Balancing Protectionism and Innovation:

The Future of the European Automotive Industry in the Age of Chinese Electric Vehicles

 

Dr. ir. Ying Zhang

Dr. iur. Urs Lustenberger

 

 

Abstract

The European automotive sector has historically been a global leader in technological excellence, safety, and premium market dominance. However, the rise of intelligent electric vehicles (EVs) from China, led by BYD, NIO, and others, has introduced a new competitive dynamic that challenges Europe’s automotive leadership. In response, the European Union (EU) has implemented protectionist policies aimed at regulating foreign EV entry, citing environmental, economic, and security concerns. This paper examines the effects of protectionist policies on market competitiveness, technological progress, and consumer choice, drawing historical parallels to the American auto industry’s protectionist policies in the late 20th century. Additionally, a comparative analysis of EV production and cost structures in Europe and China is presented, along with an evaluation of geopolitical influences on European industrial development. The study concludes by outlining strategic recommendations for Europe’s long-term competitiveness in the evolving global EV landscape.

 

Introduction

The European Union (EU) has long been a global leader in automotive engineering, safety, and environmental foresight. However, the rapid rise of China’s intelligent electric vehicles (EVs) has presented a serious challenge to Europe’s dominance in the sector. Chinese automakers have gained international traction through cost-effective production, cutting-edge AI-driven automation, and strong government support (Schmidt, 2023). In response to this growing competition, the EU has implemented regulatory measures to protect its domestic auto industry from factory closings and job losses. These policies resemble past U.S. protectionist actions against Japanese and European imports in the 1980s, which ultimately led to stagnation and loss of market share (McKinsey, 2021). The purpose of this study is to analyze the EU’s current policies on intelligent EVs and foreign competition; compare Europe’s and China’s EV production and cost structures; examine geopolitical factors shaping Europe’s auto industry; provide strategic recommendations for sustaining Europe’s global competitiveness.

 

The Rise of AI-Driven Safety and Intelligence in EVs 

Over years of development, China’s EV industry has not only made significant advancements in AI and EV safety but is actively redefining the global automotive safety landscape. The rapid integration of AI-driven technologies into Chinese EVs demonstrates a shift from traditional passive safety measures to proactive, predictive safety systems. For instance, NIO’s ET7 and ET9 leverage 33 high-performance sensors, including Lidar, radar, and predictive analytics, to anticipate and prevent accidents before they occur (Chen, 2023). Similarly, BYD’s Blade Battery technology has improved thermal management, enhanced energy efficiency while significantly reducing fire risks, addressing one of the most critical safety concerns in EV adoption (Li & Zhou, 2023).

 

However, while China has made major strides in AI-enhanced vehicle safety, European automakers continue to lead in regulatory compliance and certain safety innovations. For example, Mercedes-Benz’s Drive Pilot (2023) became the first Level 3-certified autonomous driving system in Europe, setting a precedent for highly automated driving within strict regulatory frameworks (AutoTech Review, 2023). Volvo’s EX90 integrates AI-based pedestrian protection through advanced sensor fusion technology, reinforcing Europe's commitment to pedestrian and cyclist safety. Meanwhile, BMW’s software-defined vehicle architecture enables continuous over-the-air (OTA) safety updates, ensuring long-term adaptability and compliance with evolving regulations.

 

Despite these advances, EU regulations on AI ethics, data privacy, and liability laws impose stricter limitations on the deployment of AI-driven safety innovations. Compared to China’s more flexible and rapidly evolving regulatory environment, European automakers face longer approval processes and stricter compliance requirements, potentially slowing the widespread adoption of fully autonomous safety systems. This regulatory divergence raises a critical debate: while the EU prioritizes ethical AI deployment and stringent safety validation, China’s aggressive technological expansion and regulatory flexibility allow for faster innovation cycles and market penetration.

