Summary of Key Points
Following recent economic and trade pressures from the EU on China, both sides have established a consultation mechanism (with the second meeting taking place in October). The article analyzes the EU's strategy of being aggressive at first and then more conciliatory:
1. The EU is afraid of Chinese countermeasures (due to its fragile supply chains, which would suffer even more from a trade war).
2. China views the EU as crucial for preventing a third world war; the EU's trade deficit with China reflects its own declining competitiveness (high costs and weak R&D).
3. Achieving trade balance is difficult: what the EU wants to sell to China is not needed, and what China needs from the EU is not available.
4. The EU's designation of China as a "systemic rival" is the root of long-term tensions.
5. In the event of escalating tensions, China should adjust its strategy by strengthening ties with EU member states and preparing for both scenarios.
Why Does the EU First Attack Then Soften Its Stance Towards China?
There are two main reasons behind the EU's change in approach:
1. Fear of Counteraction
The EU initially threatened tough measures but later decided to negotiate, mainly because it fears Chinese retaliation. China is known for its firm stance in trade disputes (such as imposing reciprocal tariffs). The EU is more dependent on China for rare earths, key minerals, and pharmaceutical raw materials; without these supplies, Europe might struggle to produce even basic products like toothpaste. Research by the Mercator Institute suggests that excluding Chinese suppliers would cost the EU 840 billion euros over five years, and the European Central Bank has calculated that decoupling from China would cost an additional 200 billion euros annually. The EU understands the financial implications and thus avoids taking drastic actions.
2. Strategic Need for China's Cooperation
China does not want to isolate itself from the EU, not only because it is Europe's second-largest trading partner (with a surplus of over 300 billion euros last year) but also because the EU plays a key role in a multipolar world order. Without EU support, China believes the US would be less likely to initiate a major conflict (as seen during the US-Iran war when Europe did not provide backing). Therefore, China is willing to make concessions (such as allowing the export of rare earths) to maintain dialogue.
Why Is There a Large Trade Deficit with China?
The EU often blames China for subsidizing its industries, but the truth is that Europe's own competitiveness is weak:
- Declining Global Competitiveness: The EU's global export share has dropped from 16.8% to 14.8% between 2019 and 2025, and its exports to China have decreased from 12.8% to 10.3% of China's total imports. While China's import volume increased by 47%, EU exports only rose by 17.6%. European products cannot meet China's growing demand for advanced technologies.
- High Costs and Weak R&D: Germany's industrial electricity prices are four times those in China, and natural gas is twice to three times more expensive. Additionally, labor costs in Germany (42 euros per hour) are much higher than in China (35 yuan).
- Lack of Innovation: China invested 543 billion dollars in R&D last year, 10% more than the EU. The top 20 global internet companies do not include any from Europe, and Europe is absent in fields like AI and quantum computing.
Can Trade Balance Be Achieved?
The EU wants to reduce its trade deficit with China, but efforts are futile:
- Unwanted Goods: Even if EU products like wine, dairy, and pork were freely imported, they would only account for a tiny portion of the 300 billion euro deficit.
- Essential Goods: Europe sells aircraft to China, but this does not significantly offset the trade imbalance. Additionally, EU restrictions on medical devices make little impact.
- China's Needs Unmet: China lacks advanced technologies like photolithography machines, which the EU bans under military-industrial dual-use regulations. If the EU lifted these restrictions, the deficit would decrease, but it is unwilling to share its core technologies.
The EU's Perception of China as a "Systemic Rival"
In 2019, the EU categorized China as a partner, competitor, and systemic rival. Now, the latter label dominates, reflecting concerns that China's state-led economy threatens the EU's free-market system. This perception has serious consequences:
- Politics Over Economics: Negotiations on a trade agreement were delayed due to political considerations by the European Parliament.
- Normalized Economic Tensions: Anti-subsidy measures and market access restrictions target China's economic model.
- Risk Mitigation Turns into Decoupling: Actions like dismantling Huawei equipment are seen as threats to EU security.
What Should China Do in the Face of Escalating Tensions?
China should prepare for ongoing tensions but not be overly optimistic:
- Focus on Member States: Europe consists of 27 countries with varying interests, so China should strengthen bilateral relationships with key members like Sweden and Hungary.
- Prepare for Changes: The EU's "Industrial Acceleration Act" is likely to impact trade, so China should diversify markets and enhance its own innovation capabilities to reduce reliance on European products.
In summary, the EU's policy towards China has changed. China must adapt proactively to maintain a competitive position in the global economy.