EU-China

EU’s Risky Business:

In February 2025, the Chinese company BYD introduced their newest fully electric vehicle (EV) – the Atto 2 – to the European market. On paper, the Atto 2 offers luxurious features and innovative technologies at a very affordable price – around half of what a seemingly comparable European car may cost. However, this perception is only part of the whole story. While the growing influx of competitively priced and well equipped Chinese EVs may appear the superior choice for both consumers and policymakers in Europe, they bring with them substantial economic risks. These risks threaten the domestic automotive industry, which is outmatched by Chinese EV production as well as Europe’s ambitious environmental goals that rely on a substantial shift towards EVs. Yet, the implications extend far beyond economic or ecological concerns. Chinese EVs potentially pose new challenges when it comes to the EU’s commitment to data protection abroad and at home, as well as to upholding security and global human rights standards.

Subsidies with Strings: China’s Industrial Playbook

At the heart of China’s EV production lie deliberate, state-controlled industrial policies: massive state subsidies, overcapacity, and strategic export orientation. This has enabled China’s EV manufacturers to produce high-quality vehicles at near-unbeatable prices, which facilitated companies like BYD, Nio, and Chery to scale-up production rapidly and flood global markets, including in Europe. Thereby, China’s EV sector has rapidly transformed into a global powerhouse over the last few years. Today, Beijing holds influential positions across the entire supply chain: from raw material extraction to battery production and final assembly. The EU's commitment to a green transition, which heavily relies on increasing the market share of EVs, exacerbates this issue. This situation highlights a paradox where European liberal free-market democracies are seemingly outperformed by China's state-supported enterprises.

Strategic Dependency and Economic Leverage

The EV sector highlights just how difficult it is to reduce economic dependency in a meaningful way. European manufacturers are increasingly unable to compete with Chinese EV producers as they struggle to match China’s low-cost and large production scale. Further, domestic manufactures are hamstrung by fragmented national policies and underinvestment. This imbalance risks creating a structural dependency on Chinese imports. Unlike past technological shifts, this dependency is not only commercial in nature but also geopolitical. China’s overcapacity is not a market accident but rather the product of deliberate policy choices, aimed at dominating critical technologies and global value chains. The implications for the EU extend far beyond industrial competitiveness. As demonstrated in past cases of economic coercion, most notably against Lithuania, Beijing has shown its willingness to use market access and trade ties as instruments of political pressure. A future in which China controls a large share of the EU’s EV market risks giving Beijing undue influence over European policymaking, including the ability to discourage criticism of its human rights record, military posture, or foreign policy behaviour.

The EU’s automotive sector has already proven vulnerable to geopolitical shocks. The widespread and sudden halt of European business operations in Russia following the invasion of Ukraine, underscored how quickly commercial interests become secondary. The German automotive sector, in particular, is increasingly entangled with China not only as a sales market, but also as a centre for research and innovation. This deepening exposure risks amplifying China’s leverage at a moment when Europe's strategic autonomy is under growing internal and external pressure. Unless steps are taken to reduce this asymmetry, for example through diversification and a more coordinated industrial strategy, the EU could find itself in a position of long-term dependency that undermines both its economic resilience and its political sovereignty.

Once seen as a follower, China’s automotive industry has emerged as a frontrunner in EV innovation driven by home-grown technology and deliberate strategic planning. Despite the EU's historical leadership in this field, many European automotive companies have been slow to innovate in the EV sector, trailing behind the United States and China. Today, the EU is China's largest export market for EVs, with 40 percent of Chinese EV exports intended for Europe. This is happening at a time when the increasing reliance on Chinese EV imports directly contradicts the EU’s economic security strategy's goal of reducing vulnerabilities and diversifying supply chains. Europe’s past experience with solar panels – once a German success story and now virtually completely imported from China – offers a stark warning about the long-term costs of technological complacency.

The Economic Impact: A Threat to Jobs and Industry

The economic challenges posed by Chinese EVs to Europe’s industrial base are no longer hypothetical; they are materialising in real time. Particularly as the automotive sector remains a pillar of Europe’s economy with 13.8 million people employed its significance for the EU cannot be overstated. Recently, Volkswagen announced plans to export vehicles from its plants in China to third markets, reinforcing the growing sense that Europe’s largest automaker is shifting its strategic focus away from its historic roots in Lower Saxony in favour of its increasingly integrated footprint in China. This development is not isolated. Over the past year, European carmakers and auto part suppliers have announced over 100,000 planned job cuts, with further losses reported from German carmakers Audi and Mercedes-Benz in the past weeks.  

