• Germany’s automotive sector is under pressure.
• Upcoming tariffs might accelerate factory shutdowns in Europe.

The global car industry is at a crossroads, undergoing big changes driven by new technology and altering market dynamics. With the emergence of electric vehicles (EVs), traditional carmakers are feeling the pressure from rising competition, particularly China, which has quickly become the dominant power in the EV industry.

As China’s influence grows, European carmakers find themselves in a battle to stay relevant in an industry that’s reshaping. Germany, long known as Europe’s car capital, with slogans like Vorsprung durch Technik epitomising the country’s political and industrial prowess. However, Volkswagen now faces significant challenges as trade unions resist potential layoffs and factory closures. This isn’t just a Volkswagen issue; it raises broader concerns about the future of Europe’s entire car industry.

A major part of the concern is the emergence of China’s electric vehicles, which are cheaper and rapidly gaining traction in Europe. Furthermore, traditional combustion engines are becoming obsolete as the bloc continues to legislate their eventual mothballing.

In response, the EU, the United States, and Canada are considering levying tariffs on Chinese-made electric vehicles. However, not everyone supports this plan. Some European carmakers worry that new tariffs may hasten the closure of car plants, particularly in Germany.

The Paris Motor Show made it clear that the European car sector is under pressure. Chinese carmakers showed up in full force, eager to break into the European market, which is the largest remaining market after the US imposed heavy tariffs on their vehicles.

Reactions to the tariffs have been mixed. As The Guardian reported, Carlos Tavares, the CEO of Stellantis (which owns brands like Citroën, Fiat, and Jeep), warned that the EU’s tariffs could do more harm than good. He pointed out that Chinese manufacturers, like BYD, are already planning to sidestep the tariffs by establishing facilities in Europe.

Tavares predicted that Chinese carmakers would not be building in Germany, France, or Italy, which are the traditional homes of Europe’s car industry. Instead, they will visit nations such as Hungary, where labour prices are lower. And, he believes, this shift will only expedite factory closures across Europe, negating the objective of the tariffs in the first place.

His concerns also expose deeper disagreements in the EU. France, led by President Emmanuel Macron, is in favour of the tariffs, while Germany was one of the few countries that voted against them. In the past, Germany would’ve had enough influence to unite other EU nations, but that’s not happening under Chancellor Olaf Scholz.

With no clear leadership, the car industry has stepped in to fight for its future. Faced with economic challenges and weak demand for electric vehicles, industry leaders such as Stellantis are advocating for more time to adjust to the new world of electric vehicles rather than relying on tariffs to protect domestic businesses.

BMW’s CEO, Oliver Zipse, has called for delaying the EU’s 2035 deadline for ending the production of new combustion engine cars. The European Commission has said it’s open to discussions, but for now, the deadline remains, giving the industry 11 years to make the transition.

Meanwhile, China’s BYD is not wasting time. The company plans to build all of the cars it sells in Europe locally, and to manufacture battery packs—the most expensive component of an EV—in Hungary and Turkey. Other Chinese carmakers, such as Geely (which owns Volvo and Lotus), are aiming to establish themselves in Europe, while emerging players like Dongfeng and Seres are anxious to broaden their presence.

In a series of hedge bets, some European carmakers are now partnering with the same Chinese competitors that are threatening their future.

Tariff debate: Free market vs. protectionism

The US and Canada have suggested tariffs on Chinese-made EVs to protect domestic businesses, with measures are designed to protect local carmakers from being outcompeted by cheaper Chinese alternatives.  

However, while protectionist policies may offer short-term relief to European and North American manufacturers, they have sparked a debate on the long-term consequences. Are these tariffs really the solution, or could they backfire and further erode the West’s once-dominant car industry?

At the centre of the debate is a fundamental question: Should governments intervene to protect domestic companies, or should they let the free market decide who wins and loses? Tariffs could prevent European automakers from being overwhelmed by China’s low-cost EVs. This would give European companies time to adapt, innovate, and compete in the electric vehicle industry without being subjected to immediate and overwhelming pressure from competitors overseas.

Proponents claim that if such restrictions are not implemented, Europe’s car sector will face significant job losses and factory closures, with ramifications for the broader economy.

Here’s when things become difficult. While the EU, the United States, and Canada advocate for tariffs to protect the sectors, they pose a serious question: Are we truly devoted to free-market competition, or are we heading toward protectionism?

Governments typically support open competition with minimal intervention, but tariffs seem to contradict that principle. Some argue that by shielding European carmakers from their Chinese rivals, the EU is limiting competition, which could stifle innovation and hurt consumers in the long run. It’s a difficult balance to find, and the debate emphasises the conflict between protectionist policies and free-market values.

As Europe’s car sector grapples with the rise of Chinese electric vehicles and the impact of new tariffs, the topic of protectionism versus free competition will continue to influence its future. It is still unclear whether the industry will maintain its global leadership or continue to decline. But one thing is certain: the road ahead holds both problems and opportunities.