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US-China tensions: are EVs next in the firing line?

  • The US is planning to enhance its trade and investment pressure on China, including by way of a mechanism aimed at screening investment into China by US firms. Although EIU expects these moves to be limited, we are sceptical that this leniency will last long.
  • China’s increasing global dominance in electric vehicles (EVs) will put this industry squarely in the cross-hairs of US policy action. We expect US officials to pass future regulations aimed at limiting US trade and investment exposure to this industry. However, these moves will be insufficient to dislodge China from its competitive position in both EV and non-EV automotive supply chains. 
  • US automakers will probably push back against these rules, while Chinese firms will increase their presence in markets such as Mexico to avoid US trade restrictions. 

We expect the US to publish new restrictions on outbound investment to China in early-to-mid May, targeting key advanced technologies such as semiconductors. This US action will further damage international confidence in China’s market at a time when the country’s leaders are looking to restore investor sentiment. The new mechanism, probably deployed via executive order by the US president, Joe Biden, will raise compliance burdens for multinational companies operating in China.

We counsel companies to prepare for a period of policy and legal uncertainty as the US irons out these restrictions over the coming quarter. The forthcoming mechanism has reportedly been scaled back to a notification regime, requiring companies to inform the US government of investment plans in certain sectors (rather than mandating executive or Congressional pre‑approval, which would have marked a significant shift in the US business landscape). These developments suggest that the forthcoming policy restrictions will have a less damaging effect on US businesses with asset, supply-chain or capital exposure to the Chinese market than initially feared.

We are nevertheless sceptical over the long-term viability of this leniency. The US government’s hesitation stems from its reluctance to incur significant blowback on its own companies, but we expect that US concerns over national security will ultimately overshadow this restraint in the coming years, setting the stage for a worsening of operational and policy risks across a number of specific sectors over the 2020s.

Where do US-China relations go from here?

The long-term trajectory of the US-China relationship points to a persistent state of heightened risk for multinational companies. As always, geopolitical concerns will continue to dominate the optics of the US‑China relationship. US anxieties over China’s support of Russia will preserve the risk of sweeping sanctions, while tensions over Taiwan will remain an important flashpoint in US-China ties. 

These dynamics will nevertheless emerge alongside a likely levelling-off of some tensions in 2023, as China and the US resume dialogue in some areas. Senior officials from the US Department of Commerce visited China in April, for example, probably to prepare for a visit by the US commerce secretary, Gina Raimondo, later this year. Janet Yellen, the US Treasury Secretary, has also recently pushed back against domestic calls for a “decoupling” of the US and Chinese economies. Given the likely role of her department in any outbound investment screening process, we interpret Ms Yellen’s measured comments as signalling genuine willingness within the Biden administration to keep bilateral economic relations from spiralling too far out of control.

New-energy vehicles are the next sector to watch

Electric vehicles (EV) are already firmly in the US’s geopolitical crosshairs. The first move was the passage of the US$740bn Inflation Reduction Act (IRA) in August 2022, which includes significant fiscal support for the onshore cultivation of climate-friendly industries. Provisions over subsidies, tax breaks and other incentives for the EV market have already ignited tensions with the EU, South Korea and Japan, given allegations that the IRA will foster market-distorting outcomes to the advantage of North American producers (and the detriment of European, Japanese and South Korean manufacturers, given requirements related to North American-sourced content).

We expect tensions between the US and China to spill into this area (as we have previously highlighted), given China’s growing global competitiveness in the automotive industry, as well as concerns over fair competition after China poured in more than Rmb150bn (US$22bn) in subsidies over the last decade (according to the Centre for Strategic and International Studies, a US think-tank). Some of these issues are already manifest within the conditional financial incentives under the IRA. A maximum tax credit of US$7,500 for EV battery production, for example, is only offered to companies that source 40% of battery minerals (and 50% of components) from the US, or via a country with which the US has a free-trade agreement. Starting from 2024, new restrictions will be phased in, including prohibitions on batteries (or those produced using materials) that are sourced from a “foreign entity of concern”—a designation alluding to China.

International companies with exposure to the automotive industry, both globally and in China, should prepare for future US trade regulations that increasingly target EV manufacturing (or EV‑adjacent sectors, such as battery production). US lawmakers have already begun to probe industry leaders over their dealings with Chinese suppliers and EV manufacturers, while US federal funding has also come under the microscope; the most high-profile case involves scrutiny of a US$200m grant to Microvast, a US battery-maker, over its ties to China. Future developments could include obligations couched under the aforementioned US government notification mechanism or, under a worst-case scenario, export controls, conditional restrictions or even specific prohibitions on capital deployment into China (including by way of financial or equity flows). 

US will not be able to influence a global restructuring of automotive supply chains

We do not expect future US rules to weigh on China’s growing clout in the EV manufacturing process, given the latter’s dominance of new-energy vehicles (NEVs)—an umbrella term that includes battery EVs, plug-in hybrids and hydrogen fuel-cell vehicles. China’s domestic NEV market has become increasingly mature after years of subsidy-driven growth: robust annual growth averaging around 30% in 2023‑27 will allow NEVs to account for about 48.5% of new-car sales by 2027. Chinese battery component manufacturers, which are competitive globally, are also moving ahead with major overseas expansion plans, while Chinese raw material firms are racing to secure key mineral production sites, particularly in Africa (China already absorbs around half of Africa’s mineral exports). International investment by the US and its allies has been tepid by comparison.

US automakers, most of which have operated joint ventures in the Chinese market for decades, are already pushing domestic lawmakers to relax regulations on sourcing requirements, claiming that the expansion of manufacturing in the US will not be economically viable unless some form of co‑operation with China is permitted. Even if lawmakers do not capitulate, automakers may find ways to work around these regulations. Ford, for example, opted for a novel ownership structure with a Chinese battery-maker, CATL, that may leave it eligible for IRA subsidies for certain types of commercial vehicles (such as trucks and vans). 

Chinese firms will also probably seek to circumvent potential restrictions by enhancing their own investment footprint in Mexico. This could allow them to benefit from local-sourcing rules under both the IRA and the US-Mexico-Canada (USMCA) agreement, while simultaneously avoiding punitive duties targeting goods shipped from China (although this may not allow them fully to escape US regulatory scrutiny, and there is a risk that US officials could push Mexico to take a stricter approach towards screening Chinese foreign investment).

Competing political and economic interests among state governments may also present opportunities for EV industry players. As US states compete for federal dollars, we expect to see different approaches to the development of the domestic EV industry. Early signs of this are emerging: Michigan’s state government determined in April that economic benefits outweighed political risks when approving the issuance of state funds to a highly politicised US$3.5bn battery plant with ties to China. The governor of Virginia, on the other hand, scuppered a similar deal on national security grounds.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the economic, political and policy outlook for more than 190 countries, helping organisations identify prospective opportunities and potential risks.