Key Takeaways:
European Union leaders are divided over how far to restrict Chinese imports flooding their markets, risking a trade war with Beijing.
EU leaders directed the European Commission to expand the bloc's trade defense toolbox as anxiety over a widening deficit with China — which hit $270 billion last year — threatens to fracture the 27-nation bloc.
"The imbalance has become unsustainable, but we must be careful not to provoke a conflict that would hurt European consumers and exporters alike," said a senior EU diplomat who spoke on condition of anonymity to describe the closed-door talks in Brussels on Thursday.
The EU's trade deficit with China has more than doubled since 2020, driven by a surge in Chinese exports of electric vehicles, solar panels and industrial machinery. Chinese EV exports rose 73% in the first five months of 2026, according to the China Passenger Car Association. Meanwhile, the bloc's industrial production contracted 1.2% in the first quarter, with Germany's manufacturing sector — the most exposed to Chinese competition — shrinking 2.8%.
The stakes are high: China is the EU's second-largest trading partner after the US, with bilateral trade exceeding $850 billion annually. Any escalation risks retaliatory measures from Beijing, which has already shown willingness to target European agricultural products and luxury goods. The European Commission is expected to present its updated trade defense proposals by September.
A Divided Bloc
The consensus gap reflects competing national interests. France and Italy, whose automotive and luxury sectors face direct Chinese competition, have pushed for higher tariffs on Chinese EVs and industrial goods. Paris has advocated for tariffs as high as 25% on Chinese electric vehicles, matching the US rate imposed under President Donald Trump.
Germany and the Nordic countries have urged restraint. German automakers derive roughly a third of their revenue from China, making them vulnerable to retaliation. Berlin has warned that a full-blown trade war could cost the German economy as much as 0.5% of GDP, according to estimates from the Kiel Institute for the World Economy.
The divisions mirror the EU's response to previous trade disputes, including the 2018 US steel tariffs, when the bloc struggled to maintain a unified position. After the previous escalation in US-China trade tensions in 2019, EU exports to China fell 4% over six months while Chinese shipments to Europe continued rising.
Beijing's Growing Leverage
China has already demonstrated its willingness to use economic tools in response to European pressure. After the EU imposed anti-subsidy duties on Chinese EVs in late 2024, Beijing retaliated by launching an anti-dumping investigation into European brandy imports and restricting exports of key rare earth minerals used in European defense manufacturing.
The geopolitical backdrop has further complicated the calculus. EU foreign policy chief Kaja Kallas this week accused Beijing of being a "decisive enabler" of Russia's war in Ukraine, claiming the Chinese military had trained Russian personnel who later fought in Ukraine — an allegation China's Foreign Ministry dismissed as "slander and smears." The EU separately sanctioned 21 Chinese entities and seven individuals for supporting Russia's military-industrial complex.
The European Commission's forthcoming proposals are expected to include faster anti-subsidy investigations, stricter rules of origin requirements and expanded use of the EU's Anti-Coercion Instrument, which allows the bloc to retaliate against economic pressure from third countries. Any new measures would require approval from a qualified majority of EU member states — a threshold that has proven difficult to reach in previous trade disputes.
This article is for informational purposes only and does not constitute investment advice.
