Don’t Stop Me Now: Chinese Cars Are Having a Good Time in Europe

A year and a half after the EU slapped duties on electric vehicles produced in China, imports of Chinese cars are accelerating and member states are at odds over whether additional protection is needed. The European Commission’s latest and most ambitious response, the Industrial Accelerator Act, would tie public support to local content requirements in an attempt to slow the influx of Chinese cars and bolster domestic production. However, there is a significant risk that even these measures will not be enough to shield European carmakers.

Traveling at the speed of light

While sales at home are languishing, China-based carmakers are having a ball in Europe. In December, a record 9.3% of new cars sold in the EU were made in China, while in the UK the share surged to a striking 20.6%. For the full year, China-made vehicles accounted for 6.4% of EU sales and 12.1% in the UK (Figure 1).

The success of Chinese car exports comes despite the EU’s countervailing duties on Chinese-made battery electric vehicles (BEVs), in place since October 2024 (Figure 2). While the measures briefly slowed exports in late 2024, shipments have since rebounded to pre-duty levels.

At the same time, exports of internal combustion engine (ICE) and plug-in hybrid vehicles (PHEV) which are not subject to additional duties have risen rapidly. This has meant that overall passenger car exports from China reached 922,000 units, up 29% year-on-year. In early 2026, exports are accelerating even further, reaching 214,000 units in just the first two months, up 62% year-on-year.

Defying the laws of history

The speed at which Chinese carmakers, particularly BYD, Chery, and SAIC, are gaining market share in Europe is unprecedented. It differs markedly from the experience with Japanese and Korean automakers, which entered the market in the 1970s and 1990s, respectively (Figure 3).

Several factors help explain this acceleration. More Chinese carmakers are entering Europe at the same time than Japanese or Korean firms did. They also have much larger production capacity, allowing them to scale up quickly, especially as a price war drags on at home. With the US market largely closed to them, exports are focused on Europe, where margins are higher. On top of that, European EV incentives are giving Chinese manufacturers an extra boost.

This dynamic is further amplified by the fact that not only East Asian manufacturers, but also Western carmakers, are using China as an export hub, adding to the pressure on Europe’s auto sector.

All of this is weighing on incumbent carmakers and European-based suppliers, whose contracts depend on the viability of domestic OEMs. In Europe’s five largest markets: France, Germany, Italy, Spain, and the UK, Chinese brands have gained 3.3 percentage points market share in just three months (December–February). Annualized, this equates to roughly 357,000 vehicles, or the output of about one and a half car plants.

No stopping them

Worryingly for European industry, there is little reason to expect Chinese exports to slow in the near term without additional policy action. China’s domestic auto market is entering a period of weaker growth while production capacity remains high. At the same time, a weak yuan against the euro boosts the price competitiveness of Chinese vehicles, and with EV duties not high enough, the EU’s defensive measures have so far proven largely ineffective.

Export momentum is visible in company data. BYD’s overseas sales recently exceeded its domestic sales for the first time. Seasonal factors such as the Spring Festival may have influenced the figures but the broader trend still stands: Chinese OEMs are increasingly relying on overseas markets for growth. Meanwhile, more China-based OEMs are adding Europe to their export plans. Even Japanese automakers such as Nissan and Mazda are restructuring their China operations to increase exports, including to the EU. Other manufacturers are exploring export platforms outside China, with some Chinese OEMs beginning to export vehicles from Thailand to the EU.

At the same time, Chinese auto investment in Europe is slowing, as firms view exports as a more profitable and predictable market entry strategy also given regulatory uncertainty within the EU. Following a surge of newly announced projects in 2022 and 2023, investment announcements have fallen sharply (Figure 5). Apart from BYD’s plant in Hungary, which is expected to begin production in the coming months, no other Chinese automaker has announced a full-scale production facility in the EU.

Carmakers may increasingly explore joint production arrangements or M&A rather than greenfield investments, which could make economic sense given Europe’s own overcapacity in the auto sector and allow faster market entry. For now, however, most discussions remain preliminary. Geely is reportedly in talks with Ford to use production capacity in Spain, while Chery is exploring cooperation with JLR in the UK. This would mirror the approach taken by Leapmotor, which established a joint venture with Stellantis to use its production facilities.

Price undertakings won’t change the picture

There are concerns that the European Commission may have opened the door to Chinese EV exporters even wider by providing guidance to China-based EV exporters to submit price undertakings in the EU’s anti-subsidy case on Chinese EVs. However, this is unlikely. The Commission opened an interim review of the EV duties following a request from Volkswagen Anhui, a Chinese joint venture that exports the Cupra Tavascan model. After consultations with MOFCOM, which has historically opposed company-specific price undertakings, the Commission also issued guidance explaining how exporters could apply for minimum import prices (MIPs).

