CHINA: An Introduction to International Trade/WTO: Consultants (PRC Firms)

National Security Measures: A Growing Barrier to China’s Electric Vehicle Exports

As China’s electric vehicle (EV) industry continues to expand globally, major trade partners such as the United States, Canada, and the European Union have introduced various trade and investment restrictions targeting the sector. These measures include additional tariffs, proposed limitations on the import of Chinese certain hardware or software, and connected vehicles incorporating these components. Such policies are expected to significantly impact Chinese EV exports, potentially reshaping their competitive position in international markets.

United States prohibits the sale or import of connected vehicles integrating specific pieces of hardware and software, or those components sold separately, with a sufficient nexus to China

On September 23, 2024, the US Department of Commerce’s Bureau of Industry and Security (BIS) issued the Notice of proposed rulemaking “Securing the Information and Communications Technology and Services Supply Chain”. In this Notice, BIS asserts that the People’s Republic of China (PRC) and Russia are able to leverage domestic legislation and regulatory regimes to compel companies subject to their jurisdiction, including carmakers and their suppliers, to co-operate with security and intelligence services. According to BIS, the privileged access that the PRC and Russia may gain to Connected Vehicles through their components, including software, could enable those foreign adversaries to exfiltrate sensitive data collected by connected vehicles and potentially allow remote access and manipulation of connected vehicles driven by US persons, posing undue or unacceptable risks to US national security and the safety and security of US persons.

Therefore, BIS plans to implement a prohibition on transactions involving Vehicle Control Systems (VCS) hardware, VCS or ADS (Automated Driving System) software that is designed, developed, manufactured, or supplied by entities owned, controlled, or directed by the PRC or Russia. In the absence of general or specific authorization, the proposed regulation prohibits the following actions:

• prohibit VCS Hardware Importers from knowingly importing into the United States certain hardware for VCS (VCS hardware);
• prohibit connected vehicle manufacturers from knowingly importing into the United States completed connected vehicles incorporating certain software that supports the function of VCS or ADS (VCS or ADS software);
• prohibit connected vehicle Manufacturers from knowingly Selling within the United States completed connected vehicles that incorporate VCS or ADS software; and
• prohibit connected vehicle manufacturers who are owned by, controlled by, or subject to the jurisdiction or direction of the PRC or Russia from knowingly selling in the USA completed connected vehicles that incorporate VCS hardware, VCS or ADS software.

The final rule is expected to be determined by 20 January 2025. Once enacted, the affected vehicles will include passenger cars, motorcycles, buses, light and medium trucks, class 8 commercial trucks, and recreational vehicles. The prohibitions on software would take effect for Model Year 2027 and the prohibitions on hardware would take effect for Model Year 2030, or 1 January 2029 for units without a model year.

This measure will directly impact Chinese manufacturers supplying connected vehicles to the US market, particularly those involving VCS hardware, VCS or ADS software. In addition to high tariffs, the USA aims to establish new trade barriers through this measure, further excluding Chinese connected vehicles – despite their cost and technological advantages – from the US market, thereby making the export and sale of Chinese electric vehicles in the USA nearly impossible.

Canada plans to follow the USA in implementing restrictions on certain Chinese hardware, software, and electric vehicles incorporating these components

Canada has followed the USA’s lead by implementing similar restrictive measures on Chinese-made electric vehicles, including the imposition of a 100% surtax on Chinese electric vehicles. Additionally, Canada is considering a potential ban on the use of Chinese-made hardware and software in these vehicles. This action is intended to address claims of overcapacity and alleged security threats posed by the increasing presence of Chinese-made EVs in the Canadian market.

According to Reuters, Canadian Finance Minister Chrystia Freeland stated that Canada is “absolutely” considering banning Chinese-made software in electric vehicles among measures to counter what it calls overcapacity and a security threat from China. Furthermore, Freeland states, “We take really seriously intentional Chinese overcapacity, and we take very seriously the security threat from China. That’s why we acted decisively in imposing tariffs on Chinese EVs ... and we are looking at whether to impose further measures.”

Ontario Premier Doug Ford called on the Canadian federal government to follow the USA's lead. He said, “To protect our shared national security, Canada must stay in lock-step with our American allies and do the same. By doing so with the US, we can protect our critical infrastructure from foreign interference, build up our North American supply chains and protect good jobs on both sides of the border.”

Despite the Canadian government’s intention to implement these measures, it has not yet established regulations regarding the prohibition of Chinese connected vehicles that incorporate specific hardware and software, nor has it issued any restrictions on the hardware and software sold separately. Therefore, the specific measures the Canadian government may implement and their potential impacts should be closely followed in the future, particularly in the electric vehicle industry, where the implementation of such policies could have significant effects on China’s EV supply chain.

European Union: The ICT Supply Chain Toolbox Draft could lead to restrictions on Chinese connected vehicles and related hardware and software

In July 2024, the United Nations Economic Commission for Europe (UNECE) issued guidelines on vehicle cybersecurity, further regulating the cybersecurity management of autonomous vehicles and their systems in accordance with the UN’s R155 Cybersecurity and Cybersecurity Management System (CSMS) regulation and R156 Software Update and Software Update Management System (SUMS) regulation, with the aim of protecting user data. In recent years, the EU has also enacted a series of laws and regulations, ranging from cybersecurity policies for critical sectors such as transportation to rules governing the management of data generated by connected devices.

The EU has also increasingly focused on the security risks associated with Chinese-made connected vehicles and their associated hardware and software.

European Commission Vice President Margrethe Vestager pointed out that a connected car “can register everything where it is, and it can also transmit that data to those who have access to the data,” She further explained that the EU’s services “are looking at this, also with our economic security experts,” adding that “it’s legitimate to look into whether or not that kind of technology can be misused when it comes to security issues.”

In response to these concerns, an anonymous source indicated that the European Union is expected to draft an “ICT Supply Chain Toolbox” in the coming weeks. This toolbox will include measures to address the connectivity of electric vehicles, similar to the EU’s previous initiatives in the 5G sector, such as the 5G Security Toolbox. While the toolbox will not be legally binding, its implementation will depend on decisions made by individual EU member states. Consequently, the export of Chinese connected vehicles and related hardware and software to Europe may face some uncertainty.

Conclusion

Citing national security and cybersecurity concerns, the United States plans to impose restrictions on Chinese connected vehicles and related hardware and software. Canada is expected to adopt similar measures, and the EU may impose corresponding restrictions based on cybersecurity reviews. These measures will affect the progress of Chinese electric vehicle exports to these regions. As the international trade environment evolves, it is advisable for Chinese electric vehicle companies to closely monitor policy developments in the USA, Canada, the EU, and other key markets, and to proactively prepare for potential export challenges.