Question: How will AI·IAA reshape the competitive landscape for Chinese companies in Europe?

The EU plans to impose restrictions on technology transfer, shareholding ratios, and localization in four key industries—batteries, electric vehicles, photovoltaics, and critical raw materials. Leading companies that have already established factories in Europe will gain a relative advantage.

Text | Chen Yushen

Editor | Huang Kaixian

On March 4, the European Commission released the proposal for the Industrial Accelerator Act (IAA), which sets mandatory requirements for foreign investments in the four major sectors—battery, electric vehicles, photovoltaics, and critical raw materials—including technology transfer, foreign ownership limits, product local content, and employment conditions. These restrictions apply only to investors from third countries with more than 40% global capacity in these industries and explicitly prioritize “EU manufacturing” in public procurement.

Compared to the EU’s Carbon Border Adjustment Mechanism (CBAM), which mainly addresses “who pays for carbon emissions,” the IAA focuses on industry and investment rules. It consolidates policies on public procurement, public support, approval procedures, foreign investment access, and supply chain security into a package aimed at promoting reindustrialization, directly defining how foreign manufacturing enters the European market. The EU aims to increase the manufacturing sector’s share of GDP from 14.3% in 2024 to 20% by 2035.

From a policy economics perspective, the IAA signifies that the EU is confronting a reality: relying solely on market signals like carbon pricing may not suffice to preserve its industry; raising carbon prices and tariffs alone may not turn green transformation into profitable local manufacturing investments.

Therefore, the EU is transforming its expertise in single-market regulation into an industrial policy toolkit. Besides requiring imported goods to bear the cost of carbon at borders, it also seeks to determine which companies and supply chains are eligible to share in the increased demand created by reindustrialization.

For China, this means that future competition in Europe will increasingly manifest as market access, standard compliance, local value addition, and regulatory adherence, rather than traditional trade friction. The marginal advantage of directly exporting Chinese products will diminish, pushing Chinese companies toward deeper localization. Leading firms that have already established factories in Europe will have relative advantages, with competition shifting from price to institutional compliance.

Why is the EU Suddenly “Accelerating”?

Manufacturing only accounts for 14.3% of the EU’s GDP in 2024, down from 17% in 2000, and significantly below its 20% target for 2035; the EU’s share of global industrial added value has fallen from 20.8% in 2000 to 14.3% in 2024. These figures heighten concerns about Europe’s industrial position: under current economic structures, emission reductions, employment, and industrial security cannot all be achieved simultaneously.

In recent years, EU anxiety has appeared to stem from rising domestic energy prices, the attractiveness of the US Inflation Reduction Act (IRA), China’s scale advantage in clean tech, and geopolitical security concerns from the Russia-Ukraine conflict. But these factors converge on a more fundamental issue: Europe’s declining emissions are increasingly due to reduced industrial output rather than cleaner production methods.

The European Commission openly states in the proposal that production in energy-intensive industries has declined significantly since 2021; many announced decarbonization projects have been delayed, with over half still not implemented since 2023. In other words, Europe is not unaware of how to reduce emissions, but under current rules, it’s hard to convince companies that “reducing emissions in Europe” remains a profitable business.

This highlights the limitations of the EU Emissions Trading System (EU ETS) and CBAM.

ETS can raise the marginal costs of high-emission production, and CBAM can reduce some “carbon leakage,” but neither can generate demand for low-carbon European products nor create enough green premium to support large-scale investment recovery. Steel, cement, aluminum, batteries, and photovoltaics companies find it hard to justify: retrofitting blast furnaces, building hydrogen metallurgy, deploying carbon capture, expanding battery and PV capacity in Europe involve high capital expenditure, long approval cycles, and still-high energy prices, while downstream customers may not be willing to pay ongoing green premiums.

As a result, since 2024, the EU’s policy language has shifted noticeably. Former ECB President Draghi’s “EU Competitiveness Report” explicitly recommends “creating demand for clean industry through demand-side policies”; the “Clean Industrial Deal” rebinds competitiveness with decarbonization; and the “EU Competitiveness Compass” discusses high energy prices, supply chain over-concentration, and global industrial subsidies within the same framework.