 

EU Policies on Intelligent EVs and Market Protectionism

In response to the rapid expansion of China's EV industry, the European Union (EU) has implemented a series of regulatory measures aimed at controlling EV imports while fostering domestic innovation. These policies are designed to enhance sustainability, reduce reliance on foreign supply chains, and ensure competitiveness within the European market.  Key policy initiatives include: (1) The EU Battery Regulation (2023) establishes strict sustainability criteria for EV batteries, with the objective of promoting environmentally responsible battery production and recycling (European Commission, 2023). (2) Supply Chain Diversification aims to reduce Europe's dependence on Chinese battery supply chains by encouraging domestic battery production and strategic partnerships (European Commission, 2023). (3) The Fit for 55 Package (2021) mandates all new passenger cars sold from 2035 must be zero-emission, accelerating the EU’s transition toward a carbon-neutral transportation sector (European Parliament, 2022). (4) Carbon Footprint Tracking for Imported EVs introduces new regulatory mechanisms to assess the carbon footprint of imported vehicles, a measure that disproportionately impacts Chinese manufacturers due to supply chain emissions and energy-intensive production processes (European Parliament, 2022). (5) The European Chips Act (2022) focuses on strengthening domestic semiconductor production, mitigating Europe's reliance on Chinese and Taiwanese semiconductor manufacturers, which are critical for automotive AI systems and EV functionalities (EU Council, 2022). (6) The Anti-Subsidy Investigation Against Chinese EVs (2023) seeks to determine whether Chinese automakers benefit from unfair state subsidies, potentially leading to the implementation of higher tariffs on Chinese EV imports (Reuters, 2023).

 

While these policies are intended to protect European automakers and industrial sovereignty, they also raise concerns regarding their potential to restrict access to technological innovations and cost-effective EV options. By imposing trade barriers and strict regulatory requirements, the EU risks slowing the adoption of emerging technologies and limiting affordability for consumers, particularly in the mass-market EV segment. The challenge for European policymakers is to strike a balance between regulatory protectionism and the need for market openness, ensuring that Europe remains competitive in the global transition toward intelligent and sustainable mobility.

 

Cost Analysis of EVs: China vs. Europe

The cost structure of electric vehicles (EVs) in China and Europe constitutes a fundamental determinant of market competitiveness and plays a crucial role in assessing the economic implications of protectionist trade policies. Understanding regional cost disparities is essential for evaluating how pricing strategies, production efficiencies, and regulatory interventions influence the global positioning of EV manufacturers and the accessibility of EVs for consumers. Furthermore, variations in production costs, labor expenses, supply chain dependencies, and government incentives shape the competitive dynamics between Chinese and European automakers, highlighting the broader economic impact of trade restrictions and market interventions within the industry. The table below exhibits the cost comparison of EVs in China and Europe.

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China’s EV market benefits from economies of scale and vertical integration, enabling significantly lower sticker prices. Entry-level models, such as the Wuling Hongguang Mini EV, retail at approximately ¥50,000 (∼$6,900), while mid-tier vehicles (e.g., BYD Qin Plus) average ¥150,000–200,000 (∼$21,000–28,000) (BloombergNEF, 2023). In contrast, European EVs command premiums of 30–50%, with mainstream models like the Volkswagen ID.3 priced at €40,000 (∼$43,000) and premium brands (e.g., BMW i4) exceeding €60,000 (∼$65,000). This disparity stems from China’s dominance in battery production (70% of global capacity) and lower labor costs ($6/hour vs. $35/hour in the EU) (IEA, 2023), with significantly higher productivity due to fully automatic factory floors and labour and engineering skills. 

 

China historically deployed direct subsidies (up to ¥13,000 or $1,800 per vehicle) to stimulate demand, though these were phased out by 2023 in favor of tax exemptions and infrastructure investments (CATL, 2023). Conversely, Europe relies on purchase grants (e.g., Germany’s €6,750 subsidy) and tax policies, such as Norway’s 0% VAT exemption, to offset higher upfront costs. However, European incentives are often means-tested or capped, limiting their universal impact (European Commission, 2023).  

 

China’s cost leadership in lithium-ion batteries ($98/kWh vs. Europe’s $120–135/kWh) is underpinned by control over critical mineral supply chains and technologically leadership. Firms like CATL and BYD vertically integrate lithium extraction, refining, and cell manufacturing, reducing dependency on external suppliers. Europe, by contrast, imports 80% of its battery components from Asia, incurring logistical and tariff expenses (Rhodium Group, 2023). While initiatives like the European Battery Alliance aim to localize 25% of global production by 2030, progress remains incremental due to high energy costs and regulatory complexities.  

 

Total Cost of Ownership (TCO) disparities further entrench regional divides. In China, low energy costs ($0.10–0.15/kWh), minimal maintenance, and subsidized insurance yield a 5-year TCO of ∼$15,000 for entry-level EVs (e.g., BYD Seagull). In Europe, higher electricity prices ($0.30/kWh in Germany), labor-intensive servicing, and insurance premiums (∼€1,200 annually) inflate TCO. For example, the Volkswagen ID.3 incurs a 5-year TCO of €45,000, exceeding its €40,000 sticker price (IEA, 2023).  

