Can China and the EU avert a trade war?

(Edited and refined by Yuen Kum Cheong, with the assistance of AI translation.)

China-EU trade tensions are edging towards a critical point. If the conflict further escalates or ends in a breakdown, the international dispute over Chinese “overcapacity” could reach a dangerous new peak.

Data show that the China-EU trade imbalance has rapidly worsened in the past five years. Last year, the EU’s trade deficit against China widened to 359.3 billion euros (US$396.2 billion), more than double that in 2019. Brussels said it cannot accept a trade deficit with China that now runs to 1.1 billion euros a day, attributing it to unfair Chinese trade practices. Beijing countered that the EU’s figures do not stand up to scrutiny. Nearly half of China-EU trade comprises intermediate goods that European companies buy from China as cost-effective semi-finished products, which they then process and upgrade before selling globally. To Beijing, “the trade surplus is in China while Europe reaps the profit”. In addition, the EU maintains a longstanding services trade surplus with China.

To avert a trade war that could erupt at any moment, the two sides have been engaged in tense negotiations since June 2026. European Commissioner for Trade Maros Sefcovic flew to Beijing for two days of intensive talks with Chinese Commerce Minister Wang Wentao, beginning on 8 October. Sefcovic bears a weighty mandate: after he departs from Beijing with the outcome of these talks, European leaders will meet at an EU summit in Brussels this week to discuss the EU’s response to competition from China.

[Note: Talks between China and the EU ended late Friday, 9 October, with a 16-point consensus spanning trade and investment, export controls and intellectual property rights. China agreed to curb hybrid vehicle exports to the bloc, a gesture aimed at avoiding harsher restrictions but unlikely to reshape the broader trade relationship in the near term. The deal buys time for further talks in January and March.]

Franco-German axis pushes hardline stance

Before Sefcovic’s trip, Europe’s two main engines, France and Germany, submitted a non-paper to the European Commission on 5 October, warning of “a massive industrial shock” that is hitting Europe’s pharmaceuticals, aerospace, automotive, industrial machinery and chemical industries. Co-signed by French President Emmanuel Macron and German Chancellor Friedrich Merz, the policy paper called for urgent action to help these sectors and proposed two new EU instruments. The first would allow the Commission to retaliate swiftly against third countries that “severely disrupt trade relations”, including cutting off their access to Europe’s single market, where necessary. The second is a diversification instrument to reduce European supply chain dependencies on any single country.

France and Germany also advocated a mechanism that would be activated “unless a qualified majority is opposed” to the Commission implementing trade restrictions. According to European officials, the aim of the new measures is to block relevant Chinese goods from the EU market within 24 hours. This would serve as a “second strike weapon” should the China-EU trade war escalate.

That Paris and Berlin should lay such a hardline on the table before the China-EU trade talks, with Germany’s stance described as a “U-turn”, is a move that underscores how acute the tensions have become. The EU is wary of the grave consequences of a trade war and understands that China has many formidable retaliatory options, such as restricting or banning rare earth exports to Europe. However, gripped by anxiety over economic security, both sides have in effect been backed into a corner.

Addressing root causes beyond protectionism

Excluding these, the growth in exports to Europe has largely followed its pre-2019 trend, with no clear surge. Furthermore, the backdrop to the widening China-EU imbalance includes the Russia-Ukraine conflict, which caused the sharp reduction in the EU’s energy imports from Russia and the EU’s accelerated push for energy self-sufficiency and green transition. Structural shifts in European demand and Chinese supply have both played a part and should not be overlooked.

Yet, the situation cannot simply be dismissed as both sides talking past each other. On the one hand, the EU cannot simplistically lay the blame for the trade imbalance on China’s industrial policies or the RMB exchange rate. It needs to honestly confront Europe’s longer-term, fundamental problems of a lack of innovation, high costs and sluggish transformation. On the other hand, if China views the EU’s hardline merely as protectionism in a new guise, or as an attempt to leverage security concerns to counter China’s industrial edge, instead of taking European anxieties seriously, then it would have underestimated the changes in Europe’s political and economic environments.

Recently, The Economist published an article that makes an astute observation. From China’s perspective, Europe is weak and divided, unable to compete in AI, and lacks the military might to defend itself. The European economy is dependent on China’s rare earth and other supplies, and European companies are unable to match Chinese companies in innovation. There are endless elections in Europe and fragmented interests keep it disunited. Why should China make concessions to the EU?

This probably explains why France and Germany have finally decided to toughen up to seek a solution between doing nothing about China and being excessively hardline. Notably, China’s stance has also subtly shifted. Beijing has not denied that the trade imbalance exists, and its Ministry of Commerce has not emphasised a retaliatory approach after the Franco-German policy paper surfaced. Instead, it has urged France and Germany to uphold open cooperation and free trade. This measured communication suggests that China may also demonstrate a degree of technical flexibility in the subsequent negotiations.

High stakes threaten global trade

China will by no means show weakness. While Beijing may leave room for adjustments in a few of the most sensitive industries or sectors, it could also adopt targeted countermeasures in other important sectors. For instance, on 3 October China announced an anti-dumping investigation into imports of para-nitrotoluene from the EU, which directly affects the interests of the chemical industries of countries including France and Germany. This enables Beijing to keep up the pressure in negotiations while avoiding a complete breakdown.

Whether the interdependence fostered by globalisation will ultimately be weaponised is another pointed question behind the escalating friction in China-EU trade. That the two sides are still negotiating intensely indicates that neither is yet willing to bear the worst outcome. If this critical point in China-EU relations turns into a real breakdown, the outcome would be a lose-lose situation for both China and the EU. It would also send another dangerous signal to an increasingly fragile global multilateral trading system.

This article was first published in Lianhe Zaobao as “中欧贸易紧张来到临界点”.

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