The IAA is a continuation of this series of policies and a key to understanding its operational mechanism: it is neither a “patch” for climate policy nor an EU version of the IRA. While the US mainly relies on federal tax credits and subsidies to improve project returns, the EU lacks comparable scale and speed of fiscal tools. Instead, it uses market rules, public procurement, access conditions, and administrative procedures to guide investment and manufacturing to stay in Europe.

What Has the IAA Truly Changed?

The key innovation of the IAA is consolidating tools previously scattered across different laws, procedures, and policy goals into a new market organization mechanism, summarized as three levers:

First lever: creating a “demand-driven” market.

The IAA embeds “low-carbon” and “Made in EU” requirements into public procurement, public support, and auction mechanisms, making public funds the “first buyer” to underpin local manufacturing and low-carbon investments. Construction, automotive, and net-zero tech are key sectors because demand in these areas already heavily depends on public procurement, subsidies, or regulatory policies.

Standards have become enforceable bid and access rules: the proposal mandates that, when amending the “Net-Zero Industry Act,” non-price criteria such as supply chain resilience, environmental sustainability, cybersecurity, labor and social responsibility, and compliance capacity be incorporated into evaluation systems, with individual weights no less than 5%, totaling between 15% and 30%. To avoid “hard landings,” exceptions are set, allowing flexibility: if project costs could increase by more than 25% or delays exceed seven months, rules can be relaxed.

Second lever: speeding up approval processes.

Typically, European industrial investments face obstacles not only from limited subsidies but also from lengthy and complex approval procedures. This uncertainty hampers project support policies, energy prices, technological pathways, and financial conditions, delaying final investment decisions. The IAA proposes “one project, one submission, one digital process,” using a single entry point, digital declarations, and industrial acceleration zones to compress approval timelines and reduce bureaucratic friction, making project processes more predictable.

Third lever: attaching conditions at the capital level.

This is often overlooked but has the strongest systemic impact. The proposal states that foreign direct investment (FDI) exceeding €100 million in “strategic manufacturing sectors”—including batteries, EVs and key components, solar PV, and raw material extraction, processing, and recycling—must undergo additional review if the investor comes from a third country with over 40% global manufacturing capacity in related fields.

Furthermore, investments must meet at least four of the following conditions to be approved: forming a joint venture with an EU entity; holding no more than 49% of shares or voting rights; having licensing arrangements for intellectual property and proprietary technology; investing 1% of annual revenue in R&D within the EU; employing at least 50% EU workers; maintaining or restoring EU employment; and sourcing at least 30% of inputs from the EU.

This set of rules signals that the EU welcomes foreign investment but no longer accepts only final assembly in Europe. While safety reviews for foreign capital remain, the focus now also includes value-added and technological embedding, with conditional openness based on employment, R&D, supply chains, IP, and added value.

The IAA aims to turn rules into part of capital returns: those who meet these standards are more likely to secure orders, subsidies, approvals, and influence in the new EU market shaped by policy. For companies, this industrial policy shifts market organization more durably than one-time subsidies.

Additionally, the proposal states that the IAA will comply with WTO’s Government Procurement Agreement (GPA) and related bilateral trade agreements. Under these rules, companies from countries and regions with free trade agreements, customs unions, or GPA membership enjoy “treatment equivalent to EU origin,” reflecting a “layered openness.”

By March 2026, China remains an observer rather than a GPA signatory in the WTO Government Procurement Committee, and accession negotiations are ongoing. This means Chinese companies cannot yet be considered “EU-origin equivalent” within the IAA procurement and support framework.

Impact on “Made in China”

Historically, Chinese companies’ competitiveness in Europe relied on cost, scale, delivery, and supply chain integrity. After the IAA, these traditional advantages will need to pass through the EU’s institutional filters: meeting requirements on carbon footprint accounting, origin rules, public procurement eligibility, cybersecurity, supply chain resilience, local value addition, and disclosure.

Supply chain analysis by the EU Commission shows that among 204 products identified as highly dependent on imports, China is the top source for over half of the import value, with 64 categories being the primary supplier.

