Small. It's The New Big.

When gas prices shot up last summer, Millie Richardson had had it with her minivan. So the Lawrenceville, New Jersey, mom traded in her Dodge Caravan for a $17,000 Nissan Versa, a subcompact car that gets more than 30 miles per gallon. Richardson, 55, likes spending less at the pump, but she's most excited about how roomy her little car is. "My son is 6 foot 6, and he drove it," she marvels. "So it's small, but it's big—does that make sense?" What makes even more sense to Richardson, though, is this $2,500 car she's heard about that was introduced in India last month: the Tata Nano. Though there are no plans yet to bring it to America, Richardson is ready when they do. "Oh, boy, would I ever love to drive one," she says. "I would look at it as a disposable car. We have so many things in our lives now that are disposable—why not disposable cars? It would be so cheap, you could always afford a new one."

Around the automotive world, small is the new big. Driven by growing earning power in emerging markets, and rising gasoline prices and global-warming concerns in developed countries, small-car sales are hitting high gear. By 2012, forecasters expect consumers around the world to buy a record 38 million small cars annually, up 65 percent from a decade earlier. In Western Europe, the market for microcars—the tiniest runabouts on the road—is projected to rise nearly 50 percent by 2011 from 2004 levels. Even in the United States, land of the large, sales of small cars are expected to grow 25 percent by 2012 to a record 3.4 million, while SUVs and pickup trucks continue to tank. Last year subcompact sales soared 33.7 percent in the United States, driven by hot sellers like the tiny Toyota Yaris and the Mini Cooper. And Daimler had 30,000 orders in hand before it even launched its three-meter-long Smart Fortwo model in the U.S. last month. "This is not a fad," says Smart USA president Dave Schembri. "It's a trend."

But the car generating the most buzz hasn't even hit the road yet: the Nano. A car for the price of a laptop computer is transformational. Before it even goes on sale later this year, the Nano is changing the rules of the road for the auto industry and society itself. Millions of emerging-market commuters can now own four-wheel transportation, creating unheard-of mobility for the masses. But the Nano and its expected rivals will also lead to more traffic congestion, more global warming, more highway fatalities and more demand for oil. As the world approaches 1 billion vehicles on the road, the Nano and its ilk raise a daunting prospect for society: global gridlock. If the rest of the world begins buying cars at the same rate as America, the global parking lot will swell to 5.6 billion vehicles, figures Sean McAlinden of the Center for Auto Research in Ann Arbor, Michigan. "The Nano is the 21st-century equivalent of the Model T," says Global Insight auto analyst John Wolkonowicz. "The Nano will put the Third World on wheels, and that will have far-reaching implications. It's going to affect every citizen of the world."

It's already shaking up the industry. All the major car companies dispatched teams to the New Delhi Motor Show in January to snap photos and build a dossier on the new Nano. The little car from India could lead to an overhaul in the global auto industry, which was always geared to earn big profits from big cars. Now the car czars will have to learn to make a business out of selling lots of little cars that make less money, instead of relying on big rigs to make most of their money. Detroit is going through a wrenching overhaul as it retools its product line to offer more small gas sippers and fewer big guzzlers. General Motors, which last week reported a record $38.7 billion loss for 2007, can't make money at home, but turns a tidy profit in Asia selling smaller cars. "The whole story in the auto industry today is that the profits are shifting to the developing markets," says Renault- Nissan CEO Carlos Ghosn, who is working with the Indian motorcycle maker Bajaj to try to develop a $3,000 car to go against the Nano. "I'm very bullish on the $3,000 car. We're not trying to do it in Japan or Paris; we're asking Bajaj to do it. We don't know how to do a car like this, but for them it's a natural evolution."

Consumers see it as natural, too. A new generation, weaned on mini mobile phones and iPods, equates small with high tech, not cheap. "For the first time in the history of the auto industry, we have a generation that's connected globally," says J. Mays, chief designer for Ford Motor Co., which in 2010 will begin importing its stylish Fiesta subcompact from Europe. "They see an iPod or a Nokia phone or a $1,200 woman's handbag and think, 'Just because it's small doesn't mean it can't be fantastic'."

