Tariffs on Chinese electric vehicles (EV) will likely boost investments in new European factories, which is good news but could also undermine Europe’s industrial base, to address this challenge the EU needs to strengthen and unify its investment rules, writes Tobias Gehrke.

Chinese investments in Europe are way down, but those who still arrive have changed strategy, building new factories on green fields mostly along the EV value chain: battery cells, components, materials, and final car assembly.

The first signs of this tactic can already be seen. Volvo, Leapmotor and Windrose announced moving part of their EV production from China to Europe. Chery, Nio, BYD, and SAIC have secured a European production foothold; as have battery and equipment makers such as CATL, Huayou Cobalt, and Putailai.

One thing is certain: the business case for Chinese production in Europe exists only under the condition of continued high tariffs.

The upside to new factory investments in Europe appears large; creation of local jobs, lower import dependencies, more consumer offerings and market competition, and an acceleration of the climate transition. So, what are the risks?

Firstly, major investments could cement the dependencies which tariffs have sought to soften.

Prices need to come down for consumer EV uptake to grow. But price wars can also squeeze smaller competitors out of the market, leaving only the biggest survivors. China’s dominance over the key building blocks of the EV supply chain provides it with the ingredients to come out on top because losses on one end of the supply chain can be compensated at another. This could cement or even expand dependencies. Europe’s many automotive suppliers are already struggling, with their numbers dwindling.

The battery industry tells a cautionary tale. Despite government subsidies, even Europe’s biggest battery manufacturers are scuppering their battery and battery material plans No wonder, given China uses less than 40% of its battery cell output capacity and even less for battery materials. With battery cell import tariffs at a mere 1.3%, the business case for EU-made batteries is becoming weaker by the day.

Secondly, because EVs are basically connected platforms on wheels, there is a flurry of potential security concerns.

Modern cars are constantly engaging in communication and data sharing. The question of who controls these data flows is anything but trivial possibly compromising national security, cyber security, or individual privacy. The EU will soon launch a cybersecurity risk assessment into connected vehicles, heeding the stark warnings from EU intelligence services over Beijing’s active influence through its companies on foreign soil.

The EU also needs to backstop its tariffs with common protective and promotive investment rules to manage these risks.

To achieve this, European capitals can use their investment screening powers to mitigate risks. The problem: few member states are comfortable (or able) screening greenfield investments, especially in the clean technology space, even when WTO’s investment rules allow for such interventions.

A more unified investment screening process is necessary, one which designates the automotive industry’s transition to electrification as a matter of public security. This is no stretch given the industry’s 13 million workers, its a vital industrial integration role, and the expected vast deployment of data collection devices.

To encourage this governments can offer tax and purchase incentives for EVs conditioned on standards that support the EU industrial base. The problem: even though 20 EU member states currently offer such incentives, they use widely different conditions.

Even in the absence of an EU-style Inflation Reduction Act, developing common standards for how member states use their EV bonuses would give the bloc more punch in shaping the market in its interest.

Three common EU standards must unite both protective and promotive measures.

First, foreign EV investors should commit to using a share of local battery and material suppliers to help ensure Europe’s industrial base profits from the transition. If local supplies are not available, they should submit proof of it.

Second, incentives for EVs should be structured based on their CO2 emissions. France has been a pioneer, but a standardised methodology across the EU would support the industrial base as a whole.

Third, and most difficult, standards to address cyber security risks must be unified. The EU risk assessment of connected vehicles is the most promising and urgent process to pursue. Whatever its outcome, enforcement of standards across the bloc is key (unlike the fragmented implementation of 5G standards).

Will Chinese EV investors not simply skirt Europe for other destinations? For the moment this is unlikely. Europe still enjoys significant market power: almost 50% of Chinese EV exports go to the EU and UK combined. A recent survey of Chinese EV makers shows that despite harm in confidence, the majority still plan to build factories on the continent.

Tariffs have been the first salvo from Europe, but the battle is far from over. Europe will only be able to win the war for the competitiveness of its internal market, and the protection of its consumers, by establishing common security and market standards that cannot be undermined by national interests.