To Win the EV Race, Washington Must Abandon the Overcapacity Talks... and Do More

Recent talks on China’s green product overcapacity brought a new wave of tensions between Washington and Beijing. Among all, China-made electric vehicle (EV) imports are arguably the United States’ biggest headache at this moment. In addition to the existing tariffs on Chinese cars, which is at a ridiculously high 27.5%, lawmakers and senior officials, citing hyper-securitized nonsense, urged the Biden administration to hike to 125% or issue a ban of all Chinese EV imports. U.S. auto industry leaders warned that the consequence of Chinese EV imports will be “an extinction-level event.” The Biden administration, following its consistent protectionist trade agenda, also vowed to take measures to address China’s “excessive industrial capacity.”

The White House made it clear: China’s industrial overcapacity, including in the EV industry, is a result of Beijing’s overinvestment in factory capacity building which largely exceeds its domestic demand and becomes “too large for the rest of the world to absorb.” 

At least on EV, however, that statement does not align with the facts. China’s EV capacity neither drastically exceeds its domestic demand, nor is its surplus too big to be absorbed by the U.S., let alone the rest of the world.

In 2023, the world’s second largest economy produced 9.58 million new energy vehicles (primarily EVs) and consumed 9.49 million. The math is simple, over 99.06% of China’s EVs were fully consumed domestically, with just a mere 90,000 surplus.

The U.S. consumed 1.2 million EVs in 2023. Assuming that all Chinese EV surplus went to the U.S., which is highly unlikely, that would only take roughly 7.5% of the total U.S. EV sales. Japan’s Toyota took over 14% of the entire U.S. auto market in 2023, yet the White House and the U.S. auto companies seemed perfectly fine with it.

Despite being a great soundbite term, “overcapacity” is misleading about where China’s EV competitiveness truly lies. Besides justifying disruptive protectionist policies, Washington’s consistent emphasis on China’s overcapacity threat—which does not align with the facts—will also derail the true efforts to revive overall U.S. industrial capacity so it can fairly compete with China as the two countries engage in a strategic competition.

Make no mistake, the U.S., particularly its automobile industry should worry about Chinese EV imports. Chinese EVs are extremely cheap compared to their American competitors, with equally good, or even better qualities. But instead of overcapacity, Chinese EVs’ competitiveness is a result of the scale of its rapidly growing domestic EV market. 

China’s domestic market has been developed for over a decade under a combination of early economic planning and supporting policies to encourage EV consumption since the 2010s. Meanwhile, the Biden administration only recently began to replicate some of the similar efforts such as tax credit, R&D fundings, investment for EV charger installation, and government procurement of EVs.

China’s domestic EV market is also naturally larger than the U.S. About 30% of China’s 1.4 billion population is middle-income. Accordingly, roughly 400 million people in China are potential EV consumers. That is more than the entire population of the United States.

In 2023, Chinese buyers bought nine times more EVs than the American buyers. The demand for EV in China grew over 30% in 2023, while the U.S. grew only 5.9%. The rapidly growing demand of EV in China stimulates more production and therefore also pushes down the cost of EV. This is not overcapacity as a result of unfair trade practices or government overinvestment. 

It is the economies of scale.

That being said, China is far from dominating the global EV market, and the U.S. has its strength that can level the playing field and fairly compete with China—if they do the right things.

Despite the advantage of scale, domestic Chinese EV producers are increasingly reaching a bottleneck of innovation. While China’s domestic EV market continues to expand, major Chinese EV companies are increasingly engaging in a price war. As new players, such as tech giant Xiaomi, continue to join the market, the inflow of equally good yet highly similar EV products leads to fierce competition and further squeezes the already limited room for making profits. 

What is behind this increasingly intensifying price war is the limit to China’s EV model development. As Chinese EV companies prioritize combining currently operational technologies to build cars, limited efforts were spent on researching new concepts and technology breakthroughs of EV. If Chinese EV producers cannot further innovate, they will end up like the Chinese television manufacturing industry, which faded as they failed to catch up to new product concepts despite early booms.

While China’s EV makers may struggle with innovation for a while, the U.S. does not have such a problem. Tesla, for example, has continued to be the most innovative EV company in the world. The EV tycoon’s recent deal with China tech giant Baidu on autonomous driving is a testament of how China values Tesla’s innovation and its competitiveness vis-a-vis cheap Chinese EV makers. If the U.S. auto industry could leverage its innovation advantage, they may still have a chance in winning over their Chinese competitors, not by price, but by ideas.

Unfortunately, that is not what the U.S. auto industry, Congress, and the White House are currently advocating for. Instead, they called for higher tariffs on Chinese EV imports while doing little to support corporate innovation on critical technologies that could revolutionize the concept of EV, such as autonomous driving. Nor did they encourage the American consumers to upgrade their preferences to purchase more EVs to build their own economies of scale. 

Ironically, building up barriers could buy China more time. Instead of blocking U.S. EVs, Beijing has already encouraged Tesla to further expand in China. By doing so, China not only helped Tesla to operationalize its expensive innovation based on its economies of scale. It also helps stimulate domestic Chinese EV innovation to sail through the bottleneck.

From a purely economic perspective, should the U.S. go after Chinese EVs? Perhaps not. China’s strength is its market scale, which contributes to high efficiency in its EV manufacturing. Meanwhile, the U.S. is leading in innovation of ideas such as autonomous driving and Internet of things, which is what once made Detroit, and now Austin, the leader of ideas in the global automobile industry. The two countries should play their strength in different parts of the global EV supply chain, to provide cleaner and more convenient ways of commuting to the entire world.

However, from a strategic perspective, given the highly integrated nature of EV in modern innovation and manufacturing chain, the U.S. has legit needs to compete with China in every aspect of EV manufacturing, as they compete for influence and leadership in the global economy. But that requires sound policy directions and an efficient approach to build up capacity at home. Instead of building up barriers while watching the American manufacturing base shrink, the U.S. should aim at better intellectual property protection mechanisms to protect its core competitiveness, incentivize domestic EV demand, and support consistent innovation of ideas.

The irony of history is that it repeats itself while people rarely learn their lessons and change. In the 1980s, the Japanese car imports shocked the U.S. auto industry in very similar ways the Chinese EV did today. To combat the “Japanese threat”, the U.S. implemented similar protectionist policies to limit Japanese import. But neither of those policies saved the U.S. auto industry as it continued to lose competitiveness over the next 30 years .

Look familiar? Scenes like these are happening all over the place in the U.S.-China bilateral trade. EV could be next. And just like the Japan auto shock in the 1980s, the U.S. is doomed to lose the competition if it duplicates past approaches. That is, unless the U.S. restructures its policy approach and focuses on leveraging its advantage to build its own strength. Prove to the world that the world’s largest economy has the strength and the determination to compete fairly.