Commentary:HowChinaandtheEUCanAvertaCostlyTradeWar

While the trade war between the U.S. and China has entered a period of relative calm following two summits between their leaders, trade friction between Beijing and another major economic partner, the European Union, is steadily intensifying.

At the upcoming EU summit scheduled from June 18 to 19 in Brussels, discussions on how to bolster the bloc’s competitiveness and counter the economic challenges posed by China are set to take center stage.

In recent years, accusations of Chinese industrial subsidies and cheap exports hollowing out European industries have become a fixture of dialogues between Brussels and Beijing.

Moreover, at the Group of Seven summit hosted by France ahead of the EU gathering, Western leaders are expected to grapple with the so-called “China Shock 2.0” — a reference to a second wave of manufacturing competition, contrasting with the first shock that followed China’s accession to the World Trade Organization in 2001.

The current trade tensions did not emerge overnight. The friction began in earnest in September 2023 when the EU launched an anti-subsidy probe into Chinese electric vehicles.

Compared with the steep 100% tariffs imposed by the U.S. and Canada, the EU’s final anti-subsidy duties of 17.0% to 35.3% appeared more moderate, leaving room for negotiations.

Even so, Brussels is widening its net. Anti-subsidy and anti-dumping investigations have expanded from electric vehicles to green energy, medical devices and light industrial goods.

Adding to the strain, the EU recently placed several Chinese companies and individuals on its sanctions and export-control lists, citing the export of dual-use goods to Russia. Beijing responded by placing some European firms on its own export-control lists.

Three major factors have clogged the wheels of China-EU relations.

The first is political. Since the outbreak of the war in Ukraine in February 2022, the EU has accused Beijing of indirectly funding Russia’s war economy by purchasing Russian commodities and supplying dual-use goods. Under European Commission President Ursula von der Leyen, a country’s alignment on the Ukraine conflict has become the primary yardstick for the EU’s foreign relations. As long as the conflict continues, this political roadblock will remain.

Second is the economic pressure cooker. The EU is feeling the squeeze from its massive bilateral trade deficit with China, compounded by the rapid rise of Chinese companies in new-energy sectors. European businesses that once dominated the Chinese market are now clamoring for stronger trade barriers to shield them from Chinese industrial capacity.

Third, supply chain vulnerabilities are heightening anxieties. Since Donald Trump’s administration initiated a global trade war, Beijing has implemented export controls on critical minerals, including rare earths and permanent magnets, to protect its interests. While Beijing calls these measures lawful, they have delayed access to vital minerals for European firms. This has accelerated the EU’s “de-risking” strategy, aimed at reducing reliance on Chinese supply chains.

Despite the looming storm, the trade dispute between China and the EU is unlikely to escalate into a conflict on the scale of the U.S.-China trade war.

For one, the EU remains dependent on certain Chinese goods. Yangzhou Yangjie Electronic Technology Co. Ltd., which was recently added to the EU’s 20th round of sanctions against Russia, saw its restrictions temporarily lifted shortly after because its semiconductor chips are widely used across the European automotive industry.

More importantly, as the world’s most aggressive champion of a green transition, the EU relies on China’s cost and technological advantages in wind power, solar energy and battery storage. Striking out alone without Chinese technology would significantly drive up the costs and timeline of Europe’s low-carbon transition.

Furthermore, the EU’s structure as a union of sovereign states limits its fiscal firepower compared with a single nation like the U.S. Brussels’ efforts to subsidize domestic industries and cut reliance on China face hard budget constraints. For instance, in current efforts to source rare earths outside of China, many companies fear that if Beijing relaxes its strict controls, subsidized local production will become unprofitable. Commercial realities and fiscal limits continue to check plans for supply-chain independence.

Finally, the EU tends to take a more rules-based approach than Washington. Brussels has long positioned itself as a defender of the post-World War II international order. Its tiered tariffs on Chinese electric vehicles, which vary based on a company’s level of cooperation with investigators, reflect this effort to remain legally compliant.

This contrasts with the sweeping, aggressive tariffs of 84%, 125% or even 145% threatened during the Trump administration’s initial tariff battles — figures so high that Beijing eventually stopped engaging in the numbers game after raising its own retaliatory tariffs to 125%.

Beijing, too, has shown a desire to keep the dispute from spiraling. Chinese officials have repeatedly emphasized that Beijing views the EU as a partner rather than a rival, stressing that cooperation far outweighs competition. While strongly opposing trade protectionism and the “securitization” of economic issues, Beijing has urged European officials to view trade relations rationally and resolve differences through dialogue.

In practice, China could ease tensions by importing more European goods, opening up its services sector to EU firms, and encouraging Chinese companies to manufacture locally in Europe to create jobs and tax revenue. Improving export mechanisms for critical minerals like rare earths to balance security and efficiency could also address European concerns.

Neither side wants a costly trade war. For Beijing, maintaining a hard-won trade truce with the U.S. while tackling domestic economic challenges is a top priority. For Brussels, escalating energy security and inflation risks — aggravated by tensions involving Iran — mean a trade conflict with China is the last thing it needs. Finding a common denominator remains the most viable path forward.

Huang Shan is a London-based advisor for Caixin Insight.

Contact editor Lu Zhenhua (zhenhualu@caixin.com)