During a recent FNF Europe briefing to policymakers at the European Parliament, one stakeholder warned that a significant reduction of Volkswagen’s operations in Lower Saxony would deliver a “triple shock” to the region’s finances. It would mean the loss of income taxes from tens of thousands of workers, a sharp drop in business tax revenues, and a hit to the state’s budget from the absence of regular dividend payments, which have become a regular line item in its budget. Due to the highly integrated and specialised nature of their value chains, which span across multiple EU member states, the strategic decisions made by German automotive manufacturers today carry significant implications not only for the German economy, but for the EU as a whole.

These trends underscore the deep structural fragility of the European automotive model. For decades, the industry has relied on three pillars: high-margin sales in China, competitiveness in global third markets, and consistent demand in the European neighbourhood. However, this model is now under sustained pressure from Beijing’s “export-to-growth” strategy and its “Made in China 2025” plan. Joint ventures that once gave foreign firms access to the Chinese market are losing ground, while Chinese manufacturers, such as BYD and other Chinese EV producers, are rapidly gaining footholds in Latin America, Southeast Asia, and, increasingly, within the European neighbourhood and the EU itself.

Driving a Trojan Horse? Data, Security, and Surveillance

Aside from the clear economic risks that Chinese EVs present to Europe’s automotive manufacturing, growing concerns about data privacy, surveillance, and cybersecurity cannot be sidelined. As the former head of MI6 aptly put it, EVs are not just cars but “computers on wheels.” European regulators should take seriously the data security risks this implies. Under the National Intelligence Law and China’s Data Security Law, Chinese EV manufacturers and their suppliers operate under a legal obligation to cooperate with the Ministry of State Security and are prohibited from disclosing this cooperation to foreign governments, raising serious cybersecurity concerns. Chinese Communist Party cells are required to be embedded within the corporate structures of these firms, making the firewall between commercial operations and the Chinese state increasingly porous. Additionally, many manufacturers rely on software and components from firms such as DeepSeek, which have already been flagged for their data practices.

Mirroring concerns about potential espionage risks linked to Chinese EVs, in a recent example, two major UK firms have reportedly instructed staff not to charge their mobile phones in Chinese EVs, citing fears that data could be accessed or intercepted. The measures also include bans on connecting devices via Bluetooth or charging cables and restrictions on parking near production facilities. Defence companies in the US and France have reportedly introduced similar measures to guard against the risk that Chinese-made EVs could be used to monitor their employees. What is more, is the fact that EVs are purchased by a wide range of actors, from individuals to businesses and municipalities. This makes consistent consumer protection and transparency more challenging as various actors have access to potentially sensitive information. To address this, it would be essential for the EU and its member states to quickly introduce clear, uniform regulations across the Single Market that balance openness with security, and ensure data governance frameworks are robust enough for the EV age.

Hidden Costs: Labour and Human Rights in the EV Supply Chain

At the same time, the EU cannot afford to ignore the human rights concerns associated with China’s EV supply chain. Beijing has secured a commanding lead in the supply chain for key battery materials with Chinese firms like BYD having established a strong presence in lithium mining and processing operations across Latin America and parts of Africa. Persistent allegations of child labour in cobalt mining in the Democratic Republic of Congo, reports of supplier involvement in Chinese state-led “labour transfer programmes”, and documented links between Chinese EV manufacturers and entities sanctioned for forced labour in Xinjiang all point to systemic risks. Several Chinese EV companies with ties to forced labour practices in Xinjiang continue to operate in the EU market, despite being blacklisted in the United States for their alleged involvement in human rights violations. At the same time, CATL, a major Chinese battery supplier, has faced criticism for allegedly subjecting workers to extreme schedules, which violates both Chinese and EU labour standards. These issues are pertinent to the EU’s evolving regulatory frameworks, particularly instruments like the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD), which aim to address labour abuses and unethical sourcing in global supply chains.

The growing scrutiny has already led to tangible shifts in corporate behaviour. Volkswagen’s recent decision to exit Xinjiang reflects growing pressure on European firms to sever ties with entities linked to systemic human rights abuses. While the company cited economic reasons for the sale, the move underscores the reputational and legal risks European firms face if they remain entangled with controversial actors in the Chinese EV ecosystem. Beyond supply chains, the ethical and legal implications of technology partnerships with Chinese firms demand closer examination. Several leading Chinese tech companies such as Hikvision and others have been implicated in surveillance activities and abuses, particularly in Xinjiang. Partnerships of this nature carry considerable reputational risks in liberal democracies and may expose European firms to secondary sanctions or consumer backlash.

Rethinking Strategy: What Can the EU Do?

