The trade policies and subsidies of the Chinese Communist Party are distorting the market and destroying European industries, causing serious imbalance in EU-China trade relations and raising concerns of an imminent trade war among Europeans. Experts believe that Europeans need to respond in the upcoming bilateral negotiations this autumn and prepare for this conflict in the right way.
In a recent publication titled “How to Win a Trade War,” columnists Soumaya Keynes from the Financial Times and economist Chad Bown from the Peterson Institute for International Economics warn that initiating a trade war is usually not a good idea. However, given the shifting international economic landscape, it becomes crucial to determine the appropriate response strategy once engaged in such a situation.
Janka Oertel, a prominent policy researcher at the European Council on Foreign Relations (ECFR) European Power project, pointed out in the latest analysis article in the influential German foreign policy and international relations journal “International Politics Quarterly” that starting a trade war is like starting a war – one must have clear advantages, such as stable economic growth, relative political stability at home, and no unexpected additional fronts. Additionally, one must have enough leverage to truly constrain the other party.
The article argues that the best time for Europe to engage in a trade war with China was about a decade ago when China’s leader Xi Jinping weaponized the economic dependency relationship and heavily subsidized key industrial sectors. European governments should have begun reducing their economic reliance on China at that time.
Compared to that period, the current situation is even more challenging. Chinese companies are fiercely competing with European companies in almost every industry, both in Europe and in third-party markets. At the same time, European exports to China have dramatically declined.
The economic environment in Europe is becoming increasingly unfavorable, with volatile energy prices, rising defense expenditures (to support European rearmament and Ukraine’s resistance against Russia), and economic pressure from both Washington and Beijing.
Furthermore, reform efforts have stalled for years, and economic growth in the Eurozone is close to zero. Internal politics within the EU are also becoming increasingly unstable, challenging the fundamental principles of European integration. All these factors indicate that the EU cannot afford to engage in a trade war under any circumstances.
The economic situation in China is also not optimistic. While China’s manufacturing power is robust and its technological capabilities are rapidly advancing, the overall economic outlook in China is bleak. Economic growth remains sluggish, prices continue to fall, and both household and business consumption and investment appetite are weak. High levels of debt and worsening unemployment exacerbate the economic challenges in China. The real estate market is collapsing, and the impact of the COVID-19 pandemic has prevented China from regaining its previous growth trajectory.
In this scenario, China is increasingly dependent on exports, especially on the European market, giving Europe leverage. For the Chinese Communist Party, Europe remains the largest advanced market open to Chinese products. Losing this market would pose a far greater risk for China than Europe losing access to the Chinese market.
Therefore, China is striving to maintain the status quo, leading to tensions between the two sides. On one hand, the EU is seeking ways to protect its industrial base, while China faces severe overcapacity and requires the European market as a critical export destination to alleviate domestic economic difficulties and absorb excess production capacity.
The article suggests that during the mid-October EU leader summit, serious consideration should be given to the issues in EU-China trade relations and a thorough assessment of the current situation. While Europe has been reluctant to acknowledge the “China issue” in the past, attitudes have somewhat shifted, though some have turned to fatalism, believing that it is too late to change the situation.
Unemployment figures and factory closures are rising in Europe weekly, particularly in Germany, concentrating in industries such as machinery, chemicals, and automobiles, which China has portrayed as contributing to mutually beneficial trade relations with Europe. Economic experts estimate that Europe has lost up to 400,000 jobs.
The article argues that a trade war between China and Europe has already begun, albeit with limited retaliatory measures so far. The European Commission should expand its countermeasures by implementing safeguard measures against surging imports, increasing subsidy investigations, expanding government procurement tools into more industries, systematically conducting product safety and security reviews, and redesigning subsidy standards across countries.
In consideration of the impact various industries are facing, the timing is critical, and some member states may need to take action first to avoid delays stemming from coordination among member states.
The article suggests that Europeans should refrain from taking singular high-profile measures, as they are susceptible to significant pressure and lobbying influence. Instead, utilizing various potential countermeasures within the EU comprehensively can prevent prolonged negotiations revolving around new tools.