 

China’s cost advantages are also reinforced by domestic market saturation (80% share for local brands) and state-backed R&D, fostering rapid innovation cycles. Europe faces structural headwinds, including reliance on imported raw materials and stringent environmental regulations that raise production costs. Although the EU’s Critical Raw Materials Act seeks to secure lithium and cobalt supplies, its 2030 targets (10% domestic extraction) remain insufficient to rival China’s resource hegemony.  

 

China’s EV cost superiority is a product of integrated supply chains, scaled production, and strategic state intervention. Europe’s higher costs reflect fragmented supply networks, labor market rigidities, and nascent battery ecosystems. Bridging this gap requires Europe to accelerate gigafactory investments, streamline permission for mineral extraction, and reconcile decarbonization goals with affordability imperatives. These findings underscore the interplay of industrial policy and market dynamics in shaping global EV competitiveness.  

 

Comparative Analysis of EV Industry Between Europe and China

The electric vehicle (EV) industry is at the forefront of the global transition toward sustainable and intelligent mobility. While both China and Europe have emerged as leaders in this sector, they differ significantly in market dynamics, production strategies, innovation models, and government policies. This section provides a comparative analysis of the EV industries in China and Europe, reflecting on the pros and cons of incorporating Chinese innovation into the European automotive sector and assessing the geopolitical impact on Europe’s industrial development.

 

China embraces rapid innovation with low production costs and AI-driven automotive ecosystem, which make its EVs highly competitive; European automakers maintain an edge in safety standards, sustainable production, and high-end luxury EVs. However, without balanced international collaboration, the protectionist policies in the EU makes the European auto industry innovation slow down.

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Lessons from American Auto Protectionism

The U.S. automotive industry’s resistance to foreign competition during the 1970s and 1980s offers a seminal case study in the unintended consequences of protectionist trade policies. Faced with rising imports of fuel-efficient Japanese vehicles, the U.S. government implemented measures such as the 1981 Voluntary Export Restraint (VER), which imposed quotas on Japanese automakers (Johnson, 2022). While ostensibly designed to shield domestic manufacturers and preserve jobs, these policies inadvertently stifled innovation within the American auto sector. Rather than incentivizing technological advancement or operational efficiency, U.S. firms relied on regulatory barriers to maintain market share, resulting in complacency and stagnation (Johnson, 2022). This outcome underscores a critical paradox of protectionism: insulating industries from competition often diminishes their long-term capacity to adapt to global market dynamics.  

 

Japanese automakers, however, responded to these restrictions with strategic agility. By circumventing tariffs through foreign direct investment (FDI)—establishing production facilities within the U.S., such as Honda’s Ohio plant in 1982—they not only retained access to the American market but also entrenched their dominance through superior cost efficiency and quality. This “localization strategy” allowed Japanese firms to leverage their competitive advantages while neutralizing protectionist measures, ultimately reshaping the U.S. automotive landscape. By the 1990s, Japanese brands accounted for over 30% of U.S. vehicle sales, demonstrating how protectionism can catalyze, rather than curtail, the global expansion of foreign competitors. 

 

For the European Union (EU), this historical precedent carries urgent relevance as it confronts analogous pressures from China’s rapidly advancing electric vehicle (EV) sector and America’s Inflation Reduction Act (IRA), which prioritizes domestic green technology investment. The EU adopt similar protectionist measures—such as tariffs on Chinese EVs—and these measures risk replicating the U.S. auto industry’s trajectory. Such policies are prone to delay the EU’s transition to sustainable mobility by insulating legacy automakers from competitive pressures, thereby reducing incentives for innovation in battery technology, supply chain resilience, and cost reduction (Porter, 1990). Moreover, protectionism imposes direct costs on consumers through higher prices and limited choices, exacerbating inflationary pressures in an already fragile economic climate.  

 

Further, the EU’s global competitiveness could erode if it prioritizes market shielding over market adaptation. China’s dominance in EV battery production and America’s IRA-backed investments in renewable infrastructure highlight the strategic importance of fostering innovation ecosystems rather than relying on trade barriers. As evidenced by Japan’s response to U.S. protectionism, competitors may exploit regulatory constraints by localizing production or advancing technological leaps, leaving protected industries further behind (Dunning, 1988). The EU’s automotive sector, which contributes 7% of the bloc’s GDP and supports 14 million jobs, cannot afford such stagnation (European Automobile Manufacturers’ Association, 2023).  

