Europe’s China Shock Is Rewriting the EU’s Trade Strategy

China’s industrial rise is creating a new problem for Europe: Chinese manufacturers are no longer competing mainly in low-cost goods. They are moving into electric vehicles, machinery, batteries, chemicals and other sectors that sit near the centre of Europe’s industrial economy.

The result is a shift in European policy from an open-market default toward de-risking—keeping trade open where competition is reciprocal, while using targeted restrictions where subsidies, market-access barriers or strategic dependencies create serious risks.

The scale of the EU-China imbalance

Official EU data puts the bloc’s 2025 goods imports from China at about €559.4 billion and exports at about €199.6 billion, producing a deficit of roughly €359.8 billion. Imports rose 6.4% from 2024, while exports fell 6.5%.

The European Commission’s latest figures put the deficit at €359.9 billion, up 2.7% year on year and below the 2022 record of €397.3 billion. Other reporting has described the 2025 imbalance as €360.6 billion, or approximately €1 billion per day, and has calculated a 15% annual increase. Those figures are not fully consistent with the latest official presentation, so the precise growth rate should be treated cautiously. The underlying direction, however, is clear: Europe buys substantially more goods from China than it sells there, and the gap remains historically large.

The composition of trade matters as much as the headline deficit. Electrical equipment and machinery are among the largest product groups in EU-China trade. Chinese exports are also reaching Europe in products associated with the green and digital transitions, including electric vehicles, batteries and other high-technology components.

That creates a policy dilemma. Imports can lower costs for consumers and European companies that use Chinese components. But a sustained influx of heavily subsidised or unusually low-priced goods can also compress margins, weaken investment incentives and threaten the supplier networks that support European production.

Why this is being called a second China shock

The first China shock was associated mainly with the movement of lower-cost manufacturing into global supply chains. The current shock is different in one crucial respect: Chinese firms are competing higher up the value chain.

China’s domestic demand has weakened while its industrial capacity remains substantial. Analysts describe this combination as pushing more Chinese output into overseas markets, increasing price pressure in Europe and reducing Chinese demand for European capital goods.

The exposed sectors include:

• automotive and electric vehicles;
• industrial machinery and machine tools;
• electrical equipment and automation;
• batteries and clean technology;
• chemicals; and
• other advanced manufactured goods.

For European firms, the threat is not limited to lost sales. Lower prices can reduce the return on factories and research programmes built during the electrification and decarbonisation push. If production is abandoned, Europe may also lose specialised suppliers, engineering capabilities, research capacity and skilled jobs. That is why the debate has moved beyond the size of the trade deficit to questions about industrial resilience and economic security.

Why Germany is particularly vulnerable

Germany is the clearest example of Europe’s exposure because manufacturing and exports play an unusually large role in its economic model. Its industrial strengths—vehicles, machinery, chemicals and equipment—were also sectors in which China was once an important customer and growth market.

That relationship is changing. Chinese companies are increasingly capable competitors in automotive, machinery and chemicals rather than simply buyers or low-cost production partners. Germany is being squeezed in three places at once: inside China, in third-country markets and increasingly in the European market itself.

The deterioration is visible in trade data. German exports to China fell more than 12% year on year to just under €37 billion in the first half of 2026, while China fell from Germany’s second-largest export market in 2021 to ninth in that period, according to preliminary figures reported by Reuters.

German carmakers such as Volkswagen face a particularly difficult transition. Chinese companies have developed strong positions in electric vehicles, batteries and software, while European manufacturers are still managing the cost of converting established combustion-engine businesses. Chinese competition is therefore no longer based only on lower prices; it increasingly involves technology, product speed and integrated supply chains.

The risk for Germany is that its traditional export formula weakens faster than new sources of growth can replace it. But this does not mean every industrial decline can be attributed to China. European firms also face high energy costs, slow permitting, fragmented capital markets, skills shortages and uneven digital adoption. Chinese competition is exposing those weaknesses, not creating all of them.

What the EU has already done

The EU has not waited for a single, comprehensive China policy. Instead, it has assembled a case-by-case trade-defence toolkit.

Electric vehicles

The EU imposed additional countervailing duties on battery-electric vehicles made in China after an investigation into subsidisation. The duties apply on top of the normal EU car tariff and are intended to offset a subsidy advantage rather than prohibit Chinese EV imports entirely. By the end of 2025, some duties on Chinese-built EVs reached as high as 35.3%.

