It has largely been a great year for tech and EV stocks, thanks to the frenzy in artificial intelligence. Also helping matters is the fact that gas prices continue to rise, fueling demand for hybrid and electric vehicles. Recent data indicate that automakers sold roughly 300,000 EVs during Q2 2023.

This record statistic represents an increase in demand of more than 48%.

By all measures, EV stocks should be gearing up for another excellent quarter. But things could be about to take a turn for the worse. Why?

A new policy decision could threaten EV stocks as well as the rest of the clean energy sector.

The U.S. is currently focused on maintaining its geopolitical dominance over China. This includes banning investment in its tech sector in an attempt to limit its progress and curb potential monopolies.

Unfortunately, this could impose limits on clean energy innovators within the U.S., particularly those in the EV space that depend on Chinese exports.

How U.S.-China Tensions Could Impact EV Stocks

Writing for Barron’s, Carolyn Kissane highlighted the importance of last year’s Inflation Reduction Act (IRA), a policy that helped the U.S. maintain its position as a leader in clean energy. The passing of the IRA boosted the clean energy sector, helping EV stocks surge in the process. But as Kissane notes, the newer policy may have unintended consequences. In her words:

“[In] the time since, the U.S. has taken steps to intensify its efforts to distance itself from China. That includes a move this month by the Biden administration to ban investment in strategic tech sectors: AI, quantum computing, microelectronics, and semiconductors. The deployment of such defensive tools to reduce competition from China marks an important shift. Even in the once hopeful space for cooperation on climate, it’s becoming increasingly evident that unilateralism is now the way forward.”

From there, the author also highlights another key point: By banning investment in China, the U.S. could hold back the global energy transition by limiting critical areas of tech. This includes the development of EVs and the scaling of their production.

China has a monopoly on rare metals including lithium, nickel, cobalt, components that are critical for EV makers. In 2022, WIRED reported that the world seemed unable to “wean itself” off Chinese-mined lithium. Since then, this problem has only accelerated as demand for EV batteries has grown.

Earlier this year, the MIT Technology Review described EV batteries as a likely point of tension between the U.S. and China. It also noted that China already had control of the refined materials necessary for EV production. The report describes this factor as “so important that Western automakers who want to transition out of gas cars won’t be able to do it without turning to Chinese-made batteries.”

Why This Matters

That brings us to another important point for investors. U.S. EV producers will have a much harder time producing vehicles without help from China on the battery front.

If that trend takes effect, EV stocks in the U.S. will likely be pushed down while their Chinese peers will soar. Such a scenario could allow China’s leading EV producers such as BYD (OTCMKTS:BYDDY) and Nio (NYSE:NIO) to continue growing their presence across Asian and European markets. This could be highly problematic for automakers who build EVs in the U.S.

President Joe Biden and his administration have worked hard to help accelerate the clean energy transition that the U.S. needs. As Kissane noted, the IRA has been a historic step toward building a more sustainable future.

However, the White House should be careful to realize that action against China could pose dire consequences for U.S. EV producers, especially those who can’t manufacture without Chinese metals. EV investors, be warned.

On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.