Europe’s China dilemma: how tough is the EU prepared to be? 

Both action and inaction on China carry costs for EU industry 

Europe faces structural changes in China's economic model 

Europe’s concerns reflect a fundamental shift in China’s economic system. Weak domestic demand and extensive state support have reinforced an export-led growth model, generating large trade surpluses and excess industrial capacity. This has intensified competitive pressures on European companies, particularly in high-value manufacturing sectors. 

China’s recently adopted 15th Five-Year Plan is likely to reinforce this trend by prioritising advanced manufacturing and exports over a significant expansion of domestic consumption. US tariffs have further exacerbated the challenge for Europe by diverting Chinese exports from the US market towards the EU and other open economies. 

European policymakers are focused on two related challenges. First, they are seeking to prevent a gradual erosion of Europe’s industrial base as Chinese competitors gain market share across an expanding range of sectors. Second, they aim to reduce strategic dependencies on Chinese suppliers, particularly where these create vulnerabilities to economic coercion or security risks. 

These concerns now encompass different industries including electric vehicles, batteries, wind turbines, medical devices, chemicals, critical raw materials and other strategic technologies. 

While European governments broadly agree on the diagnosis, they remain divided on the appropriate response. European unity on China will continue to be tested as Member States pursue different national interests. European industry is similarly split. Sectors facing direct competition from Chinese imports generally support stronger protections, while companies dependent on Chinese suppliers or the Chinese market, including much of Germany’s automotive industry, tend to favour a more restrained approach. 

Existing European responses viewed as inadequate 

In recent years, the EU has become more assertive in deploying trade defence instruments against China. It has launched sector-specific trade investigations, strengthened investment screening, applied the Foreign Subsidies Regulation to Chinese bidders in public tenders, and restricted access to the EU procurement market for certain Chinese medical devices by triggering the EU’s International Procurement Instrument for the first time in 2025. 

However, these measures have done little to address the broader trade and economic imbalances with China. Even where the EU has imposed additional duties, such as on Chinese electric vehicles, their impact has been limited.  

As a result, much of the debate surrounding new trade instruments stems from a perception that the existing EU toolkit is insufficient, either because its measures are too targeted (such as anti-subsidy and anti-dumping investigations) to have a meaningful impact, or because they are too broad, affecting all trading partners (as is the case with safeguards).  

Other existing instruments lack credibility as deterrents because they are so far-reaching that the political support needed to activate them cannot be mobilised – as is the case with the Anti-Coercion Instrument.  

Overall, policymakers increasingly view the current toolkit as ill-equipped to address economy-wide distortions that create structural dependencies and enable economic coercion. 

Potential responses include a range of new instruments 

Despite persistent divisions, the political momentum is building on the need to take firmer action on China. The most concrete option under discussion is a greater use of existing trade safeguard measures. In addition, the Commission could initiate new anti-subsidy and anti-dumping investigations on entire value chains, rather than just single products.  

However, these measures alone will not address all of the underlying challenges. As such, discussions are also ongoing on how to tackle industrial overcapacity to limit imports of Chinese products on a sector-by-sector basis, as well as a possible ‘solidarity instrument’ to support Member States most affected by Chinese competition or retaliation. 

Finally, trade Commissioner Maroš Šefčovič said in early June that the EU also needed to introduce a new “diversification instrument” that would mandate diversification for sectors with excessive single-supplier dependence, reflecting concern that concentration risk is itself a strategic vulnerability regardless of pricing behaviour.  

To complement this, industrial policy initiatives have become increasingly intertwined with the trade policy agenda. The proposed Industrial Accelerator Act (IAA) would require European governments to buy either within the EU or from "trusted partners" with whom the bloc has trade agreements (i.e. not China). A proposal to strengthen the EU Cybersecurity Act, launched in January, would restrict or prohibit foreign technology used in European supply chains, especially in strategic infrastructure such as the energy and digital sectors.   

In addition, China’s support for Russia will remain a key concern for the EU. Further measures targeting Chinese firms supporting Russia’s war effort in Ukraine are likely in future sanctions packages. 

An uncertain path forward  

At the June European Council, leaders cautiously endorsed the Commission’s plan to develop further measures, opening the door to possible proposals later this year. The Commission also stressed that it remains open to dialogue with China while de-risking the relationship. This captures the balance Europe is trying to strike: taking a firmer line on China while managing Member States’ concerns about retaliation. 

One of the EU's main goals is to strengthen its leverage in negotiations with Beijing. Chinese Commerce Minister Wang Wentao met Trade Commissioner Maroš Šefčovič in Brussels on 29 June. The two sides decided to establish the EU-China Trade and Investment Consultation which will focus on trade and investment rebalancing, export controls, intellectual property rights and WTO reform. They tasked officials with advancing work in these areas and agreed to reconvene at ministerial level in autumn 2026.  

US-China relations will also shape the outlook. Following the Trump-Xi meeting in May, the two sides are in a period of cautious détente, with a further China-US leader level meeting in September Even a temporary easing of tensions allows Beijing to focus more attention on keeping Europe’s market open, while European leaders remain wary of facing trade tensions with both China and the US at once. 

Impact on business  

The recent apparent easing of China-Europe tensions, reflected in the establishment of a new consultation platform, does not preclude the possibility of renewed trade disputes. Further EU trade investigations remain likely. For example, the Commission is closely scrutinising trade flows in the chemical sector and has recently imposed definitive anti-dumping duties on imports of 1,4-butanediol (BDO) from China. 

Chinese authorities could in turn retaliate against European businesses. Any such move is likely to be calibrated to deepen divisions among Member States. China’s weaponisation of critical raw materials, including rare earths and active pharmaceutical ingredients (APIs), could resume too, affecting the production and supply chains of sectors such as the automotive, defence, renewable energy, and pharmaceuticals. Companies should assess supply chain concentration risk, envisage alternative sourcing, and identify regulatory and commercial barriers to substitution. 

Furthermore, China could follow through on its threats to target symbolic European exports, including cosmetics, wine, meat, and luxury goods. Companies operating in the Chinese market could also face increasing difficulties, including inspections, discriminatory treatment, additional administrative procedures, and greater barriers to accessing public procurement markets. 

Businesses should use the window between now and October to engage with EU officials on the potential design and development of any new China-focused overcapacity or diversification instruments. Their sectoral scope, thresholds, and exemptions remain genuinely open to discussion, and early input is likely to carry disproportionate weight.    

This blog was written by Senior Advisor James Crabtree, Associate Director Emilie Kerstens, and Manager  Francesco De Angelis, with additional input by Partner  François-Joseph Schichan.