This is where the West parts company with the Nano. Today's car buyers in developed nations expect small cars to have all the accouterments they enjoyed in their XL rides. The hot-selling Mini Cooper is a prime example: sporty and stylish, it's loaded with luxurious items like a 10-speaker stereo, leather seats and an optional voice-activated navigation system, and it's priced accordingly. The well-appointed new Mini Clubman S starts at $24,600—or roughly the price of 10 Nanos. "People like the Mini Cooper because it's so well designed and well equipped; there's nothing spartan about it," says Mini U.S. chief Jim McDowell. "I don't think American consumers are looking for a car with less safety features and fewer windshield wipers."

Indeed, the Nano, which has only one windshield wiper, has more in common with the bare-bones econo-boxes that baby boomers drove during the '70s energy crisis. The children of the boomers wouldn't know what to make of a car like that. "To Gen Y kids, something without power windows or door locks is not a real car," says Jim Lentz, president of Toyota's U.S. sales arm. "Most wouldn't know what this crank thing in the door does. It's like a rotary phone."

What this new generation does get is small as a way to reduce its carbon car-print. After all, these little runabouts are powered by tiny engines that burn less gasoline and spew fewer greenhouse gases. The irony, though, is that as millions of small cars clog the planet, they'll only add to global warming and increase demand for oil. GM chairman Rick Wagoner recently warned that the world is already consuming 1,000 barrels of oil per second, and demand is on track to rise 70 percent more by 2030. The motorization of emerging economies is driving that demand. By 2015, 100 million households in the developing world will be able to afford cars priced between the Nano and the $6,000 Renault Logan, predicts the Boston Consulting Group. Governments are already grappling with how to put the brakes on runaway energy use. In the United States, George W. Bush just signed legislation that will boost mandatory mileage on new cars to an average of 35mpg by 2020, up from about 25mpg today. In Europe, regulators are looking at requiring cars to reduce emissions of carbon dioxide (the prime global-warming gas) by up to 25 percent by 2012.

But the West can enact all the green-leaning laws it wants. That won't stop the emerging world's yearning for the freedom of the open road. And that growing automotive appetite could create a climate calamity, environmentalists warn. "Even if they are very clean cars, collectively it will lead to emissions that will only add to local pollution," Indian climatologist Rajendra K. Pachauri tells NEWSWEEK. Pachauri, chairman of the Intergovernmental Panel on Climate Change—which shared the Nobel Peace Prize with Al Gore last year—is critical of the climate consequences of the Nano: "Before we unleash this kind of animal on the streets of India, we ought to explore the public-transportation options." To rein in car ownership, Pachauri suggests that drivers pay a carbon toll to gain access to the roads. The Nano, he says, "is clearly a carbon-intensive option. We need to impose a price on that carbon."

Others hope the rise of the small car in emerging economies will accelerate alternative-fuel vehicles elsewhere. "We'll be driving $40,000 electric vehicles or hydrogen-powered cars while people in India and China are using the remaining gasoline," says Wolkonowicz. "This push for alternate-fuel vehicles in the developed world is not coming a moment too soon, because the motorization of the Third World is coming at a very rapid pace."

That came clearly into focus when Indian motor mogul Ratan Tata upstaged the Detroit Auto Show by rolling out his "people's car" in New Delhi on Jan. 10. Introducing his car to the theme from "2001: A Space Odyssey," Tata hyped its "disruptive innovation" as the equivalent of the Wright brothers' first flight. At first glance, the stubby little car doesn't look like much: no radio or air conditioning, a top speed of about 95 kilometers per hour and a motorcycle-like engine. What has captured the world's attention is the Nano's spartan simplicity. There are no tubes in the tires, to save weight and money. To ease assembly, body panels are glued instead of welded. The wheels are hooked onto the body in a fashion that one rival compared to a child's little red wagon. "We look closely at anything we regard as a breakthrough," says GM product-planning VP John Smith, with photos and diagrams of the Nano spread out in his Detroit office. "You can look at these, but I can't let you have them."

