Chinese-Made Electric Cars Arrive Stateside

In July, the electric car company Polestar unveiled a new dealership just blocks away from the White House in Washington, D.C. At the opening event, D.C. Mayor Muriel Bowser welcomed its arrival as a boost to the capital’s green transition; the dealership’s chief operating officer praised the brand’s “Swedish craftsmanship.” Absent from the ceremony was any mention of Polestar’s connections to China.

Polestar was founded in Sweden and remains headquartered there but is now owned by the Chinese car company Geely. It may be little-known compared to Chinese electric vehicle (EV) titan BYD, which recently surpassed Tesla to top global EV sales, but it can claim this title: It is the first Chinese-owned EV company to make a major push into the American market. Its U.S. sales reached nearly 10,000 in 2022; while modest, U.S. trade data suggests those sales already make Polestar by far the top exporter of electric cars from China to the United States. And it has its sights set higher: Polestar plans to have 40 retail locations across the U.S. by the end of the year and to begin producing cars out of a South Carolina factory in 2024.

In recent years, U.S. lawmakers and American auto companies have worried that the green transition will result in Chinese cars taking over U.S. roads. China’s EV industry is ascendant; it accounted for one-third of global exports last year. During a visit in 2021 to a Ford electric vehicle plant in Michigan, U.S. President Joe Biden said, “The real question is … whether we’ll build these vehicles and the batteries that go in them here in the United States or rely on other countries. … Right now, China is leading in this race. Make no bones about it.”

Does Polestar’s expansion into the U.S. confirm politicians’ fears of Chinese EVs flooding the market?

For now, American carmakers—with the help of U.S. policy—are well positioned to compete, auto analysts told Foreign Policy. Since Biden delivered that speech in Michigan two years ago, the U.S. government has taken significant steps to help them catch up. Through the 2022 Inflation Reduction Act (IRA), Congress approved consumer and production tax credits for batteries and electric cars made in America. Consumers can receive up to $7,500 off when they buy a car assembled in North America with a battery made mostly on the continent, containing minerals mined and refined in the U.S. or its free-trade-agreement partners. And those protectionist measures are layered on top of a hefty 25 percent tariff that former President Donald Trump applied to auto imports from China.

The policies have already had a large impact: Over the last year, more than $50 billion in investments in the U.S. EV sector have been announced, according to analysis by Wellesley College environmental policy professor Jay Turner. And, while the Biden administration has said it is not trying to shut out Chinese EVs, the policies seem to have largely had that effect.

So far, Polestar has been an exception in pursuing American customers. A BYD senior vice president recently told Bloomberg the U.S. market “isn’t under our current consideration.” Most Chinese auto companies have sought out friendlier markets: the European Union, where foreign EV imports are eligible for subsidies and only face a 10 percent import tariff, and emerging markets including in Southeast Asia. Chinese companies have made up 8 percent of European EV sales so far this year, according to Reuters, and their share is expected to climb in the coming years, as high as 20 percent.

For Chinese carmakers eyeing the U.S., the challenges aren’t only economic, but also political. According to Pew Research Center, 83 percent of Americans now have an unfavorable view of China. “A car and a house are still two of the only things that are emotional buys,” said Tu Le, managing director of Sino Auto Insights. “So when China EV Inc. enters the United States, they need to build that trust. … That’s not something that will happen overnight.”

China’s biggest EV companies don’t have the advantage of Polestar’s Swedish sheen. It may be owned by a Chinese company and produce its cars in China, but it markets itself as Nordic, bolstered by its ties to Volvo. Polestar was formerly the racing partner of the Swedish auto giant—which itself was purchased by Geely in 2010. Volvo, under the umbrella of Geely, has a large stake in Polestar. “That’s important, because if we look at Chinese-owned brands going overseas, it’s the ones that have sort of a Western tilt that have done the best,” said Michael Dunne, CEO of ZoZoGo, an automotive advisory firm. “There will be no friction with a U.S. customer on that front, and possibly no friction with the government.”

Polestar’s ties to Volvo have also allowed it to set up production at Volvo’s existing factory in South Carolina—a significant advantage. The Biden administration has encouraged such foreign investments under the IRA, but for other Chinese companies in the EV industry, opening up a factory in the U.S. has been far more of a headache. Ford struck a deal to license technology from leading Chinese battery company CATL, but it has faced political backlash. Virginia’s Republican governor, Glenn Youngkin, retracted his state’s offer to host the factory, and the plant, now sited in Michigan, is under investigation by House Republicans. Other battery companies with ties to China, including Gotion and Microvast, have faced similar issues.

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Despite all of the challenges, Chinese EV makers will likely try to follow Polestar’s model in the coming years: first stomaching the tariff and exporting to the U.S. to test the market, and, if successful, setting up a factory here, Le said. The market is too lucrative to ignore. But all of the policy barriers and political constraints mean that America is unlikely to be flooded with Chinese EVs in the near term, he said.

“As a group today, they feel as though U.S.-China relations are in such bad shape that now is not the right time to try to enter the U.S.,” Dunne said. “They’re looking at post-2025.” That means that Polestar, which is a relatively small player, will likely remain the only Chinese-owned EV company competing in the U.S. for the time being. Polestar did not respond to requests for comment.

Though a relief for legacy American automakers and U.S. politicians, the lack of Chinese EVs in the U.S. market comes at a cost to the nation’s decarbonization efforts. Transportation is the largest source of U.S. emissions, and the Biden administration is aiming for 50 percent of car sales to be electric by 2030. Chinese electric cars are significantly cheaper on average than American models, so their absence in the U.S. may mean fewer people will go electric in the coming years.

Ilaria Mazzocco, a Chinese energy policy expert at the Center for Strategic and International Studies, described this as a dilemma for American officials. “If you try to introduce more protectionist policies to protect your domestic market, you’re also reducing competition, and competition is ultimately what’s helped the advancement of the industry and prices fall.”

At issue are not just the barriers to Chinese EVs entering the U.S., but also the restrictions on the use of upstream battery materials from China. China refines more than half of global lithium, cobalt, and graphite—key battery minerals—and produces more than three-quarters of the world’s battery cathodes and anodes, the basic battery building blocks. Under the IRA, if a car has a battery containing minerals or components from a “foreign entity of concern”—a category that includes China—it is ineligible for the tax credits. The rules are still being finalized, but if the law is strictly implemented, that could greatly limit the number of models, including some Teslas, that are eligible for tax credits. With fewer cars subsidized, EV adoption may be slowed down.

Overall, the IRA will still be a strong driver for greener transportation—it has boosted projections for U.S. EV sales in 2030 by nearly 10 percent (to 52 percent, meeting the Biden administration goal), according to Bloomberg New Energy Finance (BNEF). However, Colin McKerracher, who leads BNEF’s transport division, said the law wasn’t designed to maximize carbon emissions reduction. “IRA is very much industrial policy first and climate policy second,” he said. That was part of the political calculus for getting the law passed with the narrowest of margins.

Prioritizing American industrial policy may pay off in the end, though, from a climate and economic perspective, experts told Foreign Policy. “There’s this period where you’re taking a step back to then take two steps forward in the future,” McKerracher said, pointing to the investment the law is unleashing, which will lead to new breakthroughs in battery chemistries and other critical green technologies. “I think some of these [IRA] measures will slow things down in the short term,” he said, “but in the long term, I think they will be a net positive.”