The EU has this week finally agreed to ratify the “Turnberry Agreement” struck with the Trump Administration last summer. A major part of the reason for doing so is that the EU in the coming months is increasingly likely to take a more confrontational approach to China’s trade practices, viewed in Brussels as increasingly detrimental to the European economy. Any EU-China trade confrontation will though be far more contained than the US-China trade conflict.
Prior to signing off on Turnberry, the European Parliament demanded that a sunset clause was added to the agreement (to come into force only after the end of the Trump Administration), and that explicit provisions were inserted for the EU to retaliate in the event of breaches of the agreement by the Trump Administration. Yet, overall the agreement makes it a lot more likely that transatlantic trade relations will remain relatively stable in the coming months. Key friction points will reemerge once the Trump Administration in the coming months begins to roll out more of its Section 301 investigations into what it deems “unjustifiable, unreasonable, or discriminatory” EU trade practices. In short, the EU will feel it has taken out at least a degree of insurance against another flare-up in actually implemented (as opposed to discussed on President Trump’s social media feed) transatlantic trade tension.
Reducing transatlantic trade tensions makes quite a lot of sense for an economy already suffering from an Iran War related growth slowdown, a negative sentiment shock and rising price pressures. European businesses will appreciate at least one area in which policy uncertainty is arguably declining. The main reason however for the EU to now stabilize its trade relations with the United States is the rapidly deteriorating trade relations the EU has with China. While the recent Xi-Trump Summit therefore in many ways maintained a high degree of US-China trade detente, EU-China relations are deteriorating. It is sensible economic policy from Brussels to seek to avoid facing deteriorating trade relations with both the two largest economies in the world at the same time.
The underlying drivers of the deteriorating EU-China trade relations are both political and economic. Politically, the main issue is China’s continued political support for Russia, and it’s clear willingness to help sustain the Russian economy through both large imports of Russian fossil fuels and export of also what appears to be a rising number of “dual use items” directly useful to Russia’s war effort against Ukraine.
As was highlighted recently, when the EU imposed economic sanctions on also a number of Chinese firms supplying the Russian military industrial sector, this issue will continue to aggravate tensions, as Beijing will invariably retaliate against such EU measures. At the same time though, the recent decision by the EU to at least temporarily lift the sanctions against Yangzhou Yangjie Electronic Technology Co., a major Chinese semiconductor supplier to the EU auto sector unable to quickly source chips elsewhere, underlines the difficulties facing the EU in any sanctions related confrontation with China.
Economically, the combination of Chinese firms’ evident technological advances across a very wide range of key industrial, environmental and high-tech goods, and China’s macroeconomic situation in which often heavily subsidized exports is the main driver of GDP growth, has put traditionally globally competitive EU industries under acute commercial pressure.
This not only materializes itself in a rising bilateral EU trade deficit with China (though the EU continues to run a sizable global trade and current account surplus), but also declining EU global export market shares across a wide range of traded manufacturing goods. In short, more and more EU firms and industries – many of whom previously did good business also in the Chinese domestic market and across the global economy – are now raising their voices for the EU to take more forceful trade protective measures against a perceived flood of hyper competitive Chinese exports.
A number of recent EU trade measures have already had the effect of signaling the intent to reduce China’s access to the EU market. In addition to Russia related sanctions on Chinese firms, the recent “Industrial Accelerator Act“, which explicitly favors firm from the EU and EU FTA partners in public procurement will, if implemented as proposed by the European Commission, curtail Chinese firms’ ability to bid for public infrastructure contracts across the EU.
The EU has also implemented a rising number of anti-subsidy investigations and associated countervailing tariffs on Chinese EV exports, soft wood and other goods categories. And as was first done with regards to critical minerals, the EU has recently proposed, as part of a new supply chain resilience regulation, to potentially force all EU firms to diversify their supply chains away from what is deemed excessive reliance on Chinese suppliers.
The Commission has also recently proposed to give itself the power to – on national security grounds usually only determined by member states – exclude individual suppliers from EU critical infrastructure (often from China). In short, a critical mass of EU members and senior European Commission officials have concluded that a more potent EU trade policy stance against China is today required. This does not mean, however, that they will be successful.
