Legal Risks in the Chinese EV Sector: Implications for Global Investors

The Chinese electric vehicle (EV) sector has become a linchpin of global supply chains, but its dominance is now entangled with regulatory and geopolitical risks that could reshape investment strategies. From 2023 to 2025, China has implemented export restrictions on critical EV battery technologies, imposed industrial policies to subsidize domestic producers, and faced retaliatory tariffs from Western markets. For global investors, these developments underscore the need to scrutinize governance practices, legal exposure, and cross-border compliance risks in a sector where national economic security and corporate strategy intersect.

Regulatory Tightening and Export Controls

China's recent export restrictions on EV battery technologies, including lithium processing and lithium iron phosphate (LFP) battery components, have added these items to a government-controlled export list, requiring licenses for international transfers, according to a CNN report. This move reflects a broader strategy to consolidate control over its supply chain, as Chinese manufacturers now hold at least 67% of the global EV battery market share, as reported by CNN. While these measures aim to secure China's position in the EV transition, they create operational risks for foreign automakers and suppliers reliant on Chinese components. For instance, companies like CATL and BYD, which have expanded production overseas, may face delays or bottlenecks if obtaining export licenses becomes more stringent, CNN notes.

The Chinese government's industrial policies, such as the "dual-credit system" and $230.9 billion in subsidies since 2009, have further entrenched domestic dominance. These subsidies have enabled Chinese EVs to capture over 20% of the EU's EV sales in 2024, prompting trade tensions and retaliatory tariffs, according to a CSIS analysis. The European Commission's 45% tariffs on Chinese EVs and the U.S.'s 100% tariffs highlight the growing friction between China's export-driven strategy and Western protectionism; a DriveTech profile on BYD's vertical integration also illustrates competitive dynamics.

Governance Practices and Legal Challenges

Chinese EV companies like CATL and BYD have adopted distinct governance models to navigate these challenges. CATL's supply chain strategy emphasizes strategic quality management, including supplier collaboration and R&D investment, to optimize production efficiency, as noted by CNN. In contrast, BYD's vertical integration—controlling everything from raw material sourcing to final assembly—has enhanced its resilience against supply chain disruptions, as the DriveTech profile illustrates. However, both firms face legal exposure from international trade disputes. For example, Chinese EV manufacturers have filed legal challenges at the EU's Court of Justice to contest tariffs, arguing that the EU's anti-subsidy investigation methodology and exclusion of Tesla from sampling were flawed, according to a Reuters report.

The legal battles extend beyond tariffs. The EU's NIS2 Directive, which came into effect in October 2024, imposes stringent cybersecurity obligations on EV manufacturers operating in the bloc. Under this framework, the EU's NIS2 Directive requires foreign EV companies to comply with data localization requirements and incident reporting protocols, with non-compliance risking fines of up to €10 million. These regulations add another layer of complexity for Chinese firms, which must align with EU data security standards while navigating China's own data sovereignty laws.

Cross-Border Legal Risks and Investor Implications

The interplay between China's industrial policies and international legal frameworks has created a volatile landscape for investors. The U.S. and EU have taken divergent approaches to addressing Chinese EV dominance: the EU's tariffs are structured to align with WTO rules, while the U.S. has imposed unilateral measures under Section 301 of the Trade Act of 1974, which critics argue violates WTO principles. China has retaliated by filing WTO complaints, including a WTO complaint against the EU and initiating anti-dumping investigations on Canadian and U.S. goods.

For investors, the key risks lie in supply chain resilience, regulatory compliance, and geopolitical volatility. Chinese EV companies' reliance on government subsidies raises questions about long-term sustainability if support wanes or if trade barriers escalate. Additionally, the EU's focus on data security—such as requiring EV manufacturers to store data on European servers—could force Chinese firms to restructure operations, increasing costs and operational complexity under the NIS2 framework.

Conclusion

The Chinese EV sector's legal and regulatory risks are no longer confined to domestic policy shifts but are now a global concern. Investors must weigh the sector's growth potential against the likelihood of prolonged trade disputes, evolving compliance standards, and the geopolitical tensions reshaping supply chains. As the EU and U.S. recalibrate their EV strategies to counter Chinese dominance, the ability of Chinese firms to adapt to cross-border legal frameworks—and the willingness of Western governments to balance climate goals with economic security—will define the sector's trajectory in the coming years.