Prevailing global trade dynamics have not been in the European Union’s (EU) favor. At home, Europe is facing a surge of Chinese exports, some of which appear to have been diverted from the US. Abroad, things are no better. Ever more potent competition from Chinese exporters in third markets has compounded the challenges posed by US tariffs.

To safeguard its market, the European Commission is exploring a range of systemic measures which go beyond piecemeal anti-dumping investigations. These include stricter local content requirements, changes to public procurement to give European manufactures a leg-up, and even “conditionality” measures targeting greenfield Chinese investment. The latter will be designed to ensure that Chinese investments add genuine value, rather than being a conduit for tariff evasion.

Some member states have other ideas. As ever, there is a danger that divergent national interests will weaken a united European response. Bickering between Brussels and member states has delayed what initially looked to be an ambitious economic security agenda.

The European Commission’s new proposals, when combined with pre-existing trade instruments, would give the EU a formidable arsenal to push back against Chinese overcapacity. Failure to act risks leaving the EU exposed to the otherwise inexorable march of China’s export juggernaut.

Playing by the rules

There is no denying that Europe finds itself at a moment of acute vulnerability.

Although individual German auto companies protecting their own interests might suggest otherwise, the US is Europe’s largest export market, twice as large as China in 2024. Whilst European – and indeed German – exports to China have decreased in real value over the last decade, exports to the US have registered appreciable growth.¹

The 15% US tariffs that will apply to most European exports to the US may not be prohibitive. However, tariffs are one of many factors which are persuading European executives to shift production to the US, including cheaper energy, less regulation, and fears over the durability of the current US-EU trade agreement. The EU shares this dilemma with others including Japan, South Korea, and Taiwan, who are also losing market share in China as Beijing doubles down on import substitution. The corollary is that the US market is likely to be more crowded and less lucrative.

Facing insurmountable tariff barriers in the US, the early data suggests that Chinese exporters are diverting shipments to Europe. In the second quarter of this year, the EU absorbed up to US$5 billion in Chinese goods diverted from the US market.² The European Commission’s newly formed specialized surveillance unit on trade diversion has noted steep and, in some cases, exponential growth in Chinese shipments of industrial robots, chemicals, paper, textiles, and steel.³

Concurrently, rapid increases in Chinese shipments to Southeast Asia, South America, and Africa – well above organic increases in demand – suggest that China is eating the lunch of established exporters, including the EU.

This export surge has compounded what is already a secular trend of imbalanced trade between the EU and China. The automotive sector might be the best publicized example, but it is far from the only industry where Europe is losing market share, both at home and in third markets. Petrochemicals, hydrogen electrolyzers, wind turbines, industrial robots, and power semiconductors, are cases in point. These are all sectors where China has made technological strides but is facing overcapacity, price wars, or related pressures.⁴

Moving beyond whac-a-mole

In late September, a prominent former EU official revealed that the EU was poised to launch 20 anti-dumping investigations on Chinese goods over the coming months.⁴ Weeks later, the European Commission proposed tariffs of up to 50% on Chinese steel above a reduced tariff-free quota. Frustrated with the Commission’s dilatory response, EU capitals are moving to hike fees on Chinese e-commerce shipments, which have grown markedly since the US withdrew de minimis exemptions, which allowed shipments below US$800 to enter the US duty-free, earlier this year.

These types of incremental measures will only get the EU so far. Within the upper echelons of the European Commission, there is an emerging view that Europe is straitjacketed by its rigid adherence to international trade rules which seems ever more anachronistic.⁶

While it is unlikely that the EU will fully cross the Rubicon and openly jettison World Trade Organization rules, there is a growing appetite to at least push the envelope.

One proposal that is gaining momentum is for explicit “buy European” requirements in public procurement.

The European Commission is specifically looking to revise public procurement rules next year to add local content requirements in addition to newly introduced “resilience and sustainability” (code for non-Chinese) criteria. Beijing has for many years used similar measures to help aspiring national champions build economies of scale.