Related to the EU’s evolving stance of China, the EU has obviously been negotiating a large number of traditional FTAs with partners around the world and will continue to do so with currently also the Philippines and Malaysia and shortly pursuing a more institutionalized relation with also the CPTPP grouping.
One of the main drivers of these deals is also for the EU to try to protect its exports markets via negotiating better bilateral trade terms than available to Chinese exporters among EU FTA partners. This ongoing attempt at strengthening its global trading position inside the traditional WTO-overseen global trading system also illustrates the probably biggest difference between the coming more intense EU-China trade conflict and the post-Liberation Day US-China confrontation. The EU will be extremely reluctant to – like Trump on Liberation Day and afterwards – take trade measures against China that explicitly run afoul of WTO rules.
This will greatly constrain the EU’s ability to forcefully and quickly via policy measures alter the EU-China trade relationship, as Brussels will lack most of the tools deployed by Donald Trump and will fundamentally want to keep it a “rules bound confrontation”. Beijing may not be similarly constrained in its responses.
The EU has other structural disadvantages in any trade confrontation against China, as it for instance does not have a large central fiscal capacity to draw on, and hence cannot offer to subsidize its firms’ quick diversification away from Chinese supply chain dependencies.
Just like the EU will seek to keep new anti-China trade measures “WTO compliant”, it will also out of necessity have to keep the “fiscally cheap” and in alignment with the EU’s other strategic economic goals, namely increasing its overall competitiveness and to accelerate decarbonization. Given that China dominates the very green sectors that the EU’s solar and battery investments rely on to drive decarbonization forward, very clear policy trade-offs exist between confronting China’s trade practices and other EU policy goals.
In a union of 27 members with very different economic relations with China, this dictates that the EU’s coming more aggressive stance will – even more than usual for EU policies – be dictated by ongoing policy compromises. It remains implausible that the EU would utilize its most potent trade policy instrument – the Anti Coercion Instrument that allows for the EU to in principle retaliate against any import – against China, as the Chinese trade challenge is very broad in scope and not related to a specific identifiable action taken by Beijing.
While the EU is therefore likely to present potentially very far reaching goals to for instance diversify away from its current supply chain reliance on China, since Brussels cannot offer to pay EU firms to do so, such goals will remain mostly aspirational and are unlikely to lead to material trade shifts in the near term. Member states are similarly not likely to give the European Commission extensive new policy powers to determine what constitutes “national security concerns” in the EU, and hence the Commission will not get new powers to effectively exclude Chinese products from EU markets on such grounds.
Rather what the Commission will increasingly be encouraged to do is to further expand its ongoing campaign of anti-subsidy investigations against a further rising number of Chinese goods categories. Such investigations will, as exhibited most famously in the EV sector, often lead to the imposition of new tariffs on Chinese exports, but these tariffs being related to the scope of proven economic damage to EU firms from Chinese subsidies will not acts a “tariff wall” against Chinese exports to the EU. Any change in EU imports from such tariffs on a given sector are hence likely to be relatively modest and temporary, though may prompt a rise in inward Chinese industrial FDI into the EU.
Emboldened by its recent success in retaliating forcefully against Donald Trump’s trade measures, China may be encouraged to retaliate stronger against any new EU trade measures aimed against it, even if these are WTO compliant. This could in principle initiate a tit-for-tat trade confrontation between the EU and China, if Brussels feels it must retaliate against w perceived Chinese “over reaction”. This risk though remains low, given the need for broad support amongst EU member states for such a trajectory to be chosen.
In sum, while there is a clearly perceived political and economic need inside the EU to take more forceful action against Chinese trade practices, the EU is likely to do so only in a WTO compliant manner, with few fiscal resources to back it up and with a constant eye to also the EU’s other policy goals of competitiveness and decarbonization.
This will not reduce the “headline risk” associated with future more frequent EU-China trade frictions, but it will ensure that the direct near-term economic impact on bilateral trade flows and the broader EU economy will remain contained. Unlike the US-China trade confrontation after April 2025, EU-China trade tensions will not have material macroeconomic impacts in the months ahead.
Jacob
