‘We’re at a tipping point’: EU prepares its toughest weapon yet against China

European Union trade commissioner Maros Sefcovic arrives in Beijing on Thursday for two days of talks with China’s commerce minister, Wang Wentao, aimed at averting a mutually destructive trade war. The EU is considering an arsenal of measures if the negotiations fail to trace a path towards a more balanced trade relationship, including one that could shut Chinese companies out of the European market within 24 hours.In advance of the talks in Beijing, China’s foreign ministry said dialogue and consultation were the best way to resolve differences, reminding the EU of how much its industry relies on Chinese components for its supply chain.“Between China and the EU, the industrial and supply chains are highly integrated and mutually dependent, and our economic and trade relations are mutually beneficial in nature,” foreign ministry spokesman Guo Jiakun said in a written statement.READ MORE“It is hoped that the EU will work with China in the same direction and resolve each other’s concerns through dialogue and consultation, so that the two parties can jointly keep the global industrial and supply chains stable and unimpeded and promote the sound and steady development of China-EU economic and trade relations.”Guo’s statement contained the implied threat that Beijing could use its near-monopoly on rare earths and permanent magnets that are essential to advanced manufacturing as leverage if the EU follows through on its most serious threats. China last year demonstrated its willingness to use critical minerals as a coercive instrument when it introduced export controls in response to Donald Trump’s tariffs.EU commissioner Maros Sefcovic is in Beijing for two days of talks. Photograph: JEAN-CHRISTOPHE VERHAEGEN/AFP via Getty Images The Europeans are looking for a commitment from China that it will moderate its huge flow of exports into the EU market, at least initially in specific sectors most at risk of being hollowed out by a flood of hyper-competitively priced goods coming from the east. China’s economy grew in the first half of this year by 4.7 per cent on an annualised basis but much of that growth was driven by exports and investment in high-tech sectors, while domestic growth was sluggish.European Commission president Ursula von der Leyen has argued for a tougher stance towards China, something the German and Spanish governments have long resisted. Spain’s left-wing prime minister, Pedro Sánchez, has pursued closer ties with Beijing, and Berlin has traditionally been keen to avoid a destabilising trade war. However, German chancellor Friedrich Merz this week backed a more assertive posture, a politically significant shift. Urgent action was needed to protect Europe’s position as a “sovereign” industrial power, he said in a joint letter to von der Leyen written with French president Emmanuel Macron. The European Commission, which is the EU’s executive arm that leads on trade, has been warning national capitals about a second “China shock” hitting Europe’s economy for some time. Intense competition from China has been blamed as one reason factory jobs are being shed across Europe’s industrial base, from the automobile to the chemicals sectors. China’s economic model relies heavily on exports, in part because it produces more goods than its domestic market can consume. Commission officials have complained that this “overcapacity” has increasingly resulted in the excess being directed towards the EU’s open market, often at low prices that undercut home grown European businesses. A trade dispute over electric vehicles (EVs) has become emblematic of this friction between Brussels and Beijing. More affordable Chinese-made EVs have been taking over a larger share of the European market, as people make the switch from diesel and petrol engines. A trade dispute over electric vehicles (EVs) has become emblematic of this friction between Brussels and Beijing. Photograph: CN-STR/AFP/Getty Images A 2024 investigation by the commission’s trade department established that BYD, SAIC and Geely had benefited from generous state subsidies, giving the Chinese EV-makers an edge over European competitors struggling to compete on price. In response the EU announced hefty tariffs on future imports of Chinese-made electric vehicles, to protect the fledgling European industry from being snuffed out over the next decade. At the time Spain and Germany opposed placing tariffs on Chinese EVs. Beijing pushed back hard against the measures as well. It is understood Germany’s then-chancellor Olaf Scholz hit the phones and called around to warn fellow EU leaders against the tariffs, according to one senior source with knowledge of the high-level lobbying efforts. Scholz feared the German car industry would be locked out of China’s massive market in retaliation. The German chancellor’s efforts came up short. EU member states backed the EV tariffs, over the objections of Berlin and Madrid. Relations between Brussels and Beijing have been prickly since. Senior commission officials want to make it easier for the EU to quickly run through a subsidy inquiry and levy defensive tariffs on Chinese products believed to be flooding the European market. There is an acceptance in Brussels that existing anti-subsidy inquiries take too long. It was a full year between the commission beginning an investigation into Chinese-made EVs and the approval of trade tariffs to try to redress the situation. The broader strategy pursued by von der Leyen has been to get European leaders to first recognise that the growing imbalance in the EU-China trading relationship is unsustainable and then settle on what they should do about the problem.Earlier this year the trade deficit between the two economic blocs crossed a symbolic threshold of €1 billion a day, which helped the commission president’s case. Still, nobody around the table wants to kick off a damaging trade war. Top figures in the commission’s Berlaymont headquarters have detected a shift in Berlin’s thinking over the last number of months, in response to worrying trade data.A truck drives among stacked shipping containers in Hamburg port, Germany. Photograph: Sean Gallup/Getty Images The recent letter from Merz and Macron sets out the extent of the German leader’s pivot. “We need a credible instrument in the hands of the Commission to allow for decisive and systemic reaction,” they wrote. This proposed new instrument could limit access to the EU’s single market and be triggered quickly, to hit back hard in the event Brussels is locked in a trade war. The two leaders, who did not mention China by name in their letter, suggested the commission needed to launch more investigations into “persistent market distortions” caused by trading partners. At the same time Europe had to reduce the areas where its economy was overly dependent on Beijing, or others, to guard against crucial supply chains being squeezed. The EU’s 27 leaders will pick up the discussion at a European Council summit next week. The timing of the Franco-German intervention is intended to strengthen Sefcovic’s hand in talks in Beijing. The commission is hoping for some commitment China will tamp down excessive exports, to avoid things escalating into a full-blown trade war. While Paris will always be more gung-ho about tariffs and protectionist measures, this is new territory for Berlin.“Since 2024 there has been a dramatic increase in the number of lay-offs in the German car industry due to Chinese overcapacity,” said Esther Goreichy, visiting fellow at the Mercator Institute for China Studies think tank in Berlin. It is striking that France and Germany, the EU’s two largest economies, were now lined up together behind the commission, a dynamic that gave the Brussels-based executive a mandate to be more assertive. “We are now at the tipping point,” Goreichy said.