Sanctions and exposures: the case of UAC

Balancing competition and cooperation

The EU-China Trade Trajectory amidst the new Trump era

Introduction

In the wake of Trump's trade moves, the relationship between the U.S. and the EU enters uncharted territory. The imposition of tariffs, while aimed at correcting the €198 billion trade deficit, stirs deep economic and political tensions. As the EU faces the prospect of escalating tariffs and the threat of a 50% increase, it is compelled to reassess its strategy, leading to a reevaluation of trade policy, economic diversification, and its global alliances, including those with China. What has followed is not just a clash of markets, but a recalibration of the EU's place in the international economic order. Thus, this brief will inform on both the current trade developments between China and the EU, as well as the possible developments facing the threat of US tariffs.

Impact of Trump’s Second Term and the EU’s Policy Shift

Following Trump’s escalation of tariffs, the EU is moving towards greater economic resilience and diversification. The fluctuating US tariffs on the EU would keep the bloc’s economic growth stuck at 0.9% in 2025, coming down from earlier projections at 1.3%. Reducing the impact of US tariffs requires the EU to both diversify its trade market and engage in constructive economic cooperation with China, while minimizing its dangerous overdependence. Additionally, the EU is pursuing new trade agreements with Japan, South Korea, Australia, and ASEAN countries to broaden its global partnerships.

The Complicated EU-China Trade Relationship Dynamics

3.1. Economic interdependence: A Foundation of Complexity

The relationship between the EU and China is one of the most significant bilateral ties in the global economy, but it has proven to be one of the most complex ones as well.

As the European Commission notes, China is the EU’s largest import partner, with a value of €564.5 billion, and its third-largest export market, with €280.5 billion in 2024. This represents a trade volume of €845 billion, which accounts for 30% of global trade and makes China the EU’s third-largest trading partner behind the US and the UK. However, this has led to a significant trade deficit for the EU, amounting to €280,5 billion. On paper, a trade deficit is not a major issue, but the EU views it as a risky dependence on various sectors.

3.2. The asymmetry in the EU-China Trade Relations

The persistent trade deficit and increasing EU dependence on Chinese imported goods point to an asymmetric interdependence. As Eurostat points out, while the EU presents a few trade surpluses, most notably of €6.4 billion in raw materials, it suffers from larger trade deficits in chemicals (€8.4 billion), other manufactured goods (€131.4 billion), and machinery & vehicles (€176.7 billion). This poses significant supply-chain vulnerabilities for European manufacturing, particularly for semiconductors and renewable energy. China also supplies 98% of critical raw materials in the EU, threatening the autonomy of EU high-tech manufacturing and innovation. Meanwhile, in the automotive sector, the trade deficit is reflected in the increase in Electric Vehicle (EV) exports from China, which rose by 85% in 2024, making Chinese EV exports capture 25% of the EU market, evidencing how profound the impact is in various industries across the EU.

Fig 1: EU EV Imports and Exports with China

Fig 2: EU trade with China by product group, 2014 and 2024

According to the EU, this asymmetric relationship is partly due to China’s economic model, as European Commission President Ursula von der Leyen has directly criticized China's practice of "flooding global markets with subsidized overcapacity". Chinese industrial and import substitution policies discriminate against EU companies in the Chinese market, originating in unfair market access compared to Chinese companies in the EU. According to a European Chamber of Commerce report in 2024, only 20% of EU firms report full market access in China, while a majority (83%) of Chinese companies enjoy comprehensive access to EU markets.

The EU’s trade deficit and dependence on Chinese imports have various consequences. Firstly, a loss of competitiveness from European industries, which have to face cheaper Chinese-manufactured goods flooding the market, as well as a loss of autonomy in supply chains. Secondly, the high dependence on green technology places the EU’s environmental goals of a green transition at risk, as China’s market dominance makes green tech innovation in the EU at the mercy of China’s machinery, technology, and critical raw materials.

Fig 3: EU-China trade exposures in selected green technology (2023)

Lastly, the EU’s increasing economic dependence on specific sectors creates geopolitical leverage for China, which can use its market position in the EU in its favor in political disputes. As explained by Bruegel, Beijing’s effective support for the Russian aggression in Ukraine is a major concern for the EU, but China’s influence in European markets and use of economic coercion damages the EU’s political leverage. This issue was underscored at the recent NATO summit in The Hague, where Secretary General Mark Rutte cautioned that China might coordinate with Russia in a future conflict, highlighting broader fears of strategic alignment between the two powers.

Bilateral relations between the EU and China are further complicated by numerous trade disputes. The EU has implemented defensive trade measures on the basis of ‘basic reciprocity’, and leveling the playing field in the trade relationship. This indicates a shift from merely expressing concerns about market access barriers to actively deploying trade defense instruments to achieve reciprocal openness. Trade instruments include the EU Commission’s decision to limit Chinese firms’ access to the EU medical devices market, citing China’s unfair exclusion of European medical devices from Chinese government contracts. The EU has also imposed anti-dumping duties, which essentially function as tariffs, on the Chinese steel sector, and 45 % tariffs on Chinese EVs due to the ‘unfair market position’ they hold from Chinese government subsidies, which have prompted them to flood the EU’s EV market, as mentioned earlier. As explained by EuroNews, Beijing has also responded with defensive trade measures, restricting government purchases of medical devices from the EU valued at €5 million, imposing anti dumping duties on EU brandy exports and implementing export restrictions on critical raw materials such as gallium, which threatens the autonomy of the EU’s innovation in semiconductors, telecommunications and green tech.

