Back in 2018, when Donald Trump was first menacing the global trade system, the world’s largest car market suddenly went into reverse. After decades of uninterrupted growth, car sales in China began to backslide as its economy sputtered. Foreign carmakers, which then controlled around three-fifths of the market, were hit hard. Now forecasters are expecting China’s car market to once again go backwards. Local carmakers, which dominate the market today thanks to their prowess in electric vehicles (EVs), may bear the brunt this time. Even so, foreign carmakers will not be spared as Chinese rivals accelerate their expansion abroad.

The scale of the current reversal in China is still uncertain, but the hazard lights are flashing. Having returned to growth in 2021, annual sales of cars hit 23.8m last year, around 4% more than in 2024, according to the China Passenger Car Association (cpca), a government-backed trade body. Yet in the final quarter sales fell every month compared with the year before. The ever-hopeful cpca expects sales to remain flat this year, but others are far more pessimistic. Bernstein, a broker, predicts a decline of 5-9%.

There are other signs of trouble. Last month the China Association of Automobile Manufacturers, another state-backed trade group, appears to have deferred the publication of its weekly sales data—a sure sign of growing anxiety over weakening numbers. What is more, after years of bumper growth, even the sales of EVs may dip this year, thinks Gavekal, a research firm.

The slump has several causes. One, according to Gavekal, is that purchases of evs by companies and government bodies have run out of steam after a surge in demand in late 2024, when a subsidy was introduced for scrapping older cars, bringing sales forward. The scaling back of the subsidies this year will weigh on demand, as will the imposition of a new 5-10% purchase tax on evs. Sales figures will also suffer because of tighter restrictions on dealers registering new cars themselves, to boost sales figures, and then exporting them as “zero miles” second-hand vehicles.

As China’s car market shrinks, its long-running price war, fuelled by excess production capacity, will only intensify. That explains the government’s latest effort to rein in discounting. On February 12th China’s antitrust watchdog published rules banning the sale of cars for less than the cost to manufacture them. It is unclear how strictly this will be enforced, and less formal efforts to curb the price war have failed in the past. Executives at foreign carmakers, whose combined market share has fallen by half since 2018, say they hope the initiative succeeds. They cannot compete with Chinese rivals on price.

Unfortunately for carmakers outside China, a slowing domestic market will lead to even greater vehicle exports from the country, says Tu Le of Sino Auto Insights, a consultancy. These have surged in recent years as Chinese carmakers have sought more profitable markets abroad. Bernstein expects a further expansion in 2026 of 10-15%, reaching a total of 6.5m-7m vehicles, compared with around 750,000 in 2018. That will heap even more pressure on incumbent carmakers elsewhere, a number of which have recently been hit by vast write-downs on ev investments that were intended to help them keep pace with Chinese rivals.

It remains unclear how long China’s car market will remain stalled for. Even so, the reversal is yet another reminder to the world’s carmakers that what happens in the country steers the industry everywhere.