Who is ‘us’? Why a battle to define connected cars matters

In the waning days of the Biden Administration, the US issued a final ruling that would prohibit the sale or import of connected passenger vehicles that incorporate certain technology as well as the import of particular components from China.¹ The White House noted that such measures were critical to ensuring resilient automotive supply chains that would be secure from foreign threats.

While it remains unclear exactly how US trade and economic policies will change in 2025, scrutiny of trade with China will certainly increase. The complexity of the automotive supply chain today makes it a good test case for policy changes. An attempt to remove Chinese components from connected cars is going to be hard or nearly impossible to achieve.

The connected vehicle regulation

The challenge of determining "who is us?" is exemplified by an attempt regulate new automobiles. The final rule issued by the US Commerce Department "prohibits the import or sale of certain connected vehicle systems designed, developed, manufactured, or supplied by entities with a sufficient nexus to the PRC (People’s Republic of China) or Russia."² This includes passenger vehicle systems and components connecting vehicles to the internet via Bluetooth, satellite, cellular and Wi-Fi modules, as well as automated driving systems.

The risks of connected cars, the US government has argued, stems from the way that such technologies can control vehicle movements, as well as collect information on drivers and passengers and record data on American infrastructure in ways that could undermine US national security.

The new rules are due to take effect starting in 2027. In the meantime, the Biden administration has already imposed tariffs of 100% on Chinese EVs under a Section 301 ruling of unfair trade practices. The Inflation Reduction Act currently provides a US$7,500 subsidy for vehicle purchases with final assembly in North America and key battery minerals and components from the US or specific trade partners with a trade agreement in place.

After issuing the draft rule in September, the agency in charge of the regulation, the Bureau of Industry and Security (BIS), received 101 comments. These comments were the basis for some minor adjustments to the rules, including narrowing the scope of the regulatory change to passenger vehicles only and the addition of multiple use-case examples to better clarify potentially ambiguous language in the ruling.⁴

Global automotive firms

Automotive supply chains can be very complex. While much of the focus in autos has been focused on goods, including raw materials, parts and components, vehicles also contain significant embedded services as well as a wide array of intellectual property. The connected car regulation focuses on both hardware and software.

An attempt to eliminate reliance on a sufficient nexus of Chinese inputs, however, faces multiple challenges. Three are worth exploring in greater detail: manufacturing location, investment ownership, and battery production.

First, the connected car regulations suggest that a key security issue comes from the location of manufacturing. But this assessment quickly becomes challenging. The top two EV manufacturers in 2023, by a large margin, were Tesla and BYD (holding 19.9% and 17.1% of global market share respectively).⁵ While BYD does not manufacture vehicles in the US, Tesla’s Shanghai factory had an annual output of 750,000 vehicles out of the company’s 2023 production total of 1.8 million cars. BYD, by contrast, produced 3 million vehicles (including fully electric, plug-in hybrid, and hybrid), making it the largest maker of new energy vehicles in the world by output.⁶

Second, concerns over connected car security stem from ownership. This was a serious point of discussion during the negotiations over the Trans-Pacific Partnership (TPP) trade talks as well. Then, officials grappled with whether the type of ownership or control of firms posed a challenge to trade. There were extensive debates over whether state ownership was automatically a reason to suspect unfair trade practices or whether the key concern was unfair trade practices without reference to ownership structure. In the end, TPP officials opted to include both a competition chapter to the trade agreement as well as a separate chapter outlining agreed rules to constrain state-owned firms. Officials spent considerable time refining definitions.⁹

Since then, concerns over state ownership have become more urgent. The recent shift toward industrial policies by governments around the world has made issues of government ownership of firms, and firm ownership in general, much more pertinent. While most of China’s EV firms like BYD are not owned by the government, there has been an ongoing debate over the level of government intervention, particularly through subsidies, in creating world-class companies.

The BIS did consider this issue, ultimately ruling that: "Additionally, BIS rejects the recommendation to define ownership thresholds. While BIS recognizes that thresholds may provide a bright line for industry, BIS maintains that connected vehicle supply chains are complex and opaque, with varying ownership structures of OEMs and connected vehicle suppliers. Bright-line thresholds alone can be limited when dealing with an entity with a PRC or Russia nexus and one who may circumvent the prohibitions by adjusting its ownership structure, while still retaining corporate control or executive management that may be subject to the direction of the PRC or Russia."¹³

Perhaps the largest current obstacle to connected car regulation is the supply chain for batteries. The most important element of any EV is the battery pack and, as the numbers from 2022 shown in the figure below demonstrates, the entire EV battery chain is dominated by firms from China.¹⁴ While there are currently efforts underway around the globe to reduce dependence on Chinese inputs and manufacturing capabilities, most plans have not yet materially altered China’s dominance.

