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do Prado, V., Fabry, E., González Laya, A., Köhler-Suzuki, N., Lamy P. & Praetorius, S. “The Road to a New European Automotive Strategy: Trade and Industrial Policy Options”, Report n°129, Jacques Delors Institute, January 2025

The European automotive industry stands at a crossroads, facing three concurrent challenges: decarbonizing to tackle climate change, maintaining global competitiveness in a fierce market, and safeguarding economic security amid rising geopolitical tensions. At the heart of the European economy, the automotive sector directly employs 1.4 million people and supports 13 million jobs indirectly across the EU, with implications extending far beyond the industry itself. The transition from internal combustion engine vehicles (ICEs) to electric vehicles (EVs) presents profound challenges, as structural adjustments to production processes and supply chains will significantly affect European employment and economic prospects.

The EU has established a legislative framework for transport sector decarbonization, and the automotive industry has invested substantially in this transition. However, evolving market conditions have created a trilemma of competing objectives: decarbonization, competitiveness, and economic security. Successfully navigating this transition requires a unified yet adaptable European strategy that addresses trade-offs between the objectives, balances short-term priorities with medium- and long-term investments, and coordinates action between private and public sectors.

Each aspect of the trilemma presents both opportunities and challenges for the automotive sector, its supply chain, and the broader European economy. Addressing these issues comprehensively will require coordinated international trade and industrial policies.

The EU aims to achieve 100% zero-emission mobility for all new vehicles by 2035, in line with its commitment to climate neutrality by 2050. This target requires substantial investment in EV infrastructure, battery production, and consumer incentives. However, EV adoption rates vary significantly across member states, creating an uneven transition.

Key challenges include high costs and consumer hesitancy. EVs remain significantly more expensive than comparable ICEs, limiting widespread adoption. Inadequate charging infrastructure and high electricity prices create additional barriers. Europe must also scale up battery production to compete with China’s dominance of the global battery supply chain.

The EU automotive industry faces three major challenges to its competitiveness: high production costs, innovation gaps, and significant regulatory burdens. Labor and energy costs in Europe are substantially higher than in China, making it difficult for European manufacturers to compete on price. The transition to electric mobility strains supply chains, particularly for small and medium-sized enterprises (SMEs) dependent on internal combustion engine technologies. Moreover, strict regulatory decarbonization targets must be accompanied by corresponding support measures to avoid overburdening the industry.

External challenges include fierce competition from China and protectionist policies in the United States. China’s dominance in EV and battery production, supported by strategic subsidies and economies of scale, poses a formidable challenge to European competitiveness. The US Inflation Reduction Act diverts investments from Europe, while tax cuts planned by the new US administration may intensify competitive pressures.

Rising geopolitical tensions threaten European automotive supply chain stability, particularly through potential US tariff increases that could cause trade diversion and supply disruptions. The EU’s reliance on China’s consumer market, raw materials, and battery components creates vulnerability to economic coercion and supply disruptions. While efforts to build resilience through export market diversification, production localization, and domestic capacity scaling are underway, Europe continues to lag in mining, refining, and processing capabilities for critical raw materials.

The integration of digital technologies in modern cars and EV charging infrastructure creates new vulnerabilities, including cybersecurity risks and potential foreign government data collection. The decarbonization process also threatens social and political stability through potential job losses across the ICE supply chain.

This report examines policy measures to support the industry’s transition while aligning with EU objectives, providing a toolbox for balancing the strategic triangle outlined in the analytical section. Drawing on more than 70 interviews and stakeholder events, the policy options are organized across four key areas: regulatory measures, trade policy instruments, industrial incentives, and infrastructure investments.

Regulatory measures address coherence across the EU, revision of decarbonization targets, introduction of regulatory incentives for EV adoption, launch of public awareness campaigns, and fair access to in-vehicle data.

Trade policy instruments include notably negotiating new trade agreements, accelerating the adoption of critical raw material agreements, deepening cooperation with Japan and South Korea on battery supply chains, and implementing trade remedies and enforcement actions.

Industrial policy measures include consumer subsidies, support for corporate fleet decarbonization, phase-out of fossil fuel subsidies, increased research and development (R&D) funding, direct subsidies to help SMEs navigate industry changes, and workforce transition assistance.

Infrastructure measures focus on improving charging infrastructure and electricity grids, increasing battery material recycling, and developing hydrogen refueling infrastructure.

This report outlines four potential scenarios based on the interplay between global tensions and international cooperation, ranging from intense conflict and isolation to low tensions and robust collaboration. These scenarios highlight critical factors influencing the automotive industry’s future: government support, technological advances, supply chain resilience, and consumer demand.

Actual trajectories will likely combine elements from multiple scenarios, shaped by political and economic developments – particularly decisions made by the new US administration. The EU must navigate these challenges to ensure its automotive industry remains competitive, resilient, and sustainable.

The transition to electric mobility presents a critical opportunity for the EU to achieve its climate goals and maintain industrial leadership. With a narrow window of opportunity, the EU must act decisively to create a competitive and sustainable automotive ecosystem that can rival its global competitors. Active pursuit of market access opportunities will enable European automotive firms to benefit from growing global demand for sustainable mobility. A clear roadmap will facilitate investments required for the transition, particularly from manufacturers. Without decisive action, the EU risks both industrial decline and loss of technological edge in a sector that will define the future of mobility. A holistic strategy combining regulatory, trade, industrial, and infrastructure measures is essential to bridge the innovation gap and ensure the long-term competitiveness of the European automotive industry. The policy options identified in this report, grounded in extensive stakeholder consultations across the EU automotive industry, can also inform the EU’s Strategic Dialogue on the Future of the European Automotive Industry. The time to act and future-proof the European automotive industry is now.

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