How the EU is trapped in a status quo that rewards China

EU-China relations remain trapped in a status quo that overwhelmingly benefits Beijing. China continues to run massive trade surpluses, deepening European dependencies even as the EU builds its economic security framework and scores limited de-risking successes. At the same time, China’s critical support for Russia’s war in Ukraine carries no real cost for its ties with Europe, despite severely undermining European security. The US‑Israeli campaign in Iran has done nothing to alter this fundamental calculus. 

If the conflict in Iran were to escalate into a prolonged war of attrition, the most consequential question for Europe would be whether China might begin enabling Iran’s defence industry and overall economy in the way it has helped sustain Russia’s since the invasion of Ukraine. Only such a scenario, still far from certain, would transform Iran into a truly critical issue in EU-China relations.

Beijing has long supported the Iranian regime through missile-related technology transfers and large-scale purchases of sanctioned oil, and it would stand to gain immensely from a US strategic defeat in the Middle East. For now, however, China has adopted a posture of cautious fence-sitting: it has forcefully condemned the US-Israeli strikes, evacuated its citizens and focused on safeguarding its energy interests.

The more consequential question is whether Beijing might go further and provide active support aimed at tying down the US in the region. Given how much Iran is conceived in Beijing as a “second front that Washington can never afford to leave”, this is entirely conceivable. 

Should the war with Iran evolve in that direction, a sharp divergence of interests between Europe and China would become visible. Europe has a clear interest in a short conflict. But unlike China, it has no stake in the survival of a regime that has killed Europeans through proxy attacks and has sponsored terrorism for decades.

For now, this fundamental divergence remains largely obscured by the EU’s fragmented diplomatic messaging. While European Commission President Ursula von der Leyen stresses that no one would shed tears for a regime that had “slaughtered 17,000 young people”, French Foreign Minister Jean-Noël Barrot reached out to his Chinese counterpart Wang Yi to exchange “on the need to work towards de-escalation (…) in the framework set by UN Secretary-General resolutions and international law”. Meanwhile, European Council President Antonio Costa and Spanish Prime Minister Pedro Sanchez took principled positions against unilateralism and in favour of the “rules-based international order”, but without outlining a realistic plan to uphold it.

The war in Iran is thus not a defining issue in EU-China relations. It offers no realistic prospect for joint diplomatic initiatives, but it also does not deepen the strategic distrust created by China’s role in sustaining Russia’s war against Ukraine. For now, the conflict simply does not sit at the core of the bilateral relationship. Only a direct Chinese effort to sustain Iran’s war effort would change that equation.

The centre of gravity in Europe’s China policy remains the development of the EU’s economic security framework. Since 2023, the EU has framed its approach to China through the concept of “de-risking”, first articulated by Ursula von der Leyen as an alternative to strategic decoupling. The objective was to keep markets open while selectively reducing strategic dependencies.

Three years later, this principle is beginning to translate into concrete industrial policy, most notably through the preparation of the Industrial Accelerator Act (IAA) and the upcoming revision of the EU Chips Act. 

The proposed IAA is arguably the most significant development in EU-China relations so far in 2026.  It aims to reduce strategic dependencies across sectors central to European competitiveness, including steel, cement, aluminium, batteries, electric vehicles, solar technologies and critical raw materials. Although framed in country-agnostic terms, the legislation targets China’s dominance across large segments of the clean-tech supply chain — areas where European dependence has continued to deepen, even as policymakers debated de-risking.

One key provision is a “40% rule”: foreign investments above 100 million euros in strategic sectors would face enhanced scrutiny if the investor’s home country controls more than 40% of global production capacity in that sector. This threshold effectively singles out China in several industries. The Act would also require that 70% of components in these sectors be produced in Europe for projects to qualify for public subsidies.

On paper, this embrace of the European preference principle represents a significant step toward de-risking and rebalancing EU-China relations. Will it work? It remains uncertain whether the EU will be willing to restrict access to the single market in a way that decisively reshapes corporate incentives, so that Chinese firms calculate that their best option is to localise production in Europe and integrate deeply with European supplier networks.

In addition, European rhetoric about strategic diversification continues to coexist with growing economic interdependence with China. Recent trade data illustrate the contradiction. The structural imbalance remains striking: throughout the 2020s, China’s trade surplus with the EU has consistently exceeded 300 billion euros annually. While Chinese exports to the US declined sharply in early 2026, falling by 11% year-on-year in the first two months of the year, exports to the European Union (EU) surged by nearly 28%, after an 8.4% growth in 2025. Shipments to Germany, France and Italy each increased by more than 30%.

And while European governments emphasise de-risking, many companies are pursuing a “China for China” strategy, expanding their presence in the Chinese market rather than relocating production. German firms in particular have increased their investments: new German foreign direct investment in China reached roughly 7 billion euros in 2025, a four-year high, up from 4.5 billion euros the previous year. Major industrial players continue to deepen their local footprint. 

But de-risking is not talk only. In critical raw materials and rare earth supply chains, genuine progress is under way. Europe has begun investing in domestic processing capacity to reduce its dependence on Chinese refining. A flagship project is the Solvay plant in La Rochelle, historically the most significant rare earth processing facility outside China.

In 2025, the site began producing high-end materials for permanent magnets used in electric vehicles and wind turbines. By 2026, it is scaling up production of neodymium and praseodymium oxides and aims to reach 4,500 tons annually by 2030, enough to meet roughly 30% of European demand. The plant has recently secured long term contracts with US customers. 

Another major initiative is the integrated rare earth hub in Lacq in southwestern France. Built around a refinery operated by Carester’s subsidiary Caremag, the facility will process recycled magnets and imported concentrates into critical elements such as dysprosium and terbium. It is paired with a downstream metallurgy plant operated by the American firm USA Rare Earth and its subsidiary Less Common Metals. The Japan Organization for Metals and Energy Security provides financing in exchange for a long-term supply. Together, the projects aim to establish one of the first integrated rare earth supply chains outside China, and display concrete alignment between European, American and Japanese players.

However, the scale of these initiatives highlights a broader challenge. European efforts remain fragmented and relatively modest compared to China’s industrial capacity. National funds for critical raw materials exist in several countries. France has created a 2 billion euro investment vehicle through Infravia, Germany has launched a 1 billion euro raw materials fund, and Italy has established a similar facility. At the European level, the new ResourceEU initiative provides about 3 billion euros in financing through the European Investment Bank. Yet taken together, these efforts still fall short of the scale required to transform global supply chains.

Ultimately, the de-risking agenda will only succeed under two conditions. First, the EU needs to use its most powerful economic instrument: access to the single market. From Beijing’s perspective, the EU market remains China’s most valuable strategic asset in its relationship with Europe. As long as access is granted, China will continue to enjoy a highly profitable status quo characterised by structural surpluses and polite diplomatic complaints. Yet the European Commission and EU member states have so far shown little willingness to fully leverage this power. 

Second, progress will require closer coordination with partners such as the US and Japan. Without such alignment, the EU is unlikely to significantly alter the balance of economic power with China. This would involve a coordinated trade policy agenda addressing industrial overcapacity and responding jointly to cases of weaponised supply chains. Ideally, it would move to the creation of integrated markets for strategic goods produced within these partner economies, reducing China’s ability to exercise pricing power across critical sectors. The upcoming June G7 summit under French presidency offers a timely opportunity to move the de-risking agenda from strategic narrative toward concrete collective action.

Related: Buying time: Germany between a changed US and rising China | China’s diplomatic blitz in Trump’s backyard — who will dominate the western hemisphere?