Two geopolitical economic experts have recently written articles pointing out that the European Union’s traditional rules on free trade and individual case investigations are struggling to address the long-standing issue of the Chinese Communist Party expanding its exports through non-market means such as industrial subsidies and currency policies. With Germany’s stance shifting significantly, Europe is now facing a critical opportunity to reshape its trade policy towards China.
According to Shannon K. O’Neill, Senior Vice President for Foreign Relations at the Council on Foreign Relations (CFR), the EU must confront the issue of China distorting competition using national subsidies and non-market policies if it wishes to uphold the free trade system.
Jessie Yin, Deputy Director of the Geoeconomics Center at the Atlantic Council, highlights the need for the EU to follow the United States’ lead in creating trade tools that do not rely on data provided by Chinese exporting companies (such as cost, subsidies, and supply chain).
O’Neill notes that the EU has been actively signing free trade agreements with economic entities like New Zealand, Australia, India, and the Southern Common Market in recent years, aiming to maintain the existing multilateral trade order by reducing tariffs, opening up service markets, and establishing rules on labor, environment, digital trade, and investment.
However, she points out that the weakness of this system lies in presuming that major economies will abide by similar market rules. She writes, “When the second largest global economy, China, does not adhere to these regulations, traditional trade rules become ineffective.”
O’Neill explains that China’s export competitiveness stems not only from economies of scale but also from extensive support provided to Chinese enterprises by the authorities through cheap land, low-cost financing, tax incentives, and a protected domestic market.
Citing data from the International Monetary Fund (IMF), she reveals that China’s support spending for enterprises amounts to around 4.4% of GDP, nearly three times that of Europe. Bolstered by cheap financing and tax benefits, Chinese firms are shifting from labor-intensive industries to high-end sectors like automotive, telecommunications, batteries, and drones, posing a significant challenge to European industries.
Yin focuses on the shifts in Germany’s policy, noting its historical stance as a representative of an export-oriented economy. With China’s accession to the World Trade Organization (WTO), Germany benefited more than many other European countries by exporting automobiles, machinery, chemicals, and advanced technologies to the rapidly growing Chinese market.
However, Yin points out that this dynamic has now reversed. During the COVID-19 pandemic, China expanded its manufacturing exports to support its domestic economy, posing competition for Germany’s automotive, chemical, and machinery industries. Following Russia’s invasion of Ukraine, industrial costs in Germany rose, further accelerating this transformation.
Germany has transitioned from maintaining a trade surplus with China to incurring a continuous deficit in recent years. This change has resulted in Berlin aligning its stance more closely with Brussels, indicating a shift in the political balance within Germany.
In a recent speech in Cologne, German Chancellor Friedrich Merz expressed concerns about the undervaluation of the Chinese Renminbi. He emphasized that the EU, regardless of its innovation or excellence, would struggle to compete against a rival that manipulates its currency.
Merz urged Beijing to “allow its currency to float freely, including against the backdrop of competition in capital markets.”
Driven by Germany, France, Italy, and the Netherlands, the European Council has initiated discussions on the issue of “global macroeconomic imbalances.” Yin highlights that since early June, the EU has launched nine additional anti-dumping investigations against Chinese imports.
Both experts agree that the EU’s current reliance on anti-dumping, anti-subsidy, and foreign subsidy investigations is struggling to keep pace with China’s expanding exports.
O’Neill suggests that the EU has initiated a record number of anti-dumping and anti-subsidy investigations in recent years and established tools to restrict companies that accept foreign subsidies from bidding on public contracts. Measures have also been taken to address economic threats and differences in carbon emissions.
However, she believes these methods are often “implemented too slowly, have narrow scopes, enforcement is sporadic, or result in significant disagreements,” making it challenging to produce sufficient effects.
Yin also points out that the EU’s traditional investigations heavily rely on export companies providing information on costs, subsidies, and supply chains. This gives Chinese authorities an opportunity to delay or weaken EU measures by restricting company cooperation or evidence required for investigations.
In May of this year, China for the first time invoked the “Anti-Foreign Unjust Extra-Territorial Jurisdiction Regulations” to prohibit domestic entities from cooperating with the EU in a cross-border subsidy investigation involving Nuctech.
Yin views this as a signal that China is developing new defensive economic tools, directly challenging the EU’s evidence-based investigative procedures and regulations.
Both experts agree that Europe is no longer facing just trade disputes over individual products but must also focus on preserving free trade while preventing the erosion of its industrial base through exploitation of system vulnerabilities by China.
In their policy recommendations, both experts concur that the EU must take more proactive measures. Yin suggests the EU should establish tariff tools that are not solely dependent on data from Chinese exporters, such as by drawing insights from the U.S.’s Section 301 of the Trade Act or Section 232 of the Trade Expansion Act, to protect key industries from economic and national security perspectives.
O’Neill emphasizes that the EU should fully leverage its extensive network of free trade agreements by forming joint defenses with other countries affected by the impact. She believes that tightening rules of origin collectively, preventing the transit of Chinese goods through third countries, or limiting the import percentage of a single country in crucial products would be more effective than unilateral measures by the EU.
Additionally, O’Neill notes that the “Anti-Reciprocal Trade Agreements” (ARTs) signed by the U.S. with multiple countries are more targeted in reviewing sensitive investments and preventing commodity transshipments.
Both experts assert that Europe is now confronted not just with trade disputes over specific products but with the challenge of maintaining free trade while safeguarding against China’s exploitation of institutional weaknesses.