3.3. The EU’s strategic Dichotomy towards China

The EU’s official stance towards China is described as “partner, competitor, and systemic rival”, as outlined by the European Commission’s 2019 strategic outlook and reaffirmed by the European Council in 2023. This encapsulates the inherent tensions in the bilateral economic relationship, which guides the EU’s de-risking approach.

As a study from the European Parliament finds, China is recognized as a major economic partner and crucial pillar to climate action cooperation, with the Chinese market offering strategic and economic benefits. However, the EU’s approach has since come closer to the ‘Economic Competitor’ perspective, according to the Commission, due to China’s disruptive market practices and economic policies, which magnify the relationship’s imbalances. The designation of China as a systemic rival further reflects the EU’s view towards their complicated relationship, based on the fundamental differences in governance models, geopolitical alliances, and values.

In response to the rising concerns with the economic partnership, the EU has adopted a “de–risking” strategy, aimed at reducing critical dependencies on China while maintaining cooperation. This involves efforts including supply chain diversification, as exemplified by the European Chips Act and Critical Raw Materials Act, which seek to increase the EU’s semiconductor market share to 20% by 2030 and increase EU production, transformation and recycling of critical mineral needs. However, defensive trade actions by both sides can be perceived as steps towards economic disengagement and threaten the growing economic cooperation.

Impact on EU-China Relations: Future Prospects and Scenarios

Despite persistent economic and geopolitical tensions, the future of the EU-China economic relationship appears to be increasingly influenced by US trade policy and shared economic worries, which could push towards increased cooperation. The challenge for the EU now lies in balancing competing priorities: proactively responding to US protectionism, reassessing its trade policy with China, and de-risking from critical dependencies on the Chinese market. The increasingly complex and fluctuating trade relationship with the US is forming a shared impetus for Brussels and Beijing to look for an easier economic relationship to mitigate external shocks from the US market. This pressure is added to the mutual domestic economic slowdowns: China’s economic growth post-COVID has been lower than expected, while the EU faces a projected 0.9% growth in 2025, with major economies like Germany and France facing significant challenges.

4.1. Effective strategies on trade with China, economic partnerships, and security

In navigating effective trade strategies and advancing economic security, the EU is increasingly encouraged to diversify its partnerships beyond the US and China. As proposed by Merics, this involves deepening cooperation with the G7 as well as other like-minded countries such as Australia and South Korea. Additionally, the EU is encouraged to pursue mutually beneficial relationships with emerging and developing economies as part of a broader strategy to strengthen economic security and reduce dependencies in critical supply chains .

Complementing this outward-looking approach, targeted engagement with China remains an essential component of the EU’s economic strategy. Evidence shows that sector-specific dialogue channels between the EU and China have shown to be more productive than broader structural discussions. In particular specific channels, such as the automotive and agricultural sectors have shown measurable progress. The technical working groups in the automotive sector have harmonized electric vehicle charging standards, which significantly facilitates reciprocal trade in EVs, as both markets now operate with unified product standards. Meanwhile the agricultural dialogue has resulted in the addition of 175 new products to the 2020 agreement, offering protection for European speciality food and beverage producers. These targeted dialogues foster mutual trust and deliver tangible outcomes, offering a more constructive path for addressing trade frictions and strengthening the EU-China economic relationship.

4.2. Possible Compromise Scenarios

To advance negotiations, it is clear that both the European Union and China will need to engage in strategic compromises. As cited by John Zadeh, possible compromise scenarios include sectoral sequencing, EV Tariff Compromise, Reciprocal Market Access and Strategic Framing. First, Sectoral Sequencing focuses on reaching agreements in less controversial sectors such as agriculture or pharmaceuticals first before dealing with more complex disputes such as EV tariffs and critical minerals. Second, proposals suggest a gradual phase-in of EU tariffs over three years, offering better access to China's domestic EV subsidies for European carmakers. This would allow gradual adjustment for European manufacturers, as well as addressing subsidy imbalances. Third, proposals suggest that both sides would open specific sectors, such as financial services or healthcare, at the same time to ensure fairness. Last but not least, experts suggest combining short-term confidence-building with longer-term mechanisms to resolve deeper disagreements. Strategic compromises are needed to allow both sides to show balanced progress and efficiently enhance economic cooperation.

Conclusion

According to the European Commission impact assessment, a comprehensive agreement between the EU and China could result in an export increase of €32 billion annually by 2027. Sectors like machinery, agricultural products, and services are expected to see the largest gains of this deal. For China, increased access to European markets could boost exports by €48 billion, with sectors like consumer electronics, textiles, and electric vehicles benefiting the most.

Ultimately, an approach that balances economic cooperation with strategic caution may offer the EU its best path forward, one that protects its interests while keeping the door open for stable, mutually beneficial ties with China. As both sides weigh the potential benefits, the EU faces a pivotal moment. While the economic potential is substantial, the significance of these negotiations goes beyond trade. Their outcome and timing are likely to influence the EU’s broader strategic direction, shaping its position in an evolving global order and its future engagement with China.