Europe braces for a turbulent ride with China
Europe braces for a turbulent ride with China
WRITTEN BY VICTOR DE DECKER
28 January 2025
As Lenin famously observed, “there are decades where nothing happens, and there are weeks where decades happen”. This statement resonates profoundly with the series of events that unfolded in November 2024, marking a pivotal moment in EU-China relations. The month witnessed a convergence of geopolitical and economic upheavals that will shape the future trajectory of international diplomacy and trade.
The European Commission’s decision to impose tariffs on Chinese electric vehicles was not an isolated incident but a reflection of growing tensions between the EU and China over market practices and state subsidies. Concurrently, China’s announcement of a massive RMB 10 trillion (USD 1.4 trillion) stimulus package highlighted the urgent need to stabilise its faltering economy amid a real estate crisis and weak domestic demand. Adding to the global volatility, Donald Trump’s re-election to the White House signalled a potential shift towards more aggressive US trade policies, raising concerns about a possible trade war. Meanwhile, the collapse of the German government underscored the internal political instability within the EU, further complicating the region’s ability to respond cohesively to external challenges.
However, a key question remains: to what extent can European authorities strike a deal with China while facing coercive pressure from the Trump administration on the one hand and Beijing’s inflexible negotiation tactics on the other?
The combination of these four events will prove a tough challenge for European Commission President Ursula von der Leyen’s next term.
EV tariffs and Chinese stimulus
The EU’s decision to introduce tariffs on Chinese electric vehicles came after an in-depth investigation by the European Commission, which found that Chinese battery electric vehicle (BEV) production was unfairly subsidised, undermining European competitiveness. The success of Chinese electric cars, according to the EU’s investigation, is no coincidence. The Chinese government has pursued extensive industrial policies over the past decades that have strongly supported its car and battery manufacturers. Between 2009 and 2023, the Chinese government provided the sector with an estimated USD 231 billion in subsidies, according to CSIS calculations.
The new tariffs, which can be as high as 45 per cent, were set per manufacturer based on state aid received and their cooperation during the investigation. Although the duties are high by European standards, Chinese brands are unlikely to disappear from the market anytime soon. In fact, Chinese EVs are already sold at higher profit margins in Europe, meaning that even with these tariffs, they can still remain competitive in European markets. Instead of a blockade on Chinese car brands, it is still possible for Chinese manufacturers to set up factories in Europe and thus bypass import tariffs.
In May 2024, French Finance Minister Bruno Le Maire — the biggest advocate for these tariffs among EU member states — underlined that "BYD and the Chinese auto industry are very welcome in France". However, this will be with strings attached. As the EU is reviewing its FDI screening capacities, in combination with wielding the newly conceptualised Foreign Subsidies Regulation (FSR), the EU is not only putting up new barriers on trade but also on investments from Chinese firms in Europe. Additionally, the European Commission plans to require Chinese EV and battery companies to transfer intellectual property to European firms in exchange for access to European subsidies. Although similar tactics have been common practice within various sectors in the Chinese market, China’s Ministry of Commerce (MOFCOM) urged Chinese companies to refrain from investing in countries that supported these tariffs — most notably France.
It comes as no surprise that the tariffs don’t sit well with China, as electric vehicle exports are a key part of China's growth model under President Xi Jinping. The EU has been the largest single export market for Chinese EVs in recent years, accounting for nearly a third of all global EV exports out of China. Trade barriers pose a risk for China, especially if a precedent is set that could also affect other green sectors. However, it will be challenging for China to contest these tariffs at the multilateral level, as the European Commission has meticulously adhered to World Trade Organization (WTO) regulations, which permit the imposition of tariffs when the exporting country has benefited from subsidies. Meanwhile, Chinese retaliatory tariffs on European exports such as pork and cognac are being deployed to convince European countries to go back on their decision.
