Electric vehicle maker Polestar this week warned that proposed regulations on Chinese software in cars could put it out of business.
The company says a proposed set of rules meant to protect national security “would effectively prohibit Polestar from selling its cars in the United States, including the cars it manufactures in South Carolina.”
Polestar is a small and new manufacturer. However, its problems illustrate deeper threads in the automotive industry and show how complex the issue of Chinese cars in the U.S. has already grown.
The Chinese Car Issue
China’s auto industry is growing fast, and automakers worldwide now perceive it as a threat to their future business.
The Chinese already buy more cars than the people of any other country. By some measures, China also exports more cars than any other nation.
Chinese companies now build high-quality cars, many of which can pass strict European safety testing similar to American crash tests. Two made the finals of the 2024 World Car of the Year Awards, while just one American car qualified.
Through low-cost labor and, some say, government subsidies, Chinese automakers can produce cars at lower costs than American, European, Japanese, and Korean automakers. Chinese automakers see particularly strong electric vehicle (EV) sales.
When Chinese automakers move into a country’s market, their economies of scale can enable them to dominate sales there quickly.
Many worry they have their sights on the U.S. market. No Chinese automaker has announced plans to sell cars in the U.S. But Chinese cars now outsell American cars in Mexico, and several Chinese automakers plan factories there. Policymakers worry those factories could use North American trade agreements to send vehicles to the U.S. for sale. Chinese auto giant BYD has already begun building infrastructure in Canada.
There Are Two Major Efforts to Stop Chinese Cars in the U.S.
The Biden administration has launched a two-pronged effort to stop Chinese-owned automakers from selling cars in America. One prong has earned major media coverage, while the other has seen less attention but may be more significant.
The first involves tariffs. This year, the administration enacted a 100% tariff on electric Chinese cars. That has raised prospects of a trade war, as China could counter with tariffs on U.S. products. Tariffs are now a major issue in next week’s U.S. presidential election.
The other, however, involves software. The Commerce Department has proposed rules that would ban all Chinese-derived software from cars sold in the U.S. on national security grounds.
Today’s cars are rolling computers that maintain a constant connection to the Internet. Even the most basic economy car runs immense amounts of computer code. More complex cars, with driver assistance systems capable of accelerating, braking, and steering, are likely the most complicated piece of technology many Americans own.
The Commerce Department’s Bureau of Industry and Security (BIS) has proposed banning Chinese-derived software from cars, arguing that a foreign actor could track Americans’ movements through the cars or even shut down cars in an international crisis.
The Second Is Not Active Yet
Federal agencies must navigate many hurdles when writing new regulations. The biggest one is the public comment period.
Agencies publish proposed rules. They must then accept public comments on them for at least 30 days (though 90 is not uncommon). Any American citizen or business can comment. But, typically, comments come from affected companies and advocacy groups who favor or oppose the rules. Agencies publish the comments they receive.
They then rewrite rules to accommodate what the public thought needed changing (they have the right to change nothing) before publishing a final rule. It typically takes effect after a waiting period.
The BIS is currently accepting comments on the software rule.
The Problem: Protecting National Interests in an International Industry
Polestar perfectly illustrates how difficult it is to write regulations and propose tariffs on a global industry. In comments to the BIS, the company calls itself “a Swedish electric performance car brand” headquartered in Gothenburg, Sweden. However, the company says it builds cars “both in China at Volvo Cars’ Chengdu, China facility and in the United States at Volvo Cars’ facility in Ridgeville, South Carolina.”
That’s all true. It’s also true that Polestar’s largest shareholder is China’s Geely Holding.
Polestar is small. It’s also global.
The company tells the BIS it “has around 2,800 employees globally, with only around 280 employees in China.” It employs more people in the U.S. than overseas.
Working across multiple continents is typical of today’s automakers. Even Ford and General Motors, traditional American manufacturing giants, import cars like the Lincoln Nautilus and Buick Envision to the U.S. from China.
Polestar asked the BIS to clarify many aspects of the rule and “take into consideration the location of where the manufacturing, or software development is occurring rather than just rely on the ultimate ownership of what is a large, multinational corporation.”
We have no idea how the agency will respond or how the final rule will affect Polestar, Volvo, or even Lincoln. But the global nature of the auto industry complicates the prospect of a trade war.