Geopolitics, Domestic Political Economy and the Rise of Localization Policies in the Global EV Industry

Governments around the world are reviving industrial policy to nurture nascent industries through multiple instruments, including tariffs, subsidies and localization policies. This shift is occurring amid intensifying geopolitical competition and weakening multilateral trade norms that are reshaping the global policy space. The electric vehicle (EV) industry, at the heart of global innovation and industrial competition, has been a particular target of these policies.

As part of the industrial policy package, tariffs often make headlines for directly blocking foreign EVs from entering domestic markets. But what are the trends in the rest of the world? Have emerging markets and developing economies (EMDEs) adopted industrial policies to advance their EV industries? What are their approaches and what are the factors influencing these decisions?

A new working paper by Hanjie Wang explores why countries adopt localization policies in the global EV sector, and how geopolitical dynamics interact with domestic political-economic factors in shaping these decisions.

Main findings:

• Emerging markets and developing economies are leading adopters of localization policies in the EV sector.
• Shifting geopolitical dynamics becomes increasingly important for the adoption of localization policies, which have been strongly demanded by actors in the domestic political economy.
  • Geopolitical tensions among major powers, notably the US and the EU, and their own renewed embrace of industrial policy have reduced the normative and institutional constraints that once discouraged localization.
  • Amid restricted access to Western markets, China’s strategic interest in sustaining its EV industry and exports has generated new incentives for developing countries to adopt localization policies as a means of attracting investment and integrating into emerging value chains.
• Localization can serve as a strategic industrial policy instrument for EMDEs to negotiate more favorable positions in global value chains, but the benefits depend on whether it fosters technological learning beyond mere assembly.

The author concludes that the current geopolitical environment has opened a temporary window for developing countries to pursue localization-led industrial strategies. Whether this window endures will depend on the future trajectory of global economic and political realignment.