While the concentration in Chinese hands of materials related to batteries is higher than in most other sectors, the degree of dependence on foreign markets for any raw materials, parts, and other components is common. Simply put, it is challenging for any EV firm to create a connected car that does not include a sufficient nexus to China.

In effect, current US plans to clamp down on connected cars come makes it unclear whether American EV firms will be able to produce any EVs. This means that Chinese firms could continue to produce vehicles to be sold on global markets while American firms could struggle to produce EVs that meet domestic requirements.

While improving the scoping for regulations can make it easier for firms to comply with the rules and still meet the policy intent, efforts to adjust wording may miss the larger issues. In a world where the nationality of hardware and software matters, it is important to think through carefully just what such policy decisions mean in a broader context.

The connected car regulation may not survive 2025, but the increasing importance of a firm’s nationality as a key component of policymaking is likely to expand rapidly. It makes it critically important to begin a discussion of what, exactly, it takes to classify a company as "American" or "Chinese".

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[1] The regulation also highlights trade with Russia.  See https://public-inspection.federalregister.gov/2025-00592.pdf
[2] https://www.federalregister.gov/documents/2024/09/26/2024-21903/securing-the-information-and-communications-technology-and-services-supply-chain-connected-vehicles
[3] https://www.bis.gov/press-release/commerce-finalizes-rule-secure-connected-vehicle-supply-chains-foreign-adversary
[4] The final 213 page report reviews the comments received by officials and notes whether adjustments to the draft regulation were deemed necessary.  There were a total of 54 instances where the report noted that BIS "rejects," "declines," or "does not believe" that proposed adjustments were necessary. 
[5] https://oilprice.com/Energy/Energy-General/Visualizing-the-Global-Footprint-of-Tesla-and-BYDs-EV-Factories.html
[6] https://oilprice.com/Energy/Energy-General/Visualizing-the-Global-Footprint-of-Tesla-and-BYDs-EV-Factories.html
[7] China’s electric-vehicle leader BYD posts record sales in 2024
[8] Supply Chain Latest: European and US trade relationship - Bloomberg
[9] The definitions in Chapter 17 run for more than 3 pages, with another two pages on scope. See Chapter 17 at https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/tpp-ptp/text-texte/17.aspx?lang=eng
[10] https://www.techopedia.com/largest-tesla-shareholders
[11] https://www.marketscreener.com/quote/stock/BYD-COMPANY-LIMITED-12615771/company-shareholders/
[12] The proposed draft included the following text, which was not revised in the final regulation (beyond the addition of clarifying examples): BIS proposed to define "person owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary" to mean:
"(1) Any person, wherever located, who acts as an agent, representative, or employee, or any person who acts in any other capacity at the order, request, or under the direction or control, of a foreign adversary or of a person whose activities are directly or indirectly supervised, directed, controlled, financed, or subsidized in whole or in majority part by a foreign adversary;
(2) Any person, wherever located, who is a citizen or resident of a foreign adversary or a country controlled by a foreign adversary, and is not a United States citizen or permanent resident of the United States;
(3) Any corporation, partnership, association, or other organization with a principal place of business in, headquartered in, incorporated in, or otherwise organized under the laws of a foreign adversary or a country controlled by a foreign adversary; or
(4) Any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by a foreign adversary, to include circumstances in which any person identified in paragraphs (a) through (c) possesses the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity."  See page 81: https://public-inspection.federalregister.gov/2025-00592.pdf
[13] See page 92, https://public-inspection.federalregister.gov/2025-00592.pdf
[14] https://iea.blob.core.windows.net/assets/4eb8c252-76b1-4710-8f5e-867e751c8dda/GlobalSupplyChainsofEVBatteries.pdf
[15] https://cdn.cta.tech/cta/media/media/pdfs/cta-comments-bis-nprm-docket-no-240919-0245.pdf

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