A potential trade war with China: EU strengths and weaknesses

Concerns are growing that the European Union and China may be heading for a trade war. On October 4EU member states will vote on whether to impose permanent tariffs on Chinese-made electric vehicles (EVs) – something China has aggressively campaigned against. Regardless of the outcome, Brussels and Beijing are likely to continue dialogue to resolve their differences. However, the risk of a trade war remains, which would be detrimental to both sides.

Recognizing the need for compromise is critical. Nevertheless, if the worst-case scenario materializes and faces significant vulnerabilities in its relationship with China, the EU still has important assets in hand. This implies a combination of normative instruments and the ability to leverage its market access vis-à-vis the world’s second-largest economy.

The EU’s dependence on China

From a European perspective, the prospect of conflict is worrying because of the deep economic integration between Brussels and Beijing. By 2023, China remained the EU’s largest supplier of goodsAnd although imports from China fell by 17.8 percent compared to 2022, Europe’s trade deficit with China remains significant. In addition to trade volumes, this imbalance also highlights Europe’s strategic dependence on China. For more than a decade, Chinese industrial policy has been aimed at dominating global sectors that are crucial to the European economy.

A 2021 report The European Commission has shown that the EU is highly dependent on external actors for 137 strategic products, 52 percent of which come from China. This dependence is particularly evident in sectors such as pharmaceuticals, where up to 40 percent of inputs come from China, while alternative suppliers such as India also rely on Chinese components.

However, Europe’s greatest vulnerability lies in green technologies, with China increasingly dominating both raw materials and end products. The Chinese government has openly pursued leadership in this area, focusing on solar cells, lithium-ion batteries and electric vehicles – the “new three” – as the new drivers of economic growth. According to the International Energy AgencyChina controls about 60 percent of the raw materials essential for green technology production and refines about 90 percent of these elements. This dependence complicates the European path to energy independence. For example, in 202296 percent of solar panels and 61 percent of wind turbines imported by the EU came from China.

As the green economy grows, Europe’s dependence on Chinese inputs will increase. The EV sector is an example of this. Imports of Chinese-made electric cars rose from 1.4 billion euros in 2020 to 11.5 billion euros in 2023, which represents 37 percent of all EV imports in the EU. To avoid repeating the mistakes made with solar panels and wind turbines, the EU has decided to take action by imposing tariffs of up to 45 percent on Chinese-made electric vehicles. Member states will vote on these rates on October 4. This marks a clear shift in the EU’s strategy, which aims to curb growing dependence on Chinese technology and protect its own industries.

The other side of the coin: China’s dependence on the EU market

Over the past decade, the EU has developed a range of instruments navigate an increasingly decentralized global economy, shaped by geopolitics. In its pursuit of strategic autonomy, the EU introduced several important instruments between 2014 and 2023: foreign direct investment (FDI) screening mechanismthe regulations for foreign subsidiesand the instrument against coercion. These were intended to equip the EU for the challenges of intensifying economic competition with global players such as China.

These mechanisms give the European Commission crucial powers, such as imposing tariffs or other trade measures in response to politically motivated restrictions on foreign trade and screening both outbound and inbound investments. These initiatives aim to protect EU industries from unfair external competition. At the same time, the EU has been working to strengthen European industrial production in key sectors, increasing its global competitiveness.

In the context of a possible trade war with China, these efforts are essential as they provide the EU with a stronger basis to engage with such a powerful economic player.

When it comes to dealing with a possible trade war with China, all these efforts are crucial as they aim to build a more solid backbone to deal with such a powerful economic player. But there is also another crucial point that plays in the EU’s favor and is, paradoxically, the same one that reflects its vulnerability. While the EU’s trade deficit with China has long been seen as worrying, it also underlines China’s dependence on access to the European market.

China is twice as dependent for exports just as the EU does for China: 16 percent of Chinese exports go to the EU, while only 9 percent of EU exports go 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 looks to internationalize its green products, especially 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 example, according to Data from 2023About 60 percent of the nearly 14 million electric vehicles sold worldwide were produced in China. However, a significant portion of this production was focused on the domestic market, with approximately two-thirds of vehicles sold in 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.

Finding a delicate balance

Europe and China are deeply intertwined, with both sides having strengths and weaknesses. While much of the current focus is on Europe’s dependence on Chinese goods, the EU has significant strategic influence. By responding to China’s need for market access, Europe can exert greater influence in the management of these interdependent relationships, without severing crucial economic ties.

As trade tensions escalate, the challenge for Europe will be to assert itself as an equal partner, balancing economic dependence on China with the protection of its strategic interests. This delicate balancing act will determine the future of China-EU relations. Whether Brussels and Beijing can reach a compromise remains uncertain, but one thing is clear: in trade wars, like real wars, there are rarely real winners – especially between two economies that are so closely linked.