 

In conclusion, the U.S. auto protectionism episode underscores the futility of isolationist trade policies in a globalized economy. For the EU, the path to sustained competitiveness lies not in replicating failed strategies of the past but in embracing open markets, accelerating green innovation, and investing in workforce reskilling. By learning from history, the EU can avoid the pitfalls of stagnation and position itself as a leader in the next era of industrial transformation.  

 

Pros and Cons of Incorporating Chinese Innovation in the European Auto Industry

The EU faces a strategic dilemma regarding whether to embrace or restrict Chinese automotive technologies.  Firstly, integrating Chinese Innovation can provide Europe with the access to advanced AI and battery technologies. Chinese automakers lead in artificial intelligence-driven automation and next-gen battery innovations, such as BYD’s Blade Battery technology (safer, longer lifespan, cheaper than lithium-ion alternatives), NIO’s AI-driven sensor fusion technology for autonomous driving (Li & Zhou, 2023). Secondly, integrating Chinese innovation can lower consumer costs and increase the market growth for European auto industry globally, by making EVs more affordable for consumers and expanding market accessibility, driving higher adoption rates of zero-emission vehicles. Thirdly, integrating Chinese innovation in the European auto industry can foster infrastructure development, by learning from China’s well-developed charging and battery-swapping networks. 

 

However, there are also cons of integrating Chinese Innovation within a certain period. Firstly, there exists Intellectual Property (IP) and Data Security risks. For the longest time, European policymakers fear reliance on Chinese AI-driven vehicle software, as it could pose data privacy and cybersecurity risks. Secondly, Stronger EU regulations would be needed to ensure data sovereignty in AI-driven vehicles. Thirdly, with Chinese EV imports and the existing value and cost competitive advantage, European automakers may be disrupted, leading to job losses and industry shrinkage. Fourthly, heavy reliance on Chinese batteries and components could make Europe vulnerable to trade restrictions or geopolitical disputes.

 

All the advantages and disadvantages of integrating Chinese innovation into the European automotive industry stem from broader geopolitical and trade conflicts. EU-China trade tensions have intensified, particularly as the EU has been imposing higher tariffs on Chinese EV imports in response to concerns over market distortions and state-backed subsidies. European policymakers are increasingly wary of over-reliance on China, especially in critical supply chains for lithium, rare-earth metals, and battery production. This dependency raises strategic vulnerabilities, as any disruptions in trade relations or export restrictions from China could significantly impact Europe's ability to scale EV production and maintain technological competitiveness in the global market.

 

The ongoing geopolitical tensions between China, the EU, and other global powers directly impact the European automotive industry. The U.S. has imposed a 100% tariff on Chinese EV imports (Končan et al., 2024), pressuring Europe to adopt a similar stance. European automakers must balance relations with both China and the U.S. to avoid being caught in a global trade war. Strengthening EU-U.S. partnerships on AI-driven vehicle technologies may provide an alternative to full reliance on Chinese suppliers.

 

Nevertheless, the EU must find a balance between protecting its domestic industry and integrating beneficial innovations from China. If protectionist policies are too strict, European automakers risk falling behind further in AI and battery technology. If the EU fully opens its markets, it risks economic dependence on China. Therefore, the recommended strategy to Europe is (1) to encourage joint ventures with Chinese automakers while protecting key industries. For example: European-Chinese co-developed battery plants in Germany. (2) to strengthen European domestic innovation, with more EU-funded R&D in AI-driven mobility, and to increase investments in solid-state batteries and hydrogen fuel cell technologies. (3) to diversify supply chains, for example by diversifying the collaboration with lithium and semiconductor manufacturers worldwide.

 

Conclusion

The European automotive sector stands at a crossroads. While protectionist policies may offer short-term security, over-reliance on these measures risks stagnation. China’s advancements in AI-driven mobility and cost-efficient EV production pose both opportunities and challenges. To remain a global leader in the automotive industry, Europe must strategically integrate Chinese innovations while investing in homegrown R&D; enhance trade partnerships beyond China to secure supply chain resilience; balance market regulation with open innovation to ensure sustainable growth. The future of European mobility depends on how effectively policymakers navigate international competition, trade regulations, and industrial innovation.