Since the pandemic, China has been grappling with a significant drop in consumer confidence, which is at its lowest point since records began in the 1990s. The combination of low domestic consumption and a strategic shift away from real estate and towards manufacturing underscores China’s need to export its way out of this economic crisis. This is where the EU's trade measures become particularly impactful. While exports from China to the EU have increased by 3 per cent over the course of 2024, imports from the EU are down 4.4 per cent, further contributing to an imbalanced trade relationship that exacerbates China's internal challenges. Europe’s structural bilateral trade deficit with China has long been a thorn in the side of the struggling European industry, but Brussels’ newly found fierceness against imports from China has been met with negative reactions from Beijing. The ongoing effects of China’s domestic real estate crisis continue to dampen its economic outlook, and the November 2024 approval of a RMB 10 trillion (USD 1.4 trillion) stimulus package — while the largest in Chinese history — has failed to convince international investors of its ability to boost long-term growth. Despite the scale of the stimulus, analysts are sceptical about the potential of a large-scale debt swap programme to drive productivity, especially since credit demand remains extremely weak from both businesses and consumers.
The synthesis of Europe’s focus on blocking imports from China, driven by concerns over subsidies and other forms of Chinese state intervention, might ultimately lead to a paradoxical outcome. While certain Chinese companies — particularly in the tech and EV sectors — are making significant strides on the global stage, the overall macroeconomic outlook for China remains rather dim. Consequently, Europe’s efforts could inadvertently prompt the Chinese government to play an increasingly important role in keeping its struggling enterprises afloat through increased (central) state support over the course of 2025.
Trump 2.0 and a new era of dealmaking
Although anticipated, Trump’s re-election sent shockwaves through Europe. The newly inaugurated American president is considering an aggressive trade policy, threatening to sign an executive order imposing a 25 per cent tariff on all goods coming from Mexico and Canada, as well as adding 10 per cent to all existing tariffs on China. Higher tariffs on Chinese goods could spark a trade war, but not without purpose. According to Trump’s Treasury pick Scott Bessent, this approach is meant to “escalate to de-escalate”: increasing pressure to force bilateral trade deals. A possible deal with China could involve appreciating the yuan in exchange for lower US import tariffs. However, far more likely — at least in the short term — is China doubling down on exports to fuel its growth model.
Trump’s approach to trade with China may, in some ways, be more akin to Europe’s than Biden’s was. Whereas Biden excluded Chinese carmakers on principle, Trump — during the Republican National Convention in July — suggested he would prefer to see Chinese car factories in the US rather than in Mexico. This policy marks a significant change in direction, underscoring the reckless pragmatism but also the flexibility of US economic policy under Trump. One silver lining is that this pragmatic approach — though unpredictable — may be easier for Europe to navigate than Biden’s exclusion of China from global supply chains, which the EU opposed. The counterargument, however, is that — as in his first term — the Trump administration will likely be defined by infighting rather than consistency on China.
With the US proving to be an unreliable partner, and developing countries in the Global South not yet economically mature enough to absorb all the high-end goods China offers on global markets, Beijing is bound to strike a collaborative chord with European authorities on trade and investments. However, a key question remains: to what extent can European authorities strike a deal with China while facing coercive pressure from the Trump administration on the one hand and Beijing’s inflexible negotiation tactics on the other? In either case, the ball is now in China’s court to make an offer to Europe. China could provide more market access to European firms, or loosen capital controls, which could provide more scope for mutually beneficial investments from China to Europe. These issues are contentious within China, as they require some extent of market reform. However, this might be a price worth paying for having good relations with the biggest market in the world — especially in view of incrementally contentious relations with the US.
Germany — quo vadis?
