Tesla founder and CEO Elon Musk has long believed China will be a huge driver of electric vehicle sales, even outranking the United States one day. Wall Street analysts have expressed the same belief. But as the trade war between the United States and China intensifies, Musk finds himself on both sides of the divide. The Chinese government is doing much more to support EVs than the U.S. government right now, but the 25 percent tariff that Tesla and other foreign automakers pay to sell in the Chinese market is steep. Musk has praised the Chinese government in the past for the regulatory moves it has made to force automakers to embrace EVs. But he also recently expressed support for President Donald Trump's trade war, citing the high tariffs that China imposes on foreign automakers. That was before China's announcement of steep additional tariffs on foreign cars that would double the current import duty, which sent Tesla shares lower by as much as 4 percent early on Wednesday. Tesla shares were volatile in trading on Wednesday, bouncing back from the early loss to a significant gain, suggesting that the market, like Musk, is divided on how the China situation will play out for electric cars and whether short-term trade jitters should really factor into the analysis of longer-term corporate goals. The only thing Musk clearly knows, as well as all foreign automakers, is that they need to be able to play in China to grow. On March 8 Musk tweeted about the 25 percent import duty U.S. cars pay to be sold in China versus a 2.5 percent duty on Chinese cars coming to the U.S. market: "I am against import duties in general, but the current rules make things very difficult. It's like competing in an Olympic race wearing lead shoes." Over the summer, Musk said at the National Governors Association annual meeting, "Sometimes people are under the impression that China is either dragging their feet or somehow behind the U.S. in terms of sustainable energy promotion, but they are by far the most aggressive on Earth. It's crazy."

Tesla has been growing quickly in China

In 2017, Tesla sales in China broke the $2 billion mark versus more than $6 billion in the United States. Year-over-year that represented a significant increase: In 2016, China sales were roughly $1 billion. And it's a spike to roughly one-third of U.S. market sales, up from roughly 25 percent in 2016. "Long-term we might sell more cars in China than the U.S., just because the Chinese market is so huge," Musk said as far back as 2014. Luxury-car sales, in particular, do well in China: Almost half of all Mercedes S class sedans are sold in China. The recent slowdown in sales of Tesla's high-end Model S and Model X add to the need for new markets.

The Tesla showroom at Parkview Green Shopping Mall in Beijing. Visual China Group

Multiple reports last October indicated that Tesla has been working on a deal in China that no foreign automaker has ever received: producing in mainland China without a local joint venture partner, and potentially without import duties. The reports say Tesla would operate in a free-trade zone in Shanghai. This would allow Tesla to keep its intellectual property secret, but could still force it to pay steep tariffs if it was not granted a special exemption — essentially, treating the cars as imports. Tesla hasn't kept secret its plans to produce in China regardless of the deal specifics. It had previously said it hoped to identify a production site in China by the end of last year. There have been reports circulating since last month about a relaxation in joint venture requirements for foreign automakers. Other major automakers, including Ford, Daimler, and General Motors, also have plans to produce in China.

China has the most ambitious EV plan in the world

The importance of China to Tesla and all electric-vehicle makers comes after new measures from the Chinese government to spur the development of EVs. China is implementing new incentives for EV adoption to replace expiring subsidies and push automakers onto more aggressive EV investment and production schedules. "This will be the strictest and biggest EV plan worldwide, integrating European and California's EV policy together, and will give strong momentum for China's EV development," Jiayin Song, a Beijing-based senior associate at U.S.-based Rocky Mountain Institute, which helped China devise its long-term climate change strategy, told CNBC last October. It will be the new driver for EV development after the Chinese government gradually shrinks the size of fiscal subsidies for new-energy vehicles. The new rules regulate both automakers' company-wide average fuel mileage and the percentage of electric and plug-in hybrid vehicles in their new car sales, Song said. It requires automakers, both domestic and global, to obtain 10 percent of credits from new-energy vehicles beginning in 2019. The rule applies to car makers that manufacture or import more than 30,000 traditional vehicles annually. Those who fail to comply must buy credits or face fines, she said. In fact, China's support for EVs has been so swift that implementation of the new regulations was pushed back a year to 2019 to give automakers more time; the Chinese government was originally pressing for implementation this year. The U.S. government meanwhile this week announced its intention to drop Obama era fuel-efficiency measures. Chinese government-subsidized local electric-car makers also are rapidly advancing. The major global auto companies — including Ford and GM — will also push further into the Chinese market and EVs as the government clarifies its support for these efforts. Even if Tesla is banking on more sales from China, competition between Musk's electric-car company and local Chinese EV makers is poised to accelerate. One team of Wall Street analysts thinks Tesla's Chinese lead is secure. Piper Jaffray wrote late last year that with Tesla's brand already established in China — especially at the highest price points — and with China pushing to have all cars powered by electricity at some point in the future, the American brand's position is relatively secure. Indeed, Piper thinks it will remain the market leader in China indefinitely. Goldman analysts led by Tokyo-based Kota Yuzawa recently published an estimate that 8 percent of global auto sales, which today would represent almost 8 million cars and light trucks, will be all-electric by 2030. China is already the world's largest car market and the biggest part of any forecast. But that puts Goldman at the bearish end of Wall Street projections: Morgan Stanley, a longtime Tesla bull, projects the same EV growth to reach 27 percent.

Tesla faces a lot of competition in China