The Road to a New European Automotive Strategy: Trade and Industrial Policy Options
Jacques Delors Institute & Sciences Po on Navigating the Trilemma of Decarbonization, Competitiveness, and Economic Security
A Center for China and Globalization (CCG) delegation visited the Jacques Delors Institute (JDI) in Paris this week. Pascal Lamy, Coordinator of the Jacques Delors think tank network and former Director-General of the WTO, and Sylvie Bermann, Member of the JDI Board of directors and former French Ambassador to China and Britain, are among the European experts to receive the CCG delegation.
CCG has maintained close interactions with JDI, where Arancha González Laya, the Dean of Paris School of International Affairs at Sciences Po and former Minister of Foreign Affairs of Spain, is also a Member of the JDI Board of Directors.
So, we are happy to share a recent joint report by the JDI and Sciences Po.
The Road to a New European Automotive Strategy: Trade and Industrial Policy Options —— Navigating the Trilemma of Decarbonization, Competitiveness, and Economic Security
Executive summary
The European automotive industry stands at a crossroads, facing three concurrent challenges: decarbonizing to tackle climate change, maintaining global competitiveness in a fierce market, and safeguarding economic security amid rising geopolitical tensions. At the heart of the European economy, the automotive sector directly employs 1.4 million people and supports 13 million jobs indirectly across the EU, with implications extending far beyond the industry itself. The transition from internal combustion engine vehicles (ICEs) to electric vehicles (EVs) presents profound challenges, as structural adjustments to production processes and supply chains will significantly affect European employment and economic prospects.
The EU has established a legislative framework for transport sector decarbonization, and the automotive industry has invested substantially in this transition. However, evolving market conditions have created a trilemma of competing objectives: decarbonization, competitiveness, and economic security. Successfully navigating this transition requires a unified yet adaptable European strategy that addresses trade-offs between the objectives, balances short-term priorities with medium- and long-term investments, and coordinates action between private and public sectors.
Each aspect of the trilemma presents both opportunities and challenges for the automotive sector, its supply chain, and the broader European economy. Addressing these issues comprehensively will require coordinated international trade and industrial policies.
The EU aims to achieve 100% zero-emission mobility for all new vehicles by 2035, in line with its commitment to climate neutrality by 2050. This target requires substantial investment in EV infrastructure, battery production, and consumer incentives. However, EV adoption rates vary significantly across member states, creating an uneven transition.
Key challenges include high costs and consumer hesitancy. EVs remain significantly more expensive than comparable ICEs, limiting widespread adoption. Inadequate charging infrastructure and high electricity prices create additional barriers. Europe must also scale up battery production to compete with China’s dominance of the global battery supply chain.
The EU automotive industry faces three major challenges to its competitiveness: high production costs, innovation gaps, and significant regulatory burdens. Labor and energy costs in Europe are substantially higher than in China, making it difficult for European manufacturers to compete on price. The transition to electric mobility strains supply chains, particularly for small and medium-sized enterprises (SMEs) dependent on internal combustion engine technologies. Moreover, strict regulatory decarbonization targets must be accompanied by corresponding support measures to avoid overburdening the industry.
External challenges include fierce competition from China and protectionist policies in the United States. China’s dominance in EV and battery production, supported by strategic subsidies and economies of scale, poses a formidable challenge to European competitiveness. The US Inflation Reduction Act diverts investments from Europe, while tax cuts planned by the new US administration may intensify competitive pressures.
Rising geopolitical tensions threaten European automotive supply chain stability, particularly through potential US tariff increases that could cause trade diversion and supply disruptions. The EU’s reliance on China’s consumer market, raw materials, and battery components creates vulnerability to economic coercion and supply disruptions. While efforts to build resilience through export market diversification, production localization, and domestic capacity scaling are underway, Europe continues to lag in mining, refining, and processing capabilities for critical raw materials.
The integration of digital technologies in modern cars and EV charging infrastructure creates new vulnerabilities, including cybersecurity risks and potential foreign government data collection. The decarbonization process also threatens social and political stability through potential job losses across the ICE supply chain.
This report examines policy measures to support the industry’s transition while aligning with EU objectives, providing a toolbox for balancing the strategic triangle outlined in the analytical section. Drawing on more than 70 interviews and stakeholder events, the policy options are organized across four key areas: regulatory measures, trade policy instruments, industrial incentives, and infrastructure investments.