There are also proposals kicking around to extend non-price criteria to private corporate fleet procurement, which collectively accounts for over half of car registrations in the EU.⁷ This will be complemented by specific local content thresholds for battery cells and components in electric vehicles (EVs) sold in the EU.

These policy initiatives will be bundled together in one overarching EU Industrial Accelerator Act which may be issued in the coming months.⁸ The Accelerator Act is also expected to include proposals for explicit conditions on Chinese greenfield investment, with a focus on the auto and battery supply chain. Proposed conditions include joint ventures, technology transfer, and licensing requirements.⁹

In a further sign of Brussels’ adaptation to a more Hobbesian world, EU officials are actively drawing up a database of chokepoints where European companies dominate, which could be used to deter economic coercion.¹⁰

These measures, if passed, would add to what is on paper a formidable defensive trade arsenal. This includes the International Procurement Instrument (IPI), Foreign Subsidies regulation (which has targeted Chinese wind turbines, solar panels, and trains), and the yet-to-be-used “bazooka” or Anti-Coercion Instrument.

The 27 sovereigns

Advocates of a more robust European trade posture can be forgiven for feeling like they’ve seen this movie before. In June 2023, the European Commission put forward an economic security strategy which included forward-leaning proposals on a more coordinated European approach to export controls, and the screening of inbound and outbound investment. The initial momentum behind these proposals has been slowly asphyxiated by bureaucratic wrangling.

Although officials have more recently suggested that there has been real progress on export controls, member states continue to fight rearguard actions against what some argue is a brazen power grab by Brussels.¹¹

Similarly, it took around three years for the EU to take its first concrete action under the IPI, when Chinese manufacturers of medical devices had their access to European procurement markets curtailed in June.

Proposals around local content requirements and non-price criteria undoubtedly raise legitimate questions around competitiveness and which sectors are genuinely strategic.

However, the threat of more parochial interests thwarting a unified European approach is an ever-present risk. Germany, for example, tried to delay the launching of the initial investigation into Chinese medical devices until after former Chancellor Olaf Scholz’s visit to China.¹²

These pressures have not gone away. German Chancellor Friedrich Merz appears more exercised by China’s economic threat than his predecessor. However, he will still have to contend with the demands of Germany’s formidable auto industry, which was instrumental in informing Berlin’s decision to vote against EU tariffs on Chinese EVs. Germany’s auto titans may view the Accelerator Act as another opportunity to display obeisance to Beijing, whose approval and support they need to help protect their rapidly diminishing market share in China.

Spain and Hungary stand out as two countries that have been very successful in attracting Chinese EV and battery investment. Hungary has won investments from Build Your Dreams (BYD) and Contemporary Amperex Technology Co. (CATL) worth more than US$12 billion. CATL will also build a gigafactory in Spain. Revelations that CATL will send up to 2,000 workers to build and operate its Spanish factory are not a favorable portent for the willingness of Chinese companies to voluntarily share technology.¹³

The beggar-thy-neighbor aspect of some of the behavior of European states jostling for position is underlined by Leapmotor’s decision to manufacture its B10 model in the more politically amenable destination of Spain. Leapmotor had planned to manufacture in Poland until it was reversed by specific instructions from Beijing for Chinese companies to avoid investments in countries that voted for tariffs on Chinese EVs.¹⁴

While Hungarian Prime Minister Viktor Orbán has long defied mainstream EU positions on foreign policy, Spanish Prime Minister Pedro Sánchez’s recent and concerted efforts to court Beijing has raised eyebrows elsewhere in Europe.

Conclusion

The EU’s receptivity towards more interventionist trade measures has undeniably increased markedly over the last five years.

But political will and commitment to a unified front of European interests can be elusive.

There remains a real possibility that the Accelerator Act will fall short, either by watering down or excluding more contentious aspects, as some industry groups are pushing for.¹⁵ This would present a missed opportunity to help safeguard Europe’s industrial base.

The notion that Europe can influence policies set in Beijing or Washington has proven fanciful. Conversely, Europe can meaningfully control the terms on which foreign countries access its vast market – if it can corral its 27 sovereigns.