EU and China Edge Closer to Trade War Amid 'Unsustainable' Deficit

The European Union and China are escalating towards a potential trade war as the EU's commerce chief highlighted an "unsustainable" trade deficit with Beijing.

European Commissioner for Trade and Economic Security Maros Sefcovic stated on X that his primary goal during two days of talks in Beijing was to "begin rebalancing our... unsustainable trade deficit." He also noted that EU businesses operating in China are seeking improved market access and enhanced economic security. Last year, China's daily exports to the EU exceeded imports by approximately one billion euros, according to European figures.

Many in Europe attribute this imbalance to unfair trade practices by China, including state subsidies and price dumping, which are undercutting European industries such as automotive and chemicals. Concerns have been raised that China could retaliate by limiting supplies of critical materials like rare earth minerals or by imposing barriers on European exports.

The current discussions in Beijing follow recent actions by France and Germany. In a joint letter, President Emmanuel Macron and Chancellor Friedrich Merz advocated for a "credible instrument" to quickly counter any escalation by Beijing. This proposed mechanism, set to be discussed at an upcoming EU summit, would empower the European Commission to respond to trade aggression within days. The plan includes enhancing the use of the bloc's "trade bazooka," the Anti-Coercion Instrument, which allows for blocking or restricting trade and investment from countries deemed to be pressuring EU nations or corporations.

However, consensus on stringent measures is not universal within the EU. Spain, the eurozone's fourth-largest economy, has adopted a less confrontational stance toward China, with Prime Minister Pedro Sanchez visiting Beijing multiple times in recent years. Additionally, a coalition of lawmakers from various political parties across different EU member states voted against a resolution calling for tougher China policies.

Beijing has responded to the EU's growing assertiveness by warning against "protectionist" measures. China's commerce ministry cautioned that such actions could lead to negative consequences for those pursuing them. An editorial in the state-run Global Times newspaper issued a stark challenge, stating, "The EU does not have the capacity to wage a trade war against China. If it is truly determined to do so, then let it try."

China's foreign ministry has expressed a preference for dialogue, with spokesman Mao Ning stating that Beijing hopes to work with Brussels "in the same direction and address each other's concerns through dialogue and consultation." He emphasized China's belief in resolving economic and trade differences through open cooperation and equal discussion.

For China, the stakes are considerable, given its economy's reliance on exports to offset sluggish domestic demand. EU officials, including Bernd Lange, head of the European Parliament's trade committee, believe China's current economic challenges provide the EU with leverage. Lange noted that the EU possesses a range of tools to counter unfair subsidies and economic coercion, which should be applied consistently and potentially enhanced.

Negotiations between the EU and China have been ongoing since June. Sefcovic's priorities for the current talks include addressing surging imports in strategic sectors, increasing European exports to China, and improving access to critical raw materials. The EU also seeks clearer export licensing for materials like rare earths, following recent restrictions imposed by China.

While Brussels hopes for voluntary export limits on certain goods, such as hybrid cars, Beijing has expressed opposition to import quotas. Analysts remain cautious about the likelihood of a comprehensive agreement, though some suggest that export-restraint agreements in specific sectors could be a potential starting point.

Across the EU, there is significant concern among politicians and economists regarding China's subsidies and exports, which are seen as a major threat to key industries like steel and automotive manufacturing. European Commission President Ursula von der Leyen has likened the situation to a "China shock" that previously impacted the U.S. economy, leading to significant job losses in manufacturing.

Analysts suggest that the EU's economic recovery requires both internal reforms and a more assertive trade policy towards China. While complete disengagement from China is deemed impossible, there is a growing momentum to reset trade relations, focusing on strategic independence and diversification.

In the lead-up to Sefcovic's meetings, Beijing initiated an anti-dumping probe into EU exports of p-nitrotoluene, a chemical used in dyes and pharmaceuticals. This action followed a warning from China about potential retaliatory measures if the EU adopted stricter protectionist policies.

Trade ties between the United States and China are described as relatively stable following a summit between President Xi Jinping and former President Donald Trump, drawing attention to the diverging EU-China relationship. Chinese investment in Europe is considered a potential bargaining chip for Beijing in ongoing negotiations, particularly as EU member states compete for capital and jobs.