Key Takeaways:
Brussels is negotiating with Beijing while simultaneously preparing new trade barriers, risking a full-blown economic confrontation.
The European Union's trade deficit with China hit €31.9 billion in April — roughly €1 billion daily — as Brussels pursues a dual-track strategy of talks and new protectionist measures that threatens to escalate into a broader trade war.
"The EU must stop its protectionist steps and take concrete actions to address China's core concerns," said Jian Junbo, director of the Center for China-EU Relations at Fudan University. "Internal problems are being treated with external blame."
EU officials have launched nine investigations under the Foreign Subsidies Regulation targeting Chinese companies, are preparing tariffs on Chinese plug-in hybrid electric vehicles, and are modifying steel tariff reduction negotiations — all while the first meeting of the China-EU Trade and Investment Consultation Mechanism approaches. China's exports of NdFeB magnets, a critical rare-earth component, fell 7.72% month-on-month to 4,730 tons in May, SMM data show.
The stakes extend beyond bilateral trade. European Central Bank President Christine Lagarde on June 22 urged global leaders to address what she called RMB undervaluation, while European Commission President Ursula von der Leyen said the EU must "more proactively and strategically" use its trade toolbox. China has signaled it is prepared to deploy countermeasures including anti-discrimination investigations and supply chain security reviews, targeting EU advantages in luxury goods, machinery, and agricultural products.
The current trajectory echoes the 2018 U.S.-China trade war playbook, where tit-for-tat tariffs reduced bilateral trade flows by an estimated 15% within 12 months. The difference this time is the scale: the EU-China trade relationship spans roughly €700 billion annually, with the deficit now running at an annualized pace of about €380 billion.
Nine Investigations and a Growing Toolbox
The European Commission's Foreign Subsidies Regulation has become the primary vehicle for trade action, with nine formal investigations launched against Chinese companies operating in the EU. These probes cover sectors from rail equipment to solar panels and create what analysts describe as a de facto investment barrier for Chinese firms seeking European market access.
EU member states have authorized the Commission to take additional trade measures, with plug-in hybrid electric vehicles the next target. The previous tariff dispute, which began over Chinese EV subsidies, has already reshaped the competitive landscape for European automakers with significant China exposure, including Volkswagen, BMW, and Stellantis.
China's Countermeasure Arsenal
Beijing has multiple levers at its disposal. Beyond the anti-discrimination and supply chain security investigations flagged by Chinese officials, China controls about 60% of global rare-earth mining and 90% of processing capacity — a vulnerability the EU has acknowledged but not yet addressed. The 7.72% decline in May NdFeB magnet exports may reflect early supply chain adjustments.
China is also seeking diplomatic pressure points. Beijing has requested Austria's assistance in de-escalating tensions, according to reports, signaling a strategy of engaging individual EU member states to counterbalance the Commission's hardline stance.
The first meeting of the China-EU Trade and Investment Consultation Mechanism will test whether dialogue can coexist with escalating trade actions. If Brussels proceeds with new tariffs while talks are ongoing, Beijing has indicated it will respond with "resolute and necessary" countermeasures — language that preceded previous trade actions. The risk is a self-reinforcing cycle where each side's defensive measures are perceived as offensive by the other, pushing the relationship toward the kind of structural decoupling that has defined U.S.-China economic relations since 2018.
This article is for informational purposes only and does not constitute investment advice.