If necessary, additional measures can be introduced in the future, but the existing tools are deemed sufficient. The current issue lies not in the lack of tools and means but in the political willingness of EU member states to take action.
The article highlights China leveraging its monopoly on rare earth minerals against Europe and using economic means to control Nexperia, posing not just commercial challenges but also security and political threats. China’s control over rare earths has already forced some European companies to temporarily halt production, with some nearing complete shutdown.
During the EU leader summit in June this year, all parties recognized that while energy costs and European competitiveness are crucial, refusing to address the threat posed by China will severely impact the European economy, accelerate the decline in living standards, intensify deindustrialization, and potentially lead to political consequences such as increased nationalist sentiments and further fragmentation within the EU.
The article posits that EU disintegration is not inevitable, as Europe has rich experience in dealing with complex adversaries. Despite limited experience in trade retaliation, Europe possesses extensive experience in managing complex international relations and confronting tough adversaries.
Currently, the EU is preparing trade defense measures and “risk mitigation” schemes, albeit on a significantly smaller scale compared to the near-total trade embargo measures the US previously enacted against China. Even if the EU intensifies trade restrictions on China in the future, economic and security measures between the EU and China may still maintain a relatively high level, without reaching the confrontational extent observed in US-China relations.
Simultaneously, the EU is considering potential retaliatory measures that China might take, including limiting critical supply chains to influence production within certain European sectors. In such a scenario, the EU will need to further enhance its retaliatory capabilities.
The EU may also accelerate the adoption of more proactive trade measures, such as narrowing the cost gap between European companies and Chinese products through comprehensive tariffs and other means. Many analysts argue that factors like Chinese government subsidies and currency manipulation contribute to this cost gap. If China sees this as a reason to apply further pressure, the EU may expand the scope of its countermeasures.
Looking ahead, the political agenda in the coming period will also impact EU-China trade relations. France, Poland, and Spain are set to hold significant elections next year, and policy coordination at the EU level may be influenced by domestic political change. Xi Jinping is expected to face the CCP Congress in the second half of next year, undoubtedly aiming to maintain relatively stable Sino-European relations.
Furthermore, the EU must guard against China’s gradual pressure tactics, where China may not directly escalate but rather use aggressive threats while gradually weakening EU trade defense measures and extending its economic influence over Europe. In such a scenario, European businesses may receive short-term buffering, but the risk of deindustrialization and continued dependence on China’s supply chain in certain industries may persist.
Following the mid-October Beijing-EU trade negotiations, the direction of the EU-China trade relations in the next phase will become clearer. Some analysts believe that China is likely to adopt delaying tactics and exploit differences among EU member states.
The EU must determine in advance which areas fall under its core interests in economic defense, ensuring these are not bargaining chips in negotiations with China. The EU may then endure China’s first round of retaliatory measures, with the possibility of maintaining its stance under pressure and subsequently engaging in genuine “rebalancing” negotiations.
Regardless of the eventual outcome of EU-China negotiations, most of the EU’s “risk mitigation” measures must continue to be developed, including diversifying supply chains and addressing vulnerabilities in critical technology areas.
While European governments face pressure to advance domestic reforms, EU leaders must avoid prolonged delays in negotiations and not rely on sudden changes in China’s policies. Procrastination in deciding on stronger responses may only lead to Chinese retaliation, resulting in a higher cost.
In the event that European countries unite and show a clear stance, unexpected results may emerge. China believes the EU will eventually yield, pressuring individual EU member states one by one. If the EU comprehensively recognizes its economic strength as a significant global economic force, enacts resolute measures, and capitalizes on the negotiation power brought by the size of the EU market, significant impacts are possible. While it is improbable that this influence will force China to change its overall economic policies, it can likely prompt China to adjust its export scale, seek ways to increase domestic consumption, and reduce the pressure of excess industrial capacity overflow onto the global market.
The article concludes by suggesting that reducing the openness to Chinese products in the EU could potentially create space for other countries to adjust their trade relations, expand trade options, and assist nations concerned about shrinking choices in finding more alternative solutions. The EU remains a significant economic power capable of influencing the global trade landscape by expanding the sources of supply and rendering China’s monopolization ineffective once again.