Regulatory measures address coherence across the EU, revision of decarbonization targets, introduction of regulatory incentives for EV adoption, launch of public awareness campaigns, and fair access to in-vehicle data.
Trade policy instruments include notably negotiating new trade agreements, accelerating the adoption of critical raw material agreements, deepening cooperation with Japan and South Korea on battery supply chains, and implementing trade remedies and enforcement actions.
Industrial policy measures include consumer subsidies, support for corporate fleet decarbonization, phase-out of fossil fuel subsidies, increased research and development (R&D) funding, direct subsidies to help SMEs navigate industry changes, and workforce transition assistance.
Infrastructure measures focus on improving charging infrastructure and electricity grids, increasing battery material recycling, and developing hydrogen refueling infrastructure.
This report outlines four potential scenarios based on the interplay between global tensions and international cooperation, ranging from intense conflict and isolation to low tensions and robust collaboration. These scenarios highlight critical factors influencing the automotive industry’s future: government support, technological advances, supply chain resilience, and consumer demand.
Actual trajectories will likely combine elements from multiple scenarios, shaped by political and economic developments – particularly decisions made by the new US administration. The EU must navigate these challenges to ensure its automotive industry remains competitive, resilient, and sustainable.
The transition to electric mobility presents a critical opportunity for the EU to achieve its climate goals and maintain industrial leadership. With a narrow window of opportunity, the EU must act decisively to create a competitive and sustainable automotive ecosystem that can rival its global competitors. Active pursuit of market access opportunities will enable European automotive firms to benefit from growing global demand for sustainable mobility. A clear roadmap will facilitate investments required for the transition, particularly from manufacturers. Without decisive action, the EU risks both industrial decline and loss of technological edge in a sector that will define the future of mobility. A holistic strategy combining regulatory, trade, industrial, and infrastructure measures is essential to bridge the innovation gap and ensure the long-term competitiveness of the European automotive industry. The policy options identified in this report, grounded in extensive stakeholder consultations across the EU automotive industry, can also inform the EU’s Strategic Dialogue on the Future of the European Automotive Industry. The time to act and future-proof the European automotive industry is now.
For the whole report
Scenarios
The future of the automotive industry will be largely shaped by the level of global tensions and barriers, on one hand, and by the level of international cooperation in EV and battery value chains, as well as the competitive dynamics within them, on the other. The combination of these factors will determine the challenges and opportunities the industry faces, and the appropriate responses to address them. The solutions to the challenges of decarbonization, competitiveness, economic security, and the potential social consequences of the shift to zero emissions will be highly dependent on these factors. The level of global tensions and international cooperation could result in four scenarios: protectionist rivalry, competitive coexistence, unilateral dominance, and strategic collaboration. These scenarios, detailed below, are not mutually exclusive and may overlap in various ways. They are not predictions but frameworks for imagining possible futures. The actual trajectory of the automotive industry will likely involve elements of each scenario, shaped by complex geopolitical and economic dynamics.
SCENARIO 1: PROTECTIONIST RIVALRY
— High global tensions & low international cooperation
This is a worst-case scenario (short of a generalized armed conflict), characterized by rising trade barriers, national industrial policies aimed at self-sufficiency, and limited cross-border investment.
Driven by concerns over unfair competition and national security, additional Western countries follow Washington’s path, seeking to exclude Chinese EV producers and suppliers from their markets. The US escalates trade tensions, further eroding the multilateral trading system and triggering tit-for-tat responses that fuel greater protectionism worldwide. The new US administration imposes a series of tariffs and trade barriers targeting the automotive sector, disproportionately impacting the EU’s premium car segment and restricting its access to the North American market.
European automakers increasingly shift production to North America, with greater localization of manufacturing across the NAFTA region and other key markets to mitigate the impact of tariffs. In parallel, the EU adopts a mix of defensive measures, including high tariffs on Chinese EVs, and offensive actions, such as restricting imports of vehicle connectivity systems and granting massive subsidies to boost domestic production.
China retaliates with measures such as trade barriers on Western goods and export restrictions on critical raw materials, further escalating trade tensions and deepening the fragmentation of the global trading system.