Volkswagen Anhui has since been granted a minimum import price, limited by a quota. However, it is unlikely that large numbers of Chinese OEMs will obtain similar arrangements. First, Chinese exporters are likely to value pricing flexibility in the European market. Their strategy currently prioritizes volume growth over margins. A price undertaking would constrain discounting and promotional incentives. For example, BYD currently combines state subsidies and manufacturer incentives to offer large discounts in Germany (Table 1). Under a price undertaking, both the sticker price (manufacturer’s suggested retail price, MSRP) and all incentives would be taken into account, limiting the ability to offer such promotions.

Second, European OEMs such as Volkswagen or BMW, which export only one or two models from China, are better positioned to negotiate price undertakings than their Chinese peers. This is because the Commission indicates that simpler model lineups, clearer data, and ongoing investments in the EU can help secure such deals. Chinese exporters, by contrast, often ship larger and more complex model ranges and have less to show in terms of EU investments. Chinese exporters often ship large and complex model lineups and have less to show for in terms of EU investments. Many Chinese companies are exporting both BEVs and PHEVs, which could make it harder for them to get a price undertaking. The Commission is concerned about the risk of cross-subsidization, where losses on EV exports could be offset by profits from PHEV or ICE models, which enter the EU under a 10% MFN tariff. For these reasons, while many Chinese OEMs may explore price undertakings, only a small number are likely to receive them.

Why Europe’s local content push may also fall short

The importance of the auto sector, as a major employer, a key driver of R&D, a significant investor, and an important contributor to the EU’s trade surplus, helps explain why the European Commission launched a major ex officio case against Chinese EVs. Yet two years later, the view is that these traditional trade tools have been ineffective and highly escalatory. The Commission has therefore shifted toward more protectionist and broader industrial policy response.

The Industrial Accelerator Act (IAA) proposal published in March 2026 under the leadership of EU Commissioner Stéphane Séjourné, is proposing local content measures for a range of sectors including autos. The idea is to tie public financial support for vehicle purchases to “Made in Europe” (MiEU) criteria. Certain “trusted partners,” such as the US, UK, Korea, or Japan, would be included for parts of this framework. China, however, would clearly fall outside it.

Beyond putting Chinese-made vehicles at a disadvantage in Europe, the local content approach is also intended to address a second concern: the growing use of Chinese components in European vehicle production. As Europe transitions to electric vehicles and struggles to build a competitive battery industry, European carmakers are increasingly sourcing inputs from China. This includes not only batteries and powertrains but also a wide range of lower-value components.

Renault, for example, plans to produce its new E-Twingo in Slovenia using a Chinese battery and powertrain, and likely additional electronics sourced from China. Chinese manufacturers producing in Europe, such as BYD, would also likely operate with relatively low EU value-added if left to their own devices, after all this is what their competitive advantage is built on. More than finished vehicle imports, this gradual increase in Chinese component sourcing poses a structural risk to Europe’s supplier base.

How the Commission envisions local content criteria for the auto sector

In essence, the Commission’s approach is to define what a MiEU vehicle would look like. This framework would apply to low-emission vehicles and include the following requirements:

These thresholds clearly exclude vehicles assembled in China. Even Chinese OEMs producing within the EU would face serious hurdles. BYD, for example, has not announced plans to localize battery cell production in Europe and would likely fail to meet the battery threshold. Chery’s operations in Barcelona and Xpeng and GAC’s assembly work in Graz would similarly struggle to comply. Importantly, many non-Chinese OEMs would also find it difficult to meet these thresholds—an issue that risks undermining the entire framework.

Beyond defining content thresholds and determining who qualifies as part of the EU club, the central challenge is how these requirements would actually be applied in the automotive sector. This is not straightforward. Cars are predominantly purchased by private consumers, and the EU cannot easily prevent them from buying non-compliant but cheaper vehicles if those are available for purchase.

The Séjourné team has therefore been focused on tying the local content requirements to incentives. Once the IAA is finalized, and after a transition period has passed, the EU would require member states to only procure MiEU vehicles as part of their public procurement, to limit financial incentives (both EV grants and as part of corporate fleets) to MiEU vehicles, and to limit the CO₂ supercredit benefits to MiEU small BEVs (Table 4).

This would not ban Chinese (or other) carmakers from the European market, but it would exclude them from financial incentives, putting them firmly on the backfoot. If applied in full, this would amount to a powerful barrier, as illustrated by France’s bonus écologique, which since December 2023 has excluded East Asian-made EVs due to their high CO₂ emissions during production and transport.

Still, there are several important limitations to the IAA’s effectiveness. The first is timing. Even under an optimistic timeline, the measures are unlikely to take effect before mid-2027, if not 2028. That leaves Chinese exporters with at least another 18–24 months of relatively unconstrained access to the EU market.