The dependence is even higher in the clean industry chain targeted by the IAA. The EU Commission’s impact assessment states explicitly that Europe’s solar PV value chain is highly dependent on China—controlling over 90% of global manufacturing capacity. Without “Made in EU” requirements, this would pose significant “supply chain and energy security risks.”

In batteries and EVs, China dominates key segments like lithium-ion batteries, drive motors, and complete vehicles; it supplies 100% of the EU’s rare earths. Although the IAA text does not directly name China, its focus on “single-source dependence,” “over-concentration,” and “strategic vulnerabilities” is quite evident.

The first impact is market segmentation: Chinese exports will face increasing hurdles in markets involving public procurement, subsidies, and auctions. Competition will depend less on price and more on compliance with EU industrial and supply chain policies. Marginal advantages in exports—such as batteries, PV modules, heat pumps, wind equipment, and key automotive parts—will diminish.

It’s worth noting that the IAA retains cost and delivery exceptions; the EU also maintains openness within the GPA and existing free trade obligations. But the largest and most policy-supported demand markets will become increasingly difficult to access solely through low prices.

The second, deeper impact is that Chinese companies will be pushed toward more localized European operations.

The EU’s policy is not about excluding foreign investment but about ensuring that investments contribute more tangible local economic benefits. Past strategies of assembling in third countries and then entering the EU will become less viable under new policies.

The IAA will also accelerate differentiation among Chinese firms. Leading companies with established factories, R&D centers, certification capabilities, and local supply chains may gain relative advantages due to higher compliance thresholds, as new rules raise entry costs for latecomers and pure exporters. Conversely, firms still relying mainly on “domestic manufacturing—cross-border shipping—European distribution” will face the most direct squeeze.

The third impact shifts competition from price to institutional compliance. Maintaining cost and efficiency advantages remains important, but companies will also need to demonstrate product carbon footprints, supply chain traceability, and regulatory compliance. For many Chinese firms, this represents a deeper change than tariffs—since tariffs only affect price variables, while compliance rules alter organizational structures, investment approaches, and cross-border operations.

The Cost to the EU

Of course, the EU will pay a price for implementing the IAA, facing internal resistance and contradictions.

The European Commission’s executive summary admits that public procurement costs will rise, requiring new monitoring, reporting, and compliance efforts; international trade flows may be affected, with some partners reacting negatively. But the EU expects to gain lower external dependence, higher supply chain resilience, and greater domestic added value.

Internal disagreements have already surfaced. During the impact assessment, the Regulatory Scrutiny Board issued a negative opinion, stating that the draft did not sufficiently demonstrate how issues would evolve or why the legislation is necessary, nor did it clearly weigh different drivers.

These signals suggest that the IAA is more of an experimental shift toward industrial policy. It is not an uncontroversial optimal solution in economic theory but a “second-best” combination deemed necessary by the EU amid geopolitical competition, industrial decline, and fiscal constraints.

However, the European Commission believes that the impact of these requirements on downstream costs is manageable. For example, in photovoltaics, even if EU-made modules’ prices rise, the overall system cost increase is typically only 5% to 15%, with consumer-level cost increases around 1% to 2%. The Commission’s estimates suggest that by 2030, “EU-made” batteries for passenger cars will add about €630 (2.2%) to vehicle prices. The EU argues that this short-term cost increase is acceptable compared to the long-term loss of domestic manufacturing capacity and supply chain security.

Currently, the IAA remains a legislative proposal subject to negotiations and amendments by the European Parliament and the Council of the European Union; even if adopted, its implementation will vary significantly depending on member states’ fiscal capacity, procurement capabilities, industrial base, and administrative enforcement. It functions more as a policy framework law, leaving room for further refinement and expansion of these measures.

Despite implementation challenges, the IAA signals a shift in EU industrial policy. The EU is increasingly using public procurement, market access, and supply chain rules to steer capital and manufacturing investments toward Europe. For external companies, market entry conditions will increasingly depend on origin, carbon emissions, supply chain structure, and local economic contributions.