A crisis in the Taiwan Strait would create even greater geopolitical tensions, leading to severe disruptions in the global battery supply chain and grey-area measures like consumer boycotts of Western brands. Critical raw materials, many of which are refined in China, could become weaponized as trade restrictions and supply bottlenecks limit access to essential inputs for battery production across Europe.
The resulting shortages make it impossible for manufacturers to meet decarbonization targets, compelling a return to ICE and the exploration of alternative powertrain technologies to sustain automotive production. In this scenario, the EU is unable to meet the 2035 targets and shifts its focus towards hybrid drivetrains, increased investment in hydrogen, and continued reliance on ICE.
Western brands face consumer boycotts in China, fueled by heightened nationalist sentiment and political tensions, which lead to a significant drop in sales for European automakers in the Chinese market and compound the financial pressures from disrupted supply chains and lost revenues.
This results in a bifurcation of the automotive industry, with separate and incompatible standards, limited innovation, and higher costs and operational challenges due to diseconomies of scale. It prompts a re-evaluation of production and investment strategies, as the localization of production undermines economies of scale and complicates the EU’s efforts to balance a cohesive decarbonization agenda with maintaining global market reach.
SCENARIO 2: STRATEGIC COLLABORATION
— Low global tensions & high international cooperation
This scenario envisions positive developments, where governments prioritize global trade norms and engage in structured dialogues to establish common standards. Collaborative efforts focus on addressing shared challenges, such as decarbonization and improving production efficiency.
Here, international cooperation is high, with joint efforts to build resilient and secure supply chains for critical materials and batteries. The EU establishes a cooperation initiative with partner countries for joint materials and battery production, with tariff-free trade in zero-emissions vehicles. The EU and the US build a partnership to reduce obstacles to transatlantic EV trade. The EU and China promote joint ventures between their companies within Europe, fostering investment, agreed-upon technology transfers, job creation, and the stable supply of critical minerals.
Critical raw materials agreements with alternative suppliers outside China play a pivotal role in diversifying Europe’s CRM sources. By establishing long-term trade partnerships and developing effective CRM extraction and refining capacities within allied regions, the EU reduces its dependence on vulnerable supply chains. Additionally, recycling initiatives for battery materials help recover critical minerals domestically and contribute to a circular economy for key components.
There is greater standardization in the industry, facilitating interoperability and reducing investment risks. This fosters a more integrated global EV industry with increased innovation, lower costs, reduced threats to economic security, and faster decarbonization.
Several favorable developments converge to rapidly accelerate consumer acceptance of EVs in Europe. Following the introduction of the 2025 CO2 standards, automakers launch a range of lower-cost EV models, supported by advancements in battery technology that improve efficiency and drive down production costs. These factors lead EVs to become less expensive than internal combustion engine vehicles by the late 2020s, which boosts their attractiveness to consumers. Meanwhile, an increase in US gas production results in stabilized energy markets and falling utility costs, which eases the operational costs of EVs and further encourages consumers to make the switch.
While this signals an optimistic shift towards sustainable mobility, it also poses substantial challenges for traditional suppliers specializing in internal combustion engine components, who face job losses as demand for these parts declines. However, the booming EV sector – with its demand for batteries, charging infrastructure, and specialized components – provides significant opportunities for job creation and economic growth, which may offset these losses.
SCENARIO 3: COMPETITIVE COEXISTENCE
— High global tensions & high international cooperation
Unlike purely positive or negative scenarios, this scenario paints a mixed picture where competition and cooperation coexist. While some countries may engage in protectionist measures, others prioritize collaborative efforts to advance the automotive industry.
Governments recognize the need to maintain a global industry while addressing concerns about fair competition and national security. Western countries implement trade defense measures such as tariffs on Chinese EVs, while simultaneously engaging in strategic partnerships and joint ventures with Chinese companies. This scenario represents a ‘balancing act,’ involving carefully crafted strategies and diverse actions.
The outcome is a high degree of regionalization, with countries forming trade blocs, prioritizing internal economic goals, and engaging selectively in global trade.
This leads to a multipolar automotive industry with varying levels of integration and competition across regions.