Second, several instruments are small in scale or of limited relevance to Chinese producers. Public procurement accounts for less than 2% of the passenger car market and can largely be ignored by Chinese OEMs.

Small zero-emission-vehicle (ZEV) supercredits and low-carbon steel requirements matter more for European incumbents than for Chinese firms, which generally have relatively strong CO₂ fleet balances and may not depend heavily on supercredits. That said, not all Chinese players are equally well positioned. SAIC’s MG and Chery, which still sell substantial ICE volumes in the EU, could face more pressure.

Third, private demand remains only partially covered. While linking EV subsidies to local content rules can be highly effective as demonstrated by France’s ecobonus only around half of EU member states provide such support. And even in large markets, coverage is limited. The German government estimates that its €3 billion EV grant for 2026–2029 will support around 800,000 vehicles covering roughly 20% of private demand, but only about 7% of total market demand. Conversely, this means that 80% of private demand remains open to Chinese competition and EV grants are likely temporary in nature.

Fourth, there is a risk that the corporate fleet package, which would have the most consequential impact on Chinese firms, does not make it through the trilogue process. Corporate fleets account for roughly 60% of new car sales in the EU and benefit from generous fiscal incentives and Chinese OEMs rely heavily on them as entry channels into the EU market (Figure 7).

Article 4 of the EU’s Corporate Fleet proposal is particularly important. From 2028 onward, member states would only be allowed to provide financial support to corporate fleets if it supports low-emission and EU-made vehicles. If implemented as drafted, this would not fully lock Chinese exporters out of the largest demand segment, but it would put them at a significant disadvantage. Transport & Environment estimates that corporate tax advantages for EVs are substantial: Across large member states, the average benefit amounts to around €1,500 per year, rising to roughly €3,500 annually in Germany.

There is, however, significant opposition to the corporate fleet package. Carmakers including BMW Chairman Oliver Zipse have labeled it an “ICE ban through the backdoor” and are urging member states and the European Parliament to dilute it. Germany’s automotive association, the VDA, has criticized the initiative as unrealistic. OEMs, in particular, oppose the mandatory quotas requiring member states to accelerate the uptake of low-emission fleet vehicles by 2030 and 2035—for example, targets of 56% in Germany by 2030 and 95% by 2035. Italy’s government and Germany’s center-right Christian Democrats are among those pushing back most strongly.

There are, however, significant uncertainties. If all proposals are implemented in their current form, Chinese exporters, and potentially even localized players such as BYD, would be locked out of public procurement and put at a disadvantage in both the subsidized private market and the corporate fleet segment. Taken together, these segments account for roughly 70% of the EU’s new car market.

At the same time, around 30% of the market would remain fully open. And even within the protected segments, OEMs would face higher costs to remain eligible for support, due to local content requirements. Currently, fewer than two-thirds of vehicles produced by European OEMs use EU-made battery cells, which would become a key eligibility issue.

This creates a clear trade-off. Battery cell production costs are around 30% lower in China, and the IEA estimates that total production costs for a small BEV in China are lower by just under $10,000 compared with Germany. These cost advantages may be sufficient to incentivize continued exports from China even if this entails tariffs and exclusion from financial incentives.

Collision course: What if the IAA is not enough?

If the combination of the Industrial Accelerator Act (IAA) and the broader EU automotive policy package fails to slow Chinese market share gains, while pressure on Europe’s auto manufacturing sector continues to mount, additional policy measures become more likely.

They call him Mister Séjourné

One tool would be additional tariffs. The Séjourné cabinet is already pushing for further trade defense measures on PHEVs, which have seen a sharp increase in recent months. While there is still resistance from some parts of the Commission, this could fade if Chinese exports continue to rise and/or the Industrial Accelerator Act (IAA) is weakened.

There are several potential avenues for targeting PHEV imports, each involving different legal thresholds, timelines, and political trade-offs:

• Anti-circumvention measures: The Commission could argue that Chinese OEMs are shifting to PHEVs to evade BEV duties and seek to extend existing BEV duties to those vehicles. This would be the fastest route but would force the Commission to argue that trade pattern changes are linked to the original duties. Given that consumers may opt for PHEVs for other reasons, including range concerns, this would be a challenging path.
• A new anti-dumping case: Even if EU prices exceed China prices, the Commission could construct a “normal value” assessment using third-country benchmarks, as in past China cases. This is legally viable but more escalatory as it could easily push duties into the high double if not triple digits.
• A parallel anti-subsidy (CVD) investigation: A new CVD case is possible but would be lengthy and may yield even lower duties, as battery-related subsidization central in the BEV case is less significant for PHEVs. In addition, some subsidies already addressed in the EV case may not be reusable in a new investigation.
• Safeguards: Temporary duties on all PHEV imports could be imposed if a surge is demonstrated. However, as safeguards generally apply on an MFN basis, they would affect countries like Japan, Turkey and the US as well as China (which accounts for ~45% of EU PHEV imports).

