Coping or not? A stackelberg game perspective on European Union strategies for the rising Chinese electric vehicle market share

In recent years, Chinese electric vehicles (CEVs) have rapidly gained market share in the European Union (EU), driven by economies of scale and cost advantages that exert substantial competitive pressure on regional automakers. This development presents the EU with a strategic dilemma: whether and how to respond. While policy interventions—such as tariffs and regulatory measures—can shield domestic industries, they may also reduce consumer surplus, hinder electric vehicles (EVs) adoption, increase environmental costs due to prolonged fossil-fuel vehicle (FV) usage, and strain China-EU trade relations. To assess both the necessity and design of potential responses, we develop a theoretical bi-level Stackelberg game framework and complement the analytical results with numerical simulations. Upper-level (Policy Maker): EU determines whether to intervene, and if so, identifies the optimal combination of tariff rates, regulatory compliance requirements, and EV subsidies to maximize overall social welfare. Lower-level (Market Actors): CEV and EU-located EV manufacturers (EEVMs) engage in a price game under policy constraints, while consumers choose between CEVs and EU electric vehicles (EEVs) based on pricing and brand preferences. The framework captures dynamic feedback between policy interventions and market equilibria, yielding an optimal EU strategy under equilibrium. Numerical results show: (1) Enhanced compliance requirements outperform tariffs in achieving policy objectives; (2) Moderate subsidies for domestic EV consumers can enhance social welfare, while excessive subsidies may backfire; and (3) Environmental costs scale positively with policy intensity but are partially mitigated by subsidy increases. This study provides theoretical and quantitative support for formulating balanced and sustainable EU coping strategies toward the CEV expansion in the EU market.