David Ricardo’s theory of comparative advantage rightly posits that nations benefit from specialising in industries where they hold efficiency gains, leading to mutual gains through trade.
However, the entrenchment of such comparative advantage in favour of one country over the years can have significant geopolitical ramifications. Over time, a country that establishes a dominant position in certain industries can flood global markets with its products, leading to trade imbalances and economic dependencies for other nations.
This dynamic is exemplified in the rise of China as a leading force in the electric vehicle (EV) sector. The recent news that BYD has surpassed Tesla as the world’s top EV seller underscores a broader trend: China’s ascendance as the preeminent EV manufacturer, outpacing Western competitors.
This shift not only highlights China’s solidified comparative advantage in this critical future industry but also signals potential geopolitical and economic shifts as other nations grapple with the implications of being net importers in the burgeoning EV market, potentially leading to trade deficits and a reevaluation of their own industrial strategies in response to China’s growing dominance.
Last year’s data pointed towards the potential of EVs as a new driver of economic recovery, especially as traditional sectors begin to falter. However, now the sector confronts formidable headwinds from potential international trade constraints, particularly from the EU and US. The spectre of augmented import tariffs, hinted by US Commerce Secretary Gina Raimondo amid national security concerns, alongside the EU’s scrutiny of Chinese EV subsidies, portends a convoluted geopolitical tableau that could stymie China’s EV export trajectory.
The EU’s anti-subsidy investigations further exacerbate this scenario, amplifying the sector’s vulnerability to international policy shifts. Despite these adversities, China’s entrenched competitive edge in lithium-ion battery technology and cost-effective labour market remains a bulwark against external pressures.
However, the looming spectre of trade barriers and the potential for market isolation looms large, threatening to encumber China’s ascent in the global EV arena.
But how did China ascend to dominance within the electric vehicle (EV) sector?
Three pillars
This supremacy is founded upon three critical pillars, First is the government’s financial support. The Chinese government’s aggressive support for the EV sector has led to market inefficiencies and overcapacity, which have had significant implications for both domestic and international EV markets.
The government’s strategy included substantial financial incentives and subsidies to promote the development and adoption of EVs. These incentives were part of a broader push to stimulate technological innovation, reduce urban pollution, and decrease reliance on oil imports.
The Chinese government provided around $15 billion in incentives for the EV industry, leading to a significant ramp-up in production capacity.
BYD, one of the largest Chinese EV manufacturers, benefited significantly from these subsidies, allowing it to implement aggressive expansion strategies domestically and internationally.
The rapid expansion, fuelled by government subsidies, resulted in overcapacity, meaning the industry’s production capabilities exceeded domestic demand. To address this issue, companies like BYD looked to international markets to absorb the excess production capacity. For example, BYD’s ‘7+4’ strategy was a comprehensive approach to explore advantages in the emerging automotive segment in China and abroad.
Secondly, this dominance in the global EV sector is the result of a sophisticated interplay between its Technological Innovation Systems (TIS) and a comprehensive, multi-tiered policy framework, which includes cornerstone initiatives such as the Outline of the National Medium- and Long-term Scientific and Technological Development Plan (MLP), the Strategic Emerging Industries (SEI) program, and the Made in China 2025 (MIC 25) strategy.
These policy frameworks have evolved from focusing on bolstering domestic Research and Development (R&D) capabilities to encouraging market cultivation for emerging high-tech industries and, ultimately, aiming for technological self-sufficiency and international leadership.
This evolution is further underscored by targeted industry-specific policies, notably the ‘Battery Whitelist’ and a series of meticulously calibrated subsidy schemes designed to nurture the domestic battery manufacturing ecosystem and incentivise innovation, technological upgrades, and competitive market positioning.
This policy-driven approach has culminated in the establishment of a robust, vertically integrated battery value chain within China, highlighted by the rise of global industry leaders like CATL and a comprehensive network that spans the entire spectrum from raw material procurement and processing to advanced component manufacturing, and integration into end-use applications.
The dynamic and reciprocal relationship between TIS and policy has accelerated technological advancements within the sector and enhanced the global competitiveness of Chinese battery manufacturers.
Through this strategic alignment, China has effectively leveraged its policy instruments to create a conducive environment for the growth and global dominance of its EV battery industry, setting a benchmark for how policy and innovation systems can be harmonised to achieve significant technological and market leadership globally.
Mineral control
Thirdly, the strategic control over rare earth elements further strengthens China’s hold on the EV sector. China is the top miner and processor of rare earths, crucial for EV magnets and other high-tech applications. With China processing 89 per cent of the world’s neodymium and praseodymium and holding significant reserves of rare earth oxides, its influence over the supply chain is substantial.
Efforts by other countries to reduce reliance on China have emerged, but China’s entrenched position presents significant challenges for diversifying the global supply chain.
For India and other nations observing China’s trajectory, the lessons are multifaceted. It highlights the importance of developing a strategic, multi-tiered policy framework that supports domestic competitive high-end manufacturing and innovation, the need for self-reliance in critical raw materials and technological capabilities to avoid geopolitical vulnerabilities, and the necessity of maintaining a balance between government support and market-driven efficiencies to prevent overcapacity and foster sustainable growth.
Additionally, diversifying trade partnerships and investing in domestic capabilities in emerging sectors can mitigate risks associated with over-reliance on a single dominant player in the global market.
The writer is OSD, Research, Economic Advisory Council to the Prime Minister. Views expressed are personal
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