In November 2024, amid turbulent economic currents, the German federal government collapsed over an intra-coalition dispute over the debt brake. Snap elections are scheduled for 23 February 2025, with the Christian Democratic Union (CDU) and its leader Friedrich Merz expected to take over the leadership of Europe’s largest economy. Whereas Chancellor Olaf Scholz positioned himself as the successor to Merkel’s cautious approach to China, Merz may become the first German chancellor to strike a more critical tone toward Beijing, thereby breaking with the traditional “Wandel durch Handel” (change through trade) approach. He has persistently called China “an increasing threat to [German] security”, and was critical of Chancellor Scholz's decision to allow the Chinese state-owned shipping giant COSCO to purchase a stake in the port of Hamburg.
At the same time, Merz has strongly opposed the European Union's decision to phase out internal combustion engines by 2035, a key part of the EU's strategy to reduce carbon emissions and accelerate the transition to electric vehicles (EVs). Merz’s views are connected by a broader vision of economic resilience. He is wary of Europe’s dependence on Chinese manufacturing in emerging sectors like electric vehicles and believes in the importance of maintaining local production capacity. While supporting efforts to counter China’s industrial dominance, Merz also expresses concerns about the pace of the EU’s transition to electric mobility, suggesting that the rapid shift could be disruptive for Germany’s established automotive sector. Ultimately, his stance advocates for a balance between protecting traditional industries and ensuring European competitiveness in the evolving global market through free market policies.
However, once deemed the engine of Europe’s economy, Germany now faces sluggish growth, earning it the moniker the “sick man of Europe”. Waning economic influence, combined with headwinds on global markets from Chinese overcapacity and American tariffs, may push Merz’s potential government into further malaise.
And then there is Ukraine
On 25 November, news broke that the European Commission proposed sanctioning several Chinese firms, citing allegations that they assisted Russian companies in the development of attack drones being deployed in the ongoing conflict against Ukraine. This move by the European Commission marks a significant escalation in the geopolitical tensions, reflecting broader concerns about the involvement of third-party nations in the war. Although Chinese diplomats were swift in their denials, rejecting the allegations and reiterating China's official stance of neutrality, the situation underscores two critical realities that cannot be overlooked. First, Ukraine is grappling with increasingly severe challenges on multiple fronts, including sustained military pressure and the need for continuous international support. Second, China’s deep-rooted strategic partnership with Russia makes it improbable that Beijing would oppose Moscow in any forthcoming negotiations or resolutions to the conflict.
These dynamics point to a growing complexity in EU-China relations beyond the economic realm, where the entanglement of economic interests and political alliances can hinder diplomatic resolutions. As long as Russia's aggressive actions persist, the war in Ukraine will remain a significant source of tension between the European Union and China. The EU's concerns about sovereignty and the integrity of international law will continue to clash with China's broader strategic goals, which include maintaining a balance between its economic interests in Europe and its geopolitical alignment with Russia. Consequently, this conflict will cast a long shadow on EU-China relations, potentially stalling cooperation on global issues and eroding the foundations of trust that are essential for any meaningful partnership in the future with regard to climate change and biodiversity. The scars left by this conflict are likely to endure, shaping the geopolitical landscape for years to come and complicating any efforts to foster a relationship grounded in mutual respect and adherence to international norms — both on trade as well as security.
As the EU faces growing complexities in its relationship with China, it must adopt a multi-faceted approach to safeguard its interests and navigate the shifting geopolitical landscape. Strengthening trade dialogues, diversifying supply chains, and fostering greater political unity within the EU are crucial steps to ensure a cohesive and effective response to external challenges. Simultaneously, the EU should prioritise enhancing its technological sovereignty, leveraging multilateral platforms to address global issues, and defending its core values in dealings with China. By preparing for potential geopolitical frictions with the US and maintaining its strategic autonomy, the EU can position itself for long-term economic resilience and political influence in an increasingly competitive global environment — from both the East and the West.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Victor De Decker is a Research Fellow in the Europe in the World Programme at the Egmont Institute. His research centres on geoeconomics, economic statecraft, international political economy, and economic security, with a particular focus on EU-Asia relations. Image credit: European Union.