Steel

Steel is covered by EU safeguard measures, including tariff-rate quotas, alongside anti-dumping and anti-subsidy cases. By the end of 2025, the EU had 172 anti-dumping and anti-subsidy measures in force across trading partners; just over three-quarters targeted Chinese companies, according to Reuters.

These instruments are designed to distinguish ordinary competitive imports from imports that cause injury through dumping, subsidies or sudden surges. In practice, their product-by-product structure can make them slower than the industrial pressures they are intended to address.

Medical devices

In June 2025, the European Commission used the International Procurement Instrument for the first time to restrict Chinese operators and Chinese-origin medical devices in EU public procurement. The measure excludes Chinese tenders from covered contracts worth at least €5 million for five years.

This is different from a conventional import tariff. Its stated logic is reciprocity: EU authorities responded after finding that European suppliers did not receive comparable access to China’s public procurement market.

The next policy debate: faster and broader powers

European policymakers are considering whether the existing system is too slow and too narrow for a structural industrial challenge. Proposals discussed in the debate include faster temporary tariffs, quotas or safeguards when import surges threaten serious injury; stronger European-content criteria in procurement and clean-technology support; and tighter scrutiny of foreign subsidies, investment and strategic supply chains.

Some policymakers have also looked to a power comparable to the United States’ Section 301 process. The attraction is speed: a broader instrument could allow the EU to respond to systemic practices without opening a separate, lengthy investigation for every affected product.

The obstacles are substantial. EU member states have different commercial interests, European companies remain dependent on China as both a market and a supplier, and tougher restrictions could provoke retaliation. A broad instrument would also need to fit within EU law and the bloc’s trade commitments.

The likely direction is therefore not an immediate move to blanket protectionism. It is a more conditional version of openness: market access where competition is reciprocal, and defensive action where subsidies, dependencies or access barriers are judged material.

Subsidies versus competitiveness: both sides of the argument

The central dispute is whether China’s export strength mainly reflects unfair state support or genuine industrial competitiveness.

European governments point to preferential finance, land, energy, tax treatment, public procurement and state-linked supply chains. Their concern is that such support can sustain excess capacity and allow exports at prices European firms cannot match while paying market-based costs.

China’s counterargument is that its companies compete through scale, innovation, integrated suppliers and faster execution. From that perspective, European restrictions are protectionism intended to shelter slower incumbents.

Both explanations can contain part of the truth. Subsidies may distort capacity and prices, while European companies may also have become less competitive because of domestic costs and regulatory delays. That makes the policy trade-off difficult:

• doing too little could allow productive capacity and industrial know-how to disappear;
• doing too much could raise prices, slow the green transition and trigger retaliation; and
• protection without investment could preserve high-cost European production without restoring its long-term competitiveness.

The strongest response would therefore combine targeted trade defence with cheaper clean energy, faster approvals, deeper capital markets, stronger innovation finance and more demand for European clean technologies.

Why CBAM is creating a separate diplomatic conflict

The EU’s Carbon Border Adjustment Mechanism entered its definitive phase in January 2026. It covers carbon-intensive imports including iron, steel, aluminium, cement, fertilisers, hydrogen and electricity, requiring importers to account for embedded emissions through certificates.

The EU’s rationale is to prevent carbon leakage. If European producers face a carbon price while imported goods do not, production could move abroad or imports could gain an artificial cost advantage. CBAM is intended to align the carbon cost of covered imports more closely with that faced by EU producers.

BRICS countries see the measure differently. At a meeting in New Delhi in August 2026, BRICS environment ministers described CBAM-type measures as “unilateral, punitive, discriminatory and protectionist.” They argued that such policies can burden developing-country exports and linked their criticism to demands for greater climate-adaptation finance.

The disagreement is not simply semantic. A mechanism based formally on emissions can still affect exporters unevenly when they have more carbon-intensive production, limited emissions data or less access to finance for decarbonisation. For developing economies, the concern is that climate regulation is becoming a market-access condition designed by richer countries.

Europe’s difficult middle path

Europe is now trying to pursue four goals that pull in different directions: protect industrial capacity, preserve the benefits of open trade, maintain credible climate policy and avoid a wider confrontation with China, BRICS economies and the United States.

The most durable answer is unlikely to be either laissez-faire openness or indiscriminate tariffs. Europe needs evidence-based trade measures where competition is demonstrably distorted, alongside a domestic strategy that makes European production more productive, innovative and affordable.

China’s export surge has exposed the cost of Europe’s old assumptions. The question is no longer whether the EU should remain open, but whether it can remain open without allowing strategic industrial capabilities to erode—and whether it can defend those capabilities without abandoning the competition and investment needed to rebuild them.