EU Gets Tough on China as Trade Imbalance Stokes Deindustrialisation Fears

Brussels, July 1 (EBM Newsdesk Analysis) —By Anthony Gill

For years, Europe positioned itself as the adult in the room on global trade — the open market, rules-based counterweight to Donald Trump’s protectionism. That posture is gone. The EU is now in the middle of its most sustained confrontation with China since the two economies became structurally intertwined, and the numbers driving it leave little room for diplomatic equivocation.

The Scale of the Problem

The EU’s trade deficit with China in goods hit €98 billion in Q1 2026 — the highest since Q3 2022 — with imports from China rising 3.4% quarter-on-quarter while EU exports to China fell 4.8%. For the full year 2025, the deficit reached €359.9 billion, up 2.7% year-on-year and more than double the level of a decade ago. That is roughly €1 billion a day flowing in one direction. FortuneAI Weekly

Chinese firms now dominate Europe’s supply of goods across critical sectors including solar panels, rare earths, chemicals and industrial robots. EU tariffs of up to 35.3% on Chinese electric vehicles have done little to slow the advance of brands such as BYD, Geely and Chery — in May, Chinese models surpassed 10% of total EU auto sales for the first time. The fallout for European carmakers has been severe. BMW has announced plans to cut around 5% of its workforce by the end of 2026, while Mercedes-Benz has paused employee bonuses and offered thousands of workers voluntary redundancy. FinimizeFinimize

My read: this is no longer a cyclical trade imbalance that adjusts over time. It is structural displacement of European industry — and Brussels is only now beginning to respond at a scale that matches the problem. We covered this dynamic in detail in our analysis of how China Shock 2.0 is hitting Europe harder than America, and the data has only worsened since.

What Brussels Is Actually Doing

Among the measures under consideration, the EU has proposed overhauling the Cyber Security Act to bar Chinese firms from critical infrastructure, and drafted the Industrial Accelerator Act — legislation that would prioritise EU-made goods in public procurement. The IAA, which we reported on when China formally threatened countermeasures against it in April, is the most ambitious structural intervention Brussels has attempted — setting a target of raising manufacturing’s share of EU GDP from 14.3% in 2024 to 20% by 2035. Finimize

Trade Commissioner Maroš Šefčovič has been explicit about the direction of travel. “China’s exports to the EU keep rising, while our market share in China keeps shrinking,” Šefčovič said following talks with Chinese Commerce Minister Wang Wentao in Brussels this week. The diplomatic language was measured. The underlying message was not. Finimize

China’s Response

Beijing is not absorbing this passively. In mid-May, China’s Ministry of Justice declared the EU’s cross-border investigations under its Foreign Subsidies Regulation an improper exercise of extraterritorial jurisdiction — and went further, banning Chinese companies from cooperating with Commission probes at all. That is a direct attack on Europe’s ability to build the evidentiary base its trade cases depend on. Whalesbook

China’s state media has been unambiguous about the stakes: “China is able to cope with a situation where China-EU economic and trade relations deteriorate further or even slide to the freezing point. China does not want to go that far but it is not afraid to go that way.” Finimize

That threat lands with real weight because of where China sits in Europe’s supply chains. As we reported when China cancelled EU diplomatic talks without explanation last month, Beijing controls roughly 98% of the EU’s rare earth imports — materials essential to EV batteries, defence electronics and renewable energy infrastructure. Any EU escalation risks triggering exactly the kind of mineral squeeze that European industry cannot absorb.

The Deeper Problem Brussels Won’t Fully Acknowledge

Since 2021, Chinese exports to the EU have grown at a compound annual rate of 6%, while its imports from the EU have contracted by 2.5% per year. The EU now accounts for 31% of China’s total goods-trade surplus. That asymmetry reflects something structural, not incidental. TechGolly

The China shock derives from a combination of genuine Chinese industrial upgrading and powerful, artificial price advantages. China’s current policy trajectory — as signalled in its latest draft Five Year Plan — shows no imminent shift away from investment-led growth and manufacturing overcapacity. Waiting for Beijing to rebalance voluntarily is not a realistic plan. Samsung

The harder truth, which European policymakers have been reluctant to say plainly, is that tariffs can alter the price of individual goods but cannot rebuild an industrial base. As we examined in our analysis of whether Europe can actually stand up to China on trade, the EU’s fundamental problem is that it is trying to protect industries it spent thirty years hollowing out, using trade instruments designed for a different era of Chinese competition.

The Bottom Line

The shift in Brussels’ tone is real and the policy tools being deployed are more serious than anything Europe has attempted before. But I think the gap between political ambition and structural reality remains large. If Europe fails to adapt its toolkit to the scale of the problem, the consequences will be continued deindustrialisation, accelerