Industry Outlook: How Global Policy Is Steering the Automotive Industry

By Ankit SinghReviewed by Lexie CornerApr 18 2025

The global automotive sector is navigating a shifting policy landscape, with new regulations influencing supply chains, production models, and market strategies. Key changes include tariffs on imported goods, emissions targets, electric vehicle (EV) subsidies, and local production requirements.

Governments use these policy tools to support economic development, advance decarbonization goals, and strengthen domestic manufacturing.

This article explores how such measures are shaping the strategic decisions of automakers, suppliers, and consumers, highlighting differences across major markets and regions.

Image Credit: IM Imagery/Shutterstock.com

Trade Policies: Tariffs Reshape Supply Chains and Pricing

Trade tensions and protectionist measures are prompting automakers to reassess their global supply chains. In the United States, proposed tariffs include a 25 % tax on imports from Mexico and up to 60 % on goods from China. These measures could raise production costs and reduce vehicle affordability.

Analysts estimate that consumer prices may rise by 5–10 % for models that rely heavily on imported components such as semiconductors and battery materials.^1,2

The European Union and China are also adjusting to shifting market conditions. The EU has revised its Corporate Average Fuel Economy (CAFE) rules, which allow for increased production of traditional vehicles to help manufacturers meet compliance targets. This update has led to a 63,000-unit increase in Europe’s 2025 production forecast.

China is leading in electric vehicle battery production, making more than 75 % of global components. This cost advantage enables Chinese automakers to sell EVs at prices up to 25 % lower than their Western competitors. As a result, Chinese automakers are quickly expanding into Europe and Southeast Asia.^2,3

These trends are driving a renewed focus on local manufacturing. Ford and General Motors, for example, plan to assemble hybrid models in North America to avoid tariffs. At the same time, German automakers like Volkswagen are building battery gigafactories in Eastern Europe to reduce reliance on Asian suppliers.^3,4

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Emissions Targets and EV Subsidies: Diverging Regional Strategies

Environmental regulations are shaping distinct market trajectories across regions.

The EU has committed to reducing carbon dioxide emissions by 55 % by 2030 and plans to ban new internal combustion engine (ICE) vehicles by 2035. This has prompted automakers to accelerate EV production.

However, adoption remains inconsistent. In 2024, EVs made up 12 % of the market in Europe, while hybrid sales rose by 23 %, reflecting consumer concerns about charging infrastructure.^4,5

In the U.S., federal EV incentives under the Inflation Reduction Act (IRA) clash with state-level initiatives. The IRA’s $7,500 tax credit for domestically assembled EVs has triggered $40 billion in battery plant investments across the Midwest and South.

However, recent proposals to repeal or revise these credits have introduced policy uncertainty. Analysts expect EV sales growth to slow to 6.7 % in 2025, down from 48 % in 2023.^4,6

Meanwhile, China is doubling down on its first-mover advantage. Supported by state subsidies and a vertically integrated supply chain, the country is targeting 50 % EV sales by 2025, ten years ahead of its initial timeline.

Chinese brands like BYD now hold 12 % of Europe’s EV market, up from 9 % in 2024. Their competitive advantage lies in cost-efficient production and advanced battery technologies.³

Localization and Industrial Policies: Redrawing Production Maps

Governments are ramping up domestic manufacturing incentives to reduce geopolitical risk and create local jobs.

In the U.S., the CHIPS and Science Act allocates $52 billion to support semiconductor production, addressing shortages that have impacted advanced driver-assistance systems (ADAS) and electric vehicle components. Similarly, Canada’s Critical Minerals Strategy is positioning the country as a key supplier of lithium and nickel for the North American battery supply chain.^1,2

These policies are fragmenting global production. Asia-Pacific remains the epicenter, accounting for 60 % of light vehicle sales in 2025, driven by China’s 26 million-unit market and India’s expanding middle class.

Meanwhile, North American output is projected to decline by 155,000 units this year, influenced by trade uncertainties and tighter United States-Mexico-Canada Agreement (USMCA) content requirements.

In response, automakers such as Toyota and Hyundai are scaling up hybrid production across multiple regions. This helps them comply with local content rules while aligning with regional demand trends.^2,3,7

Technological Investments: Software and Autonomy Take Center Stage

Policy developments are accelerating progress in software-defined vehicles (SDVs) and autonomous driving technologies. In the EU, the Digital Vehicle Data regulation, which mandates standardized access to connected car data, has prompted new collaborations between automakers and tech firms such as Qualcomm and NVIDIA.

SDVs support over-the-air updates for features like safety systems and infotainment. By 2025, an estimated 7.6 million SDVs will be in operation, with North America accounting for 43 % of global adoption.^4,7

Autonomous vehicles continue to face regulatory hurdles. While companies like Mercedes-Benz and BMW have introduced Level 3 systems in Germany, U.S. regulators remain cautious. Legal issues, such as liability for AI-driven accidents, are major concerns. In fact, 78 % of industry leaders say this is a critical challenge.

China's proactive approach, which includes creating testing zones for autonomous vehicles in 20 cities, has helped companies like Baidu to advance Level 4 trials. However, widespread commercialization remains several years away.^4,5,7

Labor and Market Adaptations: Unions and Dealerships Under Pressure

Policy-driven shifts in the automotive industry are placing new demands on labor and after-sales infrastructure.

The United Auto Workers (UAW) and European unions are asking for job guarantees as automakers transition to EVs, which requires 30 % fewer assembly workers. In response, the government has launched a $2 billion EV workforce initiative to fund retraining programs in Michigan and Ohio, but progress is slow.^1,6

At the retail level, dealerships are adjusting to changing consumer habits. According to Cox Automotive, 75 % of U.S. car buyers now prefer a mix of online and in-person purchasing. This shift is pushing dealers to invest in digital sales platforms. However, declining sales of traditional ICE vehicles, which are projected to fall to 75 % of the U.S. market by 2025, could reduce revenue from traditional maintenance services.^5,6

Conclusion: A Sector at a Crossroads

Global policy developments are steering the automotive industry toward a more fragmented landscape, where regional strategies increasingly shape production, innovation, and market access. While tariffs and localization efforts may benefit domestic sectors in the short term, they also introduce cost pressures and reduce cross-border cooperation.

At the same time, emissions targets and technology investments are advancing long-term sustainability goals, but progress is slow due to infrastructure issues and consumer acceptance. For automakers, adaptability will be critical. This includes supply chain diversification, workforce retraining, and strategic alliances such as the proposed Honda–Nissan–Mitsubishi merger.

As the industry moves forward, its trajectory will depend not only on consumer demand but also on how effectively economic policy aligns with environmental ambition.^3,4

References and Further Reading

1. Next in auto 2025. PwC. https://www.pwc.com/us/en/industries/industrial-products/library/automotive-industry-trends.html
2. 2025 Light Vehicle Production Forecast. (2025). S&P Automotive Insights. https://www.spglobal.com/automotive-insights/en/blogs/2025/01/2025-light-vehicle-production-forecast
3. Global Automotive Outlook worth 85.1 Million units in 2025. (2025). MarketsandMarkets - Revenue Impact & Advisory Company | Market Research Reports | Business Research Insights. https://www.marketsandmarkets.com/PressReleases/global-automotive-industry-outlook.asp
4. Global Automotive Outlook: Predictions For 2025. (2025). Forbes. https://www.forbes.com/sites/sarwantsingh/2025/01/13/global-automotive-outlook-predictions-for-2025/
5. 2025 Global Automotive Consumer Study. Deloitte Insights. https://www2.deloitte.com/us/en/insights/industry/retail-distribution/global-automotive-consumer-study.html
6. Cox Automotive’s 2025 Outlook: Market Growth, Improving Affordability, and Higher Buyer Satisfaction Expected in Year Ahead. (2025). Cox Automotive Inc. https://www.coxautoinc.com/news/cox-automotives-2025-outlook-market-growth-improving-affordability-and-higher-buyer-satisfaction-expected-in-year-ahead/
7. 2025 Automotive Trends Report. Dykema. https://www.dykema.com/2025-Automotive-Trends-Report/index.html

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