing, and a broad range of companies, Beijing may be forced to react with stronger asymmetric measures. U.S. officials have likely calculated that any response Beijing makes will cause more pain to China over time than to U.S. interests.

While many have focused on things like rare earths and EV battery minerals as potential areas where Beijing could choose to respond by taking measures such as throttling some exports, there are also a number of key sectors of the ICT and semiconductor industry where China is a key if not the major player: smart device and televisions screen displays, where China based production accounts for a major portion of output, and legacy semiconductors and packaging, where Chinese firms, including SMIC, are major players. Even though an iPhone or AI server in the cloud uses the most advanced processors from Apple, Nvidia, or Intel, a particular device or system also uses dozens of less advanced semiconductors, many of which are produced and packaged in China. Beijing could choose to weaponize these types of supply chains also, once the dust settles on the Party Congress and the new tech savvy Politburo and Standing Committee is in place. As the full impact of the U.S. attempt to freeze China’s semiconductor industry in place sinks in, there are no low risk options that would not also result in damage to the business environment in China at a time when the economy remains in considerable distress resulting from COVID and the global economic downturn.

Paul Triolo is Senior VP for China and Tech Policy Lead for Albright Stonebridge Group. Previously, he worked at Eurasia Group, where he led the firm’s newest practice, focusing on global technology policy issues. He is frequently quoted in the New York Times, Wall Street Journal, Wired, SCMP, the Economist, and other publications, and appears on CNN, CNBC, and other media outlets that follow global tech issues.

Click here to register for the upcoming WITA Webinar: “No Chips for You! America’s New Export Controls on Semiconductors and Their Implications for Global Trade” to hear Paul Triolo and other featured speakers discuss new U.S. export controls on semiconductors sold to China that have dual uses in commercial and military technologies. 

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