SCENARIO 4: UNILATERAL DOMINANCE
— Low global tensions & low international cooperation
In this scenario, a single region or country dominates the EV industry, leveraging technological leadership, market size, and control over critical resources. China, with its established dominance in battery production and EV manufacturing, capitalizes on its competitive advantages to secure a large share of the global market, mirroring its ambitions in other ‘green’ technologies.
By 2030, the EU automotive industry faces accelerated decline as Chinese manufacturers rapidly expand their presence in the European market. Chinese automakers not only dominate the mass-market EV segment but also begin to attract younger premium customers, drawn to the advanced technology and innovative design of Chinese vehicles. A breakthrough in autonomous driving technology within China propels its EVs to achieve full autonomous driving capabilities – something EU producers have yet to accomplish. The technological edge positions Chinese EVs as the preferred choice for a new generation of consumers across all segments.
The competitive advantage of Chinese automakers – driven by imports of complete knock-down kits (CKD) and vertically integrated supply chains that minimize reliance on local EU suppliers – leads to a wave of closures among European suppliers and significant job losses across the region. Mass-market OEMs also face severe challenges, as Chinese EVs continue to gain ground in global markets. This structural crisis threatens the industrial base and economic stability of key European manufacturing regions.
Other regions also struggle to keep up, leading to a dependence on Chinese technology and supply chains. This results in a less diverse and potentially less innovative automotive industry, with limited competition to drive down costs or accelerate technological advancement. Other countries take a variety of different paths, such as continued production of internal combustion engine drivetrains, hybrids, and hydrogen vehicles.
Factors influencing the scenarios
The scenarios outlined in this report are shaped not only by the interplay between global tensions and barriers on one side, and international cooperation on the other, but also by several additional factors critical to the EV industry’s evolution:
First, government support measures, including incentives and infrastructure investments, alongside emissions standards, will play a crucial role in shaping the EV industry’s trajectory. The different regulatory frameworks in China, Europe, and the United States highlight the potential for diverse approaches to EV adoption. Second, technological advancements, such as innovations in battery technology, the expansion of charging infrastructure, and software-defined vehicles, will most certainly influence the competitiveness of the automotive industry. Breakthroughs like solid-state batteries and other advanced technologies have the potential to disrupt market trends in the medium- to longterm. Third, securing access to critical materials and developing resilient supply chains for batteries will be vital for the sustainable growth of the EV industry. Regional variations in battery chemistries and production capacities further emphasize the importance of supply chain management.
Fourth, consumer adoption of EVs will hinge on factors like purchase price, range anxiety, charging convenience, and model availability. The growing market for used electric cars could play a role in increasing affordability and accessibility. Finally, the direction of US trade policy under the new administration will greatly influence each of these scenarios. The election of the 47th president of the United States has sparked a flurry of analyses of campaign promises and comparisons with the actions of the first Trump administration.128 Ahead of the inauguration on 20 January 2025, analysts have focused on both campaign commitments and recent statements, including proposals to raise tariffs on Chinese imports to as high as 60% and impose import tariffs on goods from the rest of the world at rates between 10% and 20%. Additional tariffs on imports from Canada, Mexico, and BRICS countries are also under consideration, particularly if efforts to establish an alternative to the US dollar as the currency for international trade persist. Speculation further extends to potential measures involving the IRA, environmental regulations, and the implications of the president-elect’s close relationship with Tesla’s CEO, Elon Musk.
President Trump made it clear that he would use import tariffs as instruments to address bilateral trade deficits, support US industries, promote domestic job creation, and punish what he perceives as ‘unfair’ trade practices or regulations contrary to US interests.
The automotive industry is expected to be among the sectors most susceptible to policy changes, alongside information technology, high-tech products, and agriculture. President Trump has already revoked Biden’s 50% EV target by 2030 and frozen unspent charging fund. Further adjustment of IRA schemes can be expected as well as the imposition of tariffs, and the responses of major trading partners. If the first Trump administration is any guide, we can expect unpredictability, volatility and disruption, tempered by a transactional approach that may mitigate the impact of new measures or address specific vulnerabilities.
Possible scenarios range from the implementation of broad US tariffs on imports from all sources to more targeted, bilateral tariffs aimed at specific trading partners or groups. The degree of disruption in international trade over the coming years will largely depend on the reactions of trading partners – whether they retaliate, and at what extent.
For the whole report
