EU-China Trade Tensions and EV Disruption: Why Now Is the Time to Rebalance Auto Sector Exposure

The escalating trade war between the EU and China over electric vehicles (EVs) has created a seismic shift in the auto industry, reshaping supply chains, pricing strategies, and market dynamics. For investors, this isn't just a geopolitical headache—it's a strategic opportunity to recalibrate exposure to automakers positioned to thrive amid tariffs and industrial protectionism. Here's why the EU's automakers are worth a closer look.

The Tariff Landscape: A New Reality for EVs

The EU's imposition of countervailing duties (CVDs) on Chinese EVs in late 2024—ranging from 17.4% (BYD) to 37.6% (SAIC)—has fundamentally altered the competitive landscape. These tariffs, layered atop a 10% baseline import duty, create a total burden of up to 47.6% for certain Chinese models. The goal? To counter subsidies Beijing provides to manufacturers, which the EU claims distort global markets.

Meanwhile, the U.S. has gone even further, slapping up to 100% tariffs on Chinese EVs under Section 301. The result? A fragmented global EV market where Chinese brands face steep headwinds in the EU and U.S., while European automakers are scrambling to seize the opening.

Strategic Moves by EU Automakers: Localization and Litigation

European automakers aren't sitting idle. They're responding with two prongs: legal challenges and production relocations.

• Legal Front: BYD, Geely, and Tesla have sued the EU in its General Court, arguing the subsidy calculations were flawed (e.g., using Taiwan's land prices, which are higher than China's). A ruling could slash tariffs or force renegotiation.
• Geographic Diversification:
• BYD is building a factory in Hungary to produce EVs duty-free in the EU.
• Volvo (Geely-owned) is boosting output in Belgium.
• Tesla is absorbing tariffs by slightly hiking prices but maintaining market share.

The goal is to localize production and avoid tariffs entirely. This mirrors the U.S. strategy, where automakers like Ford and GM have invested in domestic battery factories to comply with IRA tax incentives.

Market Dynamics: Winners and Losers in the EV Race

The tariffs have already dented Chinese EV imports into the EU, which fell 7% YoY in early 2025. Analysts at S&P Mobility now forecast Chinese EV sales in Europe to hit 850,500 units in 2025, down from pre-tariff expectations of 1 million by late 2020s. This creates a vacuum that EU automakers are racing to fill.

Key beneficiaries:
- Premium Brands: BMW, Daimler, and Polestar (Volvo's EV arm) benefit from reduced competition from cheaper Chinese EVs.
- Battery Makers: European firms like Northvolt and ACC (joint venture of TotalEnergies and Renault) gain as automakers source batteries locally to avoid tariffs.

Risks:
- Minimum Price Agreements: The EU and China are negotiating a deal where Chinese EVs must meet a “minimum price” to enter the market. While this could stabilize trade, it risks making EVs pricier for consumers and slowing adoption.
- Geopolitical Volatility: A breakdown in talks could lead to higher tariffs, while a last-minute deal (e.g., linking EVs to a resolution on French cognac tariffs) might create short-term volatility.

Investment Strategy: Overweight EU Automakers, but Pick Your Battles

The EU's auto sector is now a high-beta play on resolving trade tensions. Here's how to position:

1. Overweight European Automakers with Strong EV Pipelines:
2. Volkswagen (VOW): Its Trinity platform aims to cut EV costs by 50%, while its Cupra brand targets the premium EV segment.

3. Stellantis (STLA): The merger of Fiat and Peugeot has created scale, and its EV600 platform aims to rival Chinese models.

4. Underweight Pure-Play Chinese EVs:

5. NIO (NIO) and Li Auto (LI) face steep tariffs and the risk of further restrictions. Their U.S. and European exposure is now a liability.

6. Consider ETFs for Diversification:

7. The iShares European Automotive ETF (EUAM) tracks a basket of automakers, including BMW, Daimler, and Volvo.

8. Monitor the Minimum Price Talks:

9. A deal could stabilize trade but hurt European automakers if Chinese brands undercut local competitors by lowering prices.

Final Takeaway: The Tariff Tide Lifts Some Boats

The EU-China trade war has created a zero-sum game for EV manufacturers. While Chinese brands face steep headwinds, European automakers have a window to rebuild competitiveness. Investors should focus on companies that can localize production, navigate legal hurdles, and deliver cost-effective EVs. The next six months will hinge on tariff negotiations—success here could make EU automakers the darlings of the EV era.

Final Note: Stay agile. A sudden tariff rollback or a surprise trade deal could upend this calculus. For now, the EU's auto sector is where the action is.