The Impacts of CBAM on China's Electric Vehicles Export to the European Union

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Abstract:

Purpose: The EU's CBAM fully implemented in 2026, represents a paradigm shift in global trade governance. While CBAM initially covers sectors like cement, steel, and aluminum, its future expansion to downstream products including automotive components makes it critical for China's EV exports. China has become the EU's largest automotive import source. However, this flourishing trade faces unprecedented challenges from EU green trade regulations.
This paper tries to analyze the direct and indirect channels through which CBAM affects China's EV export competitiveness, including upstream material cost implications. Quantify potential cost increases for Chinese EV manufacturers under various carbon pricing scenarios, considering the disparity between China's carbon price and EU prices. Examine regulatory interactions between CBAM and complementary EU instruments, particularly the Battery Regulation's carbon footprint requirements. Evaluate differential impacts across China's EV value chain segments to identify vulnerability hotspots. Assess strategic responses available to Chinese EV manufacturers, including technological upgrading and supply chain decarbonization.
Methodology: This study employs a quantitative research design centered on regression analysis to empirically estimate the causal effects of CBAM-related variables on China's EV exports to the EU.
The core of this research is a panel data regression model estimated using monthly data from 2020M1 to 2026M3, capturing both pre-CBAM and post-CBAM implementation periods.
To identify causal effects, a Difference-in-Differences (DID) framework will be employed.
Findings: This study reveals a statistically significant negative relationship between CBAM exposure and China's EV exports to the EU. China’s battery exports face the largest negative impact. EU countries with higher carbon prices and stricter enforcement show larger import reductions, while newer member states show smaller effects, suggesting potential trade diversion within the EU.
Practical and theoretical implications: It provides rigorous causal estimates of CBAM on trade flows, testing the pollution haven hypothesis in reverse and extending the gravity model by incorporating environmental policy variables. It illuminates how carbon regulations create differential pressures across production stages, advancing understanding of environmental upgrading in global supply chains. It contributes to debates about whether environmental regulation stimulates innovation. It provides quantified CBAM exposure elasticities to inform decarbonization investments; identifies priority areas for carbon data management; supports strategic positioning regarding vehicle segments and markets. It offers empirical evidence supporting domestic carbon market expansion; informs WTO dispute settlement preparations; guides technical assistance allocation for SMEs. It provides ex-ante impact assessments supporting evidence-based policy refinement; identifies implementation challenges requiring attention; contributes to discussions about CBAM revenue recycling. It offers empirical evidence for debates about CBAM's WTO compatibility and consistency with common but differentiated responsibilities principles.
As more countries consider carbon border adjustments, understanding the EU's pioneering mechanism provides valuable lessons for institutional design and international coordination. By documenting distributional consequences for China's EV industry, this research contributes to debates about just transitions in international trade and whether carbon border adjustments can support rather than undermine global climate cooperation.