EU and China Reach Preliminary Deal to Cap Hybrid Vehicle Exports

The European Union and China struck a preliminary deal on Friday to sharply limit China's hybrid vehicle exports to Europe. The EU plans to initially cap hybrid and plug-in hybrid imports from China at 350,000 annually, potentially starting as early as December. An EU official said the cap would more than halve shipments that were on track to reach roughly 800,000 this year. Imports totaled 302,000 in 2025. China's officials noted on Monday that the deal still allows China's automakers to increase shipments from last year's levels. Vehicles exceeding the quota would be blocked rather than face additional tariffs.

Europe is testing whether Europe can confront China's export expansion without President Trump's tariff-heavy approach. More countries are confronting the threat that China's industrial overcapacity poses to domestic industries. However, protecting individual sectors will not resolve the broader problem that China's factories produce far more than China's economy can absorb.

France and Germany last week proposed giving Brussels sweeping new powers to restrict market access over unfair trade practices. The proposal marks a significant shift for Germany, which opposed EU tariffs on China's electric vehicles in 2024. European Commission President Ursula von der Leyen warned in her annual address last month that the bloc's trade deficit with China had reached a "tipping point." Von der Leyen said the second China shock was already occurring rather than merely approaching. EU leaders are considering tougher powers to confront China's trade practices, including authority resembling Washington's power to impose sweeping tariffs on goods from China.

Daniel Mullaney, an Atlantic Council senior fellow and former U.S. trade official, said the agreement could reduce momentum for harsher measures. Mullaney said member states could become hesitant this week to disrupt the agreement. Washington is pushing trading partners to cooperate against China's industrial overcapacity. Mullaney said any individual country would find progress on overcapacity very difficult without allies.

China's automakers increased hybrid shipments to Europe after the EU imposed steep tariffs on fully electric vehicles in 2024. New data released yesterday showed that China's global passenger vehicle exports surged 64% in September to 919,000. China's domestic passenger vehicle sales fell 27% in September.

Europe's deal could shift pressure to other industries or other nations without addressing the underlying imbalances driving China's export boom. Economist Michael Pettis argued over the weekend that the agreement would do little for European manufacturing overall. Pettis said EU hybrid producers would benefit at the expense of other EU manufacturers. The deal may provide temporary relief for Europe's automakers. However, China's industrial strength and the resulting pressure on manufacturers around the world are not going away.