Body
The Biden administration recently proposed barring from the United States any electric vehicles (EVs) using certain technology from China or Russia, citing national security concerns. The rule would apply to vehicles with hardware and software allowing the vehicle to communicate externally using the internet—such as through Bluetooth, cellular, and Wi-Fi systems—and software enabling autonomous driving. “Malicious access to these systems could allow adversaries to access and collect our most sensitive data and remotely manipulate cars on American roads,” the Commerce Department said in its announcement.
The proposal reflects some legitimate cybersecurity concerns, but an import ban along with 100 percent tariff on EVs from China runs the risk of insulating the US auto industry from external competition, to its detriment. Government efforts to protect national security at all costs could end up overprotecting US automakers, stifling innovation and entrepreneurship, and hurting US industrial competitiveness in rapidly evolving high-tech fields.
A Tale of Two Supply Chains
My recent visit to China and direct exposure to its ultra-competitive EV industry brought me to that realization.
Apple and Xiaomi, the world’s second and third largest smartphone makers, respectively, provide contrasting examples of US and Chinese competitiveness in the EV industry. The two companies once had the same goal—making internet-connected, self-driving EVs, or “smartphones on wheels.” But in February 2024, Apple cancelled its decade-long project to make an Apple Car for a variety of reasons. A month later, Xiaomi rolled out its first EV model, just three years after it announced its plan to make EVs. In fact, the founder and CEO of Xiaomi, Lei Jun, reportedly said that his fear of US sanctions in 2021 pushed him to build an EV business from scratch.
Today, the Xiaomi EV factory on the outskirts of Beijing is a highly automated, state-of-the-art factory filled with robots moving, picking, painting, and assembling parts. The company says the facility, with an automation rate of 91 percent, produces one new car every 76 seconds. China installed more industrial robots than the rest of the world combined in 2022. It remains to be seen whether Xiaomi will succeed in the long run, but it’s worth noting several factors that made it possible for a Chinese smartphone maker to launch this major EV venture in only three years.
First, China’s fully established supply chains in manufacturing, particularly of EVs, were an absolute enabling factor. Nowhere else can a company mobilize vertically integrated full EV supply chains from critical minerals and batteries to electronics and software so rapidly. A huge pool of young engineering talent, along with hyper-competitive businesses and entrepreneurs, also provides key fuel for the industry’s growth. In China, 1.4 million engineering graduates entered the workforce in 2021, while just about 232,000—one-sixth of China’s total—did so in the United States.
The role of industrial policy, in many cases discriminatory and market-distorting, in shaping China’s EV industry cannot be overemphasized. Massive government policy intervention enabled Chinese companies to leapfrog Western automakers. But it also created a structural problem in the industry with fierce competition between local governments to build local EV champions by providing subsidies, loans, equity investment, and cheap land, leading to problems of unsustainable and uncoordinated excess entrants and competition, financial losses, and delayed market consolidation among more than 100 EV brands.
Representatives of global companies interviewed in China said that their strategy there is changing from low-cost production or market expansion to technology learning or "reverse engineering." They said the pace of technology development in China is so fast that they fear falling behind the latest trend if they leave the market. The Wall Street Journal reported that Ford’s CEO described the rapid rise of Chinese EV makers as an “existential threat” to the US industry.
Striking the Right Balance
The Biden administration’s proposal to ban Chinese and Russian connected car technology reflects an “all or nothing” approach, acting as if its only policy choices are prohibiting all such imports or not. It ignores the possibilities of balancing national security and economic interests through middle-ground measures.
The European Union, for instance, is taking a more cautious and measured approach, employing WTO-compliant anti-subsidy tariffs and welcoming foreign direct investment from Chinese EV makers.
China allows foreign companies to make EVs in China, but with requirements that they comply with its strict data regulations. Tesla EVs in China reportedly have used Baidu maps for navigation and have run a data center in Shanghai, storing all data gathered in China and refraining from transferring any data back to the United States, complying with China’s tightened security regulations.
The automobile trade conflict between the United States and Japan in the 1980s holds valuable lessons for today. It was Japanese investment in the US market and American exposure to Japanese competition that made both automotive industries stronger—a win-win.
US policy should not sacrifice promotion of its industrial competitiveness for the sake of protecting national security. Allowing more foreign competition would help force US automakers to learn and innovate in a rapidly evolving high-tech race. China, with all the enabling factors and magnitude of scale, will continue to advance its industrial capabilities and technological prowess despite US protection measures, including export controls and import bans.
Narrowly targeted protection measures can be justified to address national security concerns. To the contrary, overshooting on protection will ultimately hurt US industrial competitiveness. US allies and partners may share the potential security concerns but may not follow the US approach simply because it is too burdensome economically as well as politically. They may employ targeted measures to address national security concerns and avoid being flooded with imports of Chinese EVs but continue to collaborate with the Chinese EV industry for the sake of their industrial and technological competitiveness.
Whether the Biden administration’s proposed import ban is the only and most effective way of addressing national security concerns should be debated. There could be reasonable in-between measures that strike a balance between security and economic tradeoffs.
Data Disclosure
This publication does not include a replication package.