Rational breakthrough

Consensus has brought a ‘soft landing’ for the China-EU EV dispute, but sustaining value creation and win-win cooperation are key to long-term stability

On Jan 12, China and the European Union arrived at a consensus on their dispute over anti-subsidy measures targeting Chinese-made electric vehicles. The EU subsequently released the guidance document on submission of price undertaking offers, replacing the previously contemplated high anti-subsidy tariffs with a minimum import price mechanism. This arrangement has provided a “soft landing” for the trade frictions that had persisted for more than two years and brought a potentially escalating trade conflict back within the framework of World Trade Organization rules.

The China-EU EV dispute originated from a structural tension between rising trade protection pressures and deep mutual economic interdependence. The EU argued that the rapid expansion and price competitiveness of Chinese EVs posed a significant challenge to its domestic industry, prompting the high anti-subsidy duties. China, for its part, maintained that its competitive advantages stem primarily from economies of scale, technological progress and a complete industrial ecosystem, and sought to defend its legitimate interests through WTO mechanisms.

Had this trajectory continued, the dispute would likely have escalated, disrupting the highly integrated supply chains linking the two sides in vehicle manufacturing, batteries and critical raw materials. For the EU, such an outcome would have raised the cost of its green transition; for Chinese companies, it would have constrained their access to a key high-end market.

Against this backdrop, the price undertaking mechanism emerged as the most acceptable and operational compromise for both sides. On the one hand, WTO anti-subsidy rules offered a legitimate and actionable institutional framework for managing the dispute. On the other hand, the shared dependence of China and the EU on green transformation and industrial cooperation made compromise a rational choice. By substituting ex-ante constraints for ex-post penalties, the price undertaking mechanism curbs low-price shocks while preserving market flexibility, providing an institutional safeguard to de-escalate trade tensions.

The agreement rejects a zero-sum game. Rather, it establishes a managed framework for mutually beneficial competition, built on the recognition of each side’s core concerns. For China, the most immediate benefit lies in avoiding the risk of prohibitive tariffs while retaining an institutionalized channel for market access in Europe, thereby stabilizing expectations among importers and distributors. The agreement also offers a clearer pathway for improving market conditions through localized investment. Data show that in 2025, Chinese automakers sold 811,000 vehicles in the European market, a year-on-year increase of 99 percent. The agreement ensures that Chinese companies can continue operating in Europe without losing market share due to punitive tariffs.

At the same time, the constraints are evident. The low-price expansion model is no longer sustainable, while compliance costs and operational complexity will rise significantly. Implicit pressures surrounding “technology-for-market-access” arrangements may also intensify, requiring companies to carefully balance cooperation with technological security. Moreover, differentiated pricing rules applied across companies and vehicle models are likely to intensify competitive divergence among Chinese automakers.

For the EU, the agreement helps mitigate price shocks, buys time for domestic industry adjustment, and channels capital and technology toward local production through market access conditions. However, it also forces the EU to confront the reality of China’s competitiveness in the EV sector. Europe’s green transition remains difficult to achieve without participation from Chinese supply chains. In addition, divergent views among EU member states and companies toward the agreement pose challenges; how these internal differences are managed during implementation will directly affect its durability.

Over the longer term, the arrangement does not weaken China-EU supply chain linkages. On the contrary, by encouraging investment and localized production, it promotes deeper industrial interlinkages and preserves space for cooperation in green technologies.

Despite its significance, implementation will face multiple challenges. First, certain rules allow room for interpretation. Concepts such as “reasonable profit” and “elimination of injury” grant the European Commission considerable discretion in practice. Second, the complexity of pricing and compliance mechanisms may increase operational uncertainty for companies.

External geopolitical factors further complicate the outlook. Policy shifts by other major economies could indirectly influence the EU’s stance through alliance dynamics, while internal political and industrial divisions within the EU may introduce volatility during implementation.

Nevertheless, the agreement carries important demonstrative value. It shows that even in high technology, highly competitive sectors, major trade disputes need not be resolved solely through confrontation. Rule-based negotiation mechanisms can still manage risks while preserving space for industrial cooperation.

From a broader perspective, the agreement is also pushing China’s automotive industry to recalibrate its globalization strategy. As low-price pathways narrow, competition is shifting from price wars to value-based competition, with technological innovation, brand recognition and localized operations becoming core sources of competitiveness.

In the European market, localized production is no longer merely an advantage but a critical means of reducing trade risks and enhancing long-term competitiveness. BYD plans to commence mass production at its Hungary plant in the second quarter of 2026, with an eventual capacity of 300,000 vehicles. This model of “capacity going global” not only circumvents trade barriers but also deepens integration with local European supply chains.

Even more crucial is brand building. Chinese automakers must systematically shape their brand identities — strengthening product competitiveness through battery, electric drive and intelligent technologies advances; building institutional trust through compliance and sustainable practices; and enhancing consumer recognition through robust service networks.

Overall, the China-EU EV agreement represents a rules-based, rational, and transitional outcome. It stabilizes bilateral economic relations while providing both pressure and momentum for the transformation and upgrading of China’s automotive industry. Against a backdrop of rising global uncertainty, this once again demonstrates that dialogue and rules remain essential tools for managing trade frictions. Looking ahead, only by sustaining a focus on value creation and win-win cooperation can China-EU EV cooperation achieve long-term stability.

The author is the director of the Automotive Industry and Technology Strategy Research Center, College of Automotive and Energy and a research fellow at the German Studies Center at Tongji University.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.