For now, the Commission is not unified on further trade action. The trade case against Chinese EVs is viewed in retrospect as politically costly and only partially effective. China retaliated against European dairy, pork, and brandy exports and retains leverage in critical raw materials. At the same time, while concerns about Chinese car imports are rising, PHEV imports have not yet reached the surge levels that triggered the original BEV investigation, though they are very close (Figure 8).

Two hundred degrees of dependency: Resilience and green criteria

Next to local content requirements, there are other tools that the Commission and member states could use to restrict or disadvantage Chinese exporters. One such tool is the use of environmental or resilience-related non-price criteria. France and the UK have restricted their EV grant schemes based on environmental criteria. Compared with local content requirements, this approach is less targeted but ultimately aims at a similar outcome: favoring vehicles produced in Europe.

Under the EU’s Net Zero Industry Act (NZIA), these non-price criteria are no longer fully optional. From 2026, member states must include a “resilience” test in public support schemes. This means checking whether the supply chain for a technology is too dependent on a single non-EU country.

If more than 50% of EU supply either for the technology itself or for key EV components such as batteries, motors, or magnets comes from one country, governments must take this into account when granting support. In practice, this could limit or reduce subsidies for products that rely heavily on that country, most notably China.

If the IAA proves ineffective, the Commission and some member states, such as France, may push to apply these rules more broadly, including to schemes like corporate fleets.

Like an atom bomb: Cybersecurity as a “nuclear” option

A final and potentially far more restrictive option would involve greater reliance on cybersecurity rules to restrict Chinese automakers’ access to the European market. The United States has already taken such an approach. By introducing ICTS rules that target connected vehicles, Washington has banned vehicles from the US market (starting in model year 2027) that are made in China, produced by Chinese OEMs, or which use certain Chinese components.

Concerns around cybersecurity are also growing in Europe. Several EU member states have already restricted Chinese suppliers from their 5G telecommunications networks, and scrutiny of Chinese connected vehicles is increasing. In 2026, Poland banned Chinese-made cars from certain military sites, while a Norwegian public transport operator announced stricter security requirements after discovering that Chinese-made electric buses could be remotely switched off by the manufacturer. The incident triggered similar investigations in Denmark and the UK.

The EU is seeking to acquire powers similar to those introduced by the US under the ICTS framework. In its proposal to revise the Cybersecurity Act (CSA), the Commission is seeking the power to require member states to impose restrictions on high-risk vendors, including in the connected vehicles supply chain. Given Chinese laws mandating that companies share information with the government, Chinese firms would likely be seen as less trustworthy. A cybersecurity risk review overseen by the Commission in February 2026 identified several risks linked to so-called “non-technical” factors—such as potential state interference or sabotage—and recommended that member states adopt measures to restrict or exclude high-risk suppliers from critical supply chains.

The CSA is just a proposal for now and is unlikely to come into force for another 18-24 months. As with the Auto Package and the Industrial Accelerator Act, significant pushback from member states is likely. Governments are wary of the Commission encroaching on their national security competences, and many are concerned about the economic costs of pushing out Chinese suppliers, including the risk of Chinese retaliation.

Short of supporting the strong current Commission draft, member states with cyber concerns could at least grant the Commission greater authority to impose restrictions on high-risk vendors, including tighter controls on cross-border data transfers, as well as requirements to use trusted software and suppliers in connected vehicles. These measures could significantly limit Chinese OEMs’ competitiveness in the European market, by raising the price of key tech inputs.

The Commission could also leverage its powers over vehicle type approval, traditionally a technical certification process, by incorporating certain non-technical security risk factors into approval criteria.

Finally, individual member states could move ahead with their own restrictions. If narrowly targeted—for example, Poland’s ban limited to military facilities—the impact on the Single Market would likely be limited. However, broader national restrictions on Chinese-made vehicles or on vehicles using Chinese components could fragment the EU’s automotive market and splinter the Single Market.

All of this suggests that even if the IAA ultimately proves insufficient, the EU is unlikely to stop searching for additional ways to protect its automotive industry. The challenge, however, is timing and potential for escalation. The later an effective policy response comes, the more damage to Europe’s auto industry will have been done. At the same time, many of the more forceful tools such as anti-dumping cases targeting Chinese vehicles or China-specific cybersecurity restrictions would be more explicitly directed at China and therefore increase the risk of retaliation. Given the EU’s continued dependence on China for critical raw materials and automotive inputs, leverage Beijing has already with the United States, these measures could prove politically difficult to implement.