To build a truly resilient EV ecosystem, Europe must go beyond defensive measures and invest in long-term capabilities. As a new study by CSRI and FNF Europe outlines, the anti-subsidy tariffs introduced by the European Commission in late 2024 may slow the pace of Chinese EV penetration into the Single Market but they are no substitute for a coherent industrial strategy. Tariffs alone cannot compensate for the EU’s lag in battery technology, nor can they undo years of strategic underinvestment and failure to adapt to the technological and geopolitical realities. Chinese manufacturers like BYD are already adapting by turning to plug-in hybrids to boost their sales in the EU; a move seen as a way to sidestep the import tariffs currently targeting fully electric cars made in China. The EU cannot afford to rely on reactive tools but rather needs to conduct thorough risk assessments, carefully determining when and how to tackle these intertwined and dynamic challenges most effectively – this is not to securitise all aspects of the EU’s relationship with China, but to develop targeted policies that address specific threats. These could be used as a blueprint to mobilise regulators, policymakers, and the automakers in question to work together to level the playing field when it comes to competition with Chinese EVs.

Such pragmatic policy solutions aimed at restoring the EU’s competitive edge should include:

• The EU should commit to reviewing the EU’s countervailing tariffs on Chinese EVs within the first year of the new EU Commission.
• The EU should review the EU’s current Foreign Direct Investment Regulation to focus on rules regarding joint ventures to look at local ownership requirements, data security requirements, and local content requirements.
• The EU should legally require foreign EV companies from a country where the EU does not have a data standards equivalency agreement to store data on European servers and to commit not to transfer the data overseas under any circumstances.
• The EU should negotiate economic security partnership agreements with value partners such as Japan and the Republic of Korea. One target under these partnerships would be to encourage joint ventures between European automotive producers and world leading Japanese and South Korea battery producers including Samsung, SK Innovation, Panasonic, and LG Energy Solution.
• The EU should investigate forced labour in Xinjiang, add the geographic region of Xinjiang to its forced labour risk database, and introduce guidelines for European businesses regarding the prevalence of forced labour goods in the automotive supply chain.
• European policymakers should expand tax incentives and other measures to encourage European automotive companies to work together to share research, development, and production costs for EVs.
• The European Commission should work with European Member States to coordinate Next Generation EU and Multiannual Financial Framework funds to support the development of the European EV sector, including encouraging matching private sector investment in the EV battery supply chain and EV charging infrastructure. This should serve as the frontrunner to an EU-wide Green Industrial Strategy.

The experience of recent crises, from disrupted PPE supply chains during the COVID-19 pandemic to the energy shock following Russia’s invasion of Ukraine, have shown: Europe’s industrial capacity is not only an economic asset, but a pillar of national security and societal resilience. If the EU permits its automotive future to be shaped by Chinese industrial planning, it risks sacrificing more than market share and the ripple effects will extend far beyond the automotive sector – hitting machine tools, steel, electronics, and skilled labour markets.

Driving the Future

When it comes to the EV sector, prosperity, climate ambitions, and national security increasingly overlap. China's rapid ascent in this sector represents an unprecedented shift in scale, strategy, and global impact, reshaping not only the automotive industry but also global competition and the geopolitical landscape. Yet Europe’s automotive industry remains one of its few remaining industrial strengths. It is therefore neither economically prudent nor secure or morally defensible for member states to engage in a race to the bottom, courting Chinese EV investment that may be propped up by forced labour, subject to authoritarian data regimes, and indifferent to the preservation of European jobs.

The answer is not protectionism, nor a retreat from global markets. Instead, Europe must reclaim its ambition. The continent is still home to many of the world’s leading minds in research and development. By overcoming fragmented national responses and short-term thinking, and through increased strategic investment, robust policies to promote and protect key sectors, and stronger industrial partnerships, both within Europe and with trusted global allies, the EU can reinforce its manufacturing base and drive technological progress. This will not only advance Europe’s own path to net-zero but also support the global transition. By moving past the paralysis of the EV dilemma and embracing a strategy that balances openness with resilience, the EU can still shape the rules of tomorrow’s green economy – on its own terms and in line with its values.

Katharina Osthoff works at FNF Europe as a Senior Policy Advisor, covering international and institutional affairs as well as fundamental rights. Prior to joining the foundation, Ms Osthoff worked as a Policy Advisor for Foreign Affairs at the European Parliament in Brussels and the German Bundestag in Berlin, focusing on Asia and China.

Sam Goodman, is the Senior Policy Director of the China Strategic Risks Institute, the Co-Founder and Co-Chair of the New Diplomacy Project, a former Political Advisor to the Labour Party, and the author of the Imperial Premiership: the role of the modern prime minister in foreign policymaking from 1964-2015.