Rivals eager to develop their own low-cost small cars find they simply can't look away from the Nano, even as they dismiss it as far too crude for Western tastes. "It's not so much the vehicle itself," says Chrysler trend watcher Steve Bartoli, "it's the thought process that went into it that's more provocative." Until Tata rolled out his new model, nobody believed anyone could produce a $2,500 car. Now they're jumping on the Nano wagon. Chrysler is looking at developing a racy little car called the Dodge Hornet with China's Chery Automobile. GM vice chairman Bob Lutz says his company could engineer a Nano competitor with its Chinese partner Wuling. And GM is already working on a new car that would rival Renault's $6,000 Logan, says Smith. In fact, GM recently canceled plans for a new line of big V-8 engines and is pouring that money into developing small cars. "We're spending a lot of money on the low end of the business," says Smith.

Europeans are following suit. Coming soon is Volkswagen's Up!, a funky four-seater that's about three and a half meters long. Last year, Fiat launched a remake of the classic Cinquecento (a.k.a. the Fiat 500). Peugeot already offers its tiny 107 city car, developed with Toyota, which sells a similar model called the Aygo (as in "I go"). On the high end, BMW is launching its diminutive 1 Series sedan in the United States starting at $29,375, making it the smallest Beemer on U.S. highways. "We are at a crossroads," says consultant Peter Schmidt of Automotive Industry Data in Britain. "An increasing proportion of the car-buying public has discovered a conscience."

One key country hasn't bought into small-is-cool: China. SUV sales rose 51 percent in China last year, big Buicks and VWs are all the rage and small cars go begging. Ratan Tata predicted that an automaker in China would be the first to match the Nano's $2,500 price, but analysts doubt that. "In China, image is more important than function," says China auto analyst Michael Dunne of J.D. Power and Associates. "Nobody wants to be seen on the bottom of the totem pole."

The biggest roadblock facing small cars is fear about safety. Chery's QQ suffered a PR setback when a video circulated on YouTube of a horrific crash in which the tiny car was crushed between two buses and the driver burned to death. A NEWSWEEK REPORTER TEST-drove a Chevy Aveo subcompact in Detroit last week and felt dwarfed by the SUVs. U.S. statistics on highway fatalities show the smallest cars have death rates 2.5 times higher than the biggest cars. In Europe, small cars, which are driven mostly at slower speeds in cities, have lower death rates, but are in more crashes than big cars. "It comes down to physics," says Adrian Lund, president of the Insurance Institute for Highway Safety. "If you're in a smaller vehicle out there, you're at greater risk."

To overcome small-car phobia, automakers are working to burnish their safety bona fides. In every Smart car showroom in the United States, for example, you'll find the car's reinforced steel skeleton on display. Called its "tridion cell," the steel cage protects occupants in a crash. The sales staff also shows prospective buyers violent crash-test videos and talks up the car's four airbags and electronic stability control. "In America," says Smart USA president Schembri, "you have to address this issue."

The more features automakers can stuff into small cars—be they safety, style or stereos—the better for the bottom line. This is the formula Japan and Europe have used to develop a lucrative small-car market. Typically, an automaker earns about a 5 percent profit on a car. That comes to about $125 on a Nano, $1,250 on a Mini Cooper or, better yet, $2,000 or more on a BMW 1 Series convertible. Putting premium-priced mileage misers on the road could help save the planet without bankrupting the world's automakers. The problem comes in convincing drivers in America and China—the world's two largest auto markets—that they should pay more for less. "Space and weight equal value for most buyers" in America and China, says analyst McAlinden. "It's a dollar-per-pound concept."

We may like to think that the recent spike in small-car sales is driven by altruism. But auto execs says it's a pocketbook issue: U.S. gas prices doubled this decade, and Western Europe is now paying about $2 per liter, up nearly 25 cents from just two years ago. "The worst thing that could happen to us now is if gas prices fell back, because that would take the pressure off," says Ford executive chairman Bill Ford Jr. "We've all started down this path now." And there's no turning back. Forecasters predict oil prices, global warming and emerging-market desire for cars will continue to rise. As long as those factors drive demand, small cars will rule the road.