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A Potential Trade War With China: EU Strengths and Weaknesses
While the EU faces significant vulnerabilities in its economic relationship with China, it still holds key cards to play.
Concerns are growing that the European Union and China may be heading toward a trade war. On October 4, EU member states will vote on whether to impose definitive tariffs on China-made electric vehicles (EVs) – something China has been aggressively campaigning against. Regardless of the outcome, Brussels and Beijing will probably continue dialogue to resolve their differences. However, the risk of a trade war persists, which would be detrimental to both sides.
Recognizing the need for compromise is crucial. Nevertheless, if the worst-case scenario unfolds, while the EU faces significant vulnerabilities in its relationship with China, it still holds key cards to play. This involves a combination of normative tools and the ability to leverage its market access against the world’s second economy.
1. The EU’s Dependence on China
From a European perspective, the prospect of conflict is unsettling due to the deep economic integration between Brussels and Beijing. In 2023, China remained the EU’s largest supplier of goods, and although imports from China fell by 17.8 percent compared to 2022, Europe’s trade deficit with China remains considerable. Beyond trade volumes, this imbalance also highlights Europe’s strategic dependency on China. For over a decade, China’s industrial policy has focused on dominating global sectors that are critical to Europe’s economy.
A 2021 report by the European Commission revealed that the EU relies heavily on external actors for 137 strategic products, with 52 percent of these sourced from China. This reliance is particularly evident in sectors like pharmaceuticals, where up to 40 percent of inputs come from China, with alternative suppliers, such as India, also depending on Chinese components.
However, Europe’s greatest vulnerability lies in green technologies, where China increasingly dominates both raw materials and finished products. The Chinese government has openly pursued leadership in this field, focusing on solar cells, lithium-ion batteries, and EVs – the “new three” – as its new economic growth drivers. According to the International Energy Agency, China controls about 60 percent of the raw materials essential for green technology production and refines around 90 percent of these elements. This dependence complicates Europe’s path toward energy independence. For instance, in 2022, 96 percent of solar panels and 61 percent of wind turbines imported by the EU came from China.
2. As the green economy grows
As the green economy grows, Europe’s reliance on Chinese inputs is set to increase. The EV sector exemplifies this. Imports of Chinese-made EVs soared from 1.4 billion euros in 2020 to 11.5 billion euros in 2023, representing 37 percent of all EV imports into the EU. In order to avoid repeating the mistakes made with solar panels and wind turbines, the EU has decided to take action by introducing tariffs of up to 45 percent on Chinese-made electric vehicles. Member states are set to vote on these tariffs on October 4. This marks a clear shift in the EU’s strategy, aiming to curb its growing dependence on Chinese technology and protect its own industries.
3. The Other Side of the Coin: China’s Dependence on the EU Market
Over the past decade, the EU has developed a range of tools to navigate an increasingly decentralized world economy shaped by geopolitics. Between 2014 and 2023, in its pursuit of strategic autonomy, the EU introduced several key instruments: the Foreign Direct Investment (FDI) screening mechanism, the foreign subsidies regulation, and the anti-coercion instrument. These were designed to equip the EU for the challenges of intensifying economic competition with global players like China.
These mechanisms give the European Commission crucial powers, such as imposing tariffs or other trade measures in response to politically motivated foreign trade restrictions and screening both outbound and inbound investments. These initiatives aim to safeguard EU industries from unfair external competition. Simultaneously, the EU has worked to bolster European industrial production in key sectors, enhancing its global competitiveness.
In the context of a potential trade war with China, these efforts are essential, as they provide the EU with a stronger foundation to engage with such a powerful economic actor.
4. When it comes to dealing
When it comes to dealing with a potential trade war with China, all these efforts are crucial because they have aimed to build a more solid backbone to deal with such a powerful economic actor. But there is also another crucial point that plays to the advantage of the EU and, paradoxically, is the same that represents its vulnerability. While the EU’s trade deficit with China has long been seen as a concern, it also underscores China’s dependence on access to the European market.
China relies twice as much on the EU for exports as the EU does on China – 16 percent of China’s exports go to the EU, while only 9 percent of EU exports head to China. This imbalance offers Europe a strategic opportunity. In sectors such as green technology, where Europe appears particularly vulnerable, the EU is also one of China’s most important markets. As China seeks to internationalize its green products, particularly electric vehicles, the EU plays a crucial role in Beijing’s strategy, especially in light of the growing rivalry between China and the United States.
For instance, according to 2023 data, approximately 60 percent of the nearly 14 million electric vehicles sold worldwide were manufactured in China. However, a significant portion of this production was aimed at the domestic market, with around two-thirds of the vehicles being sold within China itself. To expand globally, China needs access to the EU, the world’s second-largest EV market and a leader in green transition efforts.
5. Striking a Delicate Balance
Europe and China are deeply intertwined, with both sides possessing strengths and vulnerabilities. While much of the current focus is on Europe’s dependence on Chinese goods, the EU holds significant strategic leverage. By capitalizing on China’s need for market access, Europe can exert greater influence in managing this interdependent relationship without severing crucial economic ties.
As trade tensions escalate, Europe’s challenge will be to assert itself as an equal partner, balancing its economic reliance on China with the protection of its strategic interests. This delicate balancing act will shape the future of China-EU relations. Whether Brussels and Beijing can negotiate a compromise remains uncertain, but one thing is clear: In trade wars, as in real wars, there are rarely true winners – especially between two economies so deeply interconnected.
