Europe’s naivety about the China export shock is tragic

By Lionel Laurent

EUROPEAN UNION (EU) carmakers like Volkswagen AG got their wish this week when a combustion-engine ban for 2035 onward was effectively abandoned. It was seen as too ambitious, too costly and a dream for Chinese rivals, whose electric vehicle (EV) head start (powered by subsidies) has given them a 7% share of the continent’s autos market. Faced with a choice between climate leadership and protecting jobs, the EU chose the latter.

While it’s true that the ban failed to spark a true European EV boom, dumping it is nowhere near enough to secure the industry’s future. It won’t solve Chinese competition. Worse, ditching it sends a signal that carmakers can comfortably take their foot off the investment accelerator. That’s the wrong message.

The tragedy here is Europe’s industrial and geopolitical naivety in the face of China’s export engine and high-tech ambitions, rather than clumsy bureaucratic overreach. Beijing’s trade surplus with the EU has widened to close to $300 billion this year. While once it was Germany flooding China with cars and machines, the direction reversed after COVID-19, with German car exports to China slumping 70% between 2022 and 2024. Automaker profits are sinking and they’re cutting jobs. Volkswagen has shut a plant in its home market for the first time.

Addressing this means being clear-eyed about what’s driving the imbalance. There’s genuine innovation at the core of China’s BYD Co., which took Tesla, Inc.’s crown as the world’s biggest electric car company and which sells EVs like the Dolphin Surf for less than €23,000 in Europe. But the country’s European success is also wrapped in subsidies, overcapacity and a weakening yuan. The fact that China exports more gasoline cars than EVs is also proof that this is about more than fiddly EU rules. “China makes more than the world can take,” as the Asia Society Policy Institute’s Lizzi C. Lee put it recently.

The flipside of Chinese oversupply is weak European demand. As the tariff drawbridge gets raised in the US and China squeezes out EU imports, the lack of a strong European market is becoming obvious. Sluggish economies, high sticker prices and alternative transport options have weighed on the EV transition, as have uneven charging infrastructure and expensive energy. In the first half of this year, European car production fell by 2.6%; China’s soared by 12.3%. Howls of protest at the 2035 ban have ultimately been a distraction.

European policymakers need more than regulatory U-turns, or , to address the industry’s deep-rooted problems. They must weigh other means to limit Chinese supply. EV tariffs have so far been too little too late, failing to cover other cars like hybrids. They may have to be expanded. The EU should also seek out allies to put pressure on China about its weak currency, described by hedge fund boss Stephen Jen as an unsustainable disadvantage. Economist Nicolas Goetzmann estimates that overall euro-area imports from China have increased by almost 5% between October 2022 and 2025 in volume terms.

At the same time, the EU should also put a rocket under demand at home. A recent paper by the Centre for European Reform proposes expanding subsidies to steer demand toward Europe-made EVs and filtering out Chinese production by favoring low-emission supply chains. And given the gloomy state of private-sector activity in the bloc, with Germany’s industrial sector unexpectedly deteriorating this month, the European Central Bank should signal openness to cutting interest rates further rather than mooting more hikes.

EVs are not going anywhere. BloombergNEF still forecasts global sales of electric cars will increase by 16% in 2026 to 25.4 million units. If there’s been a misdiagnosis, it’s about Europe’s capacity to transform its industry while playing by rules that neither the Chinese nor the Americans follow. Until that mindset changes, tweaking 2035 bans won’t mean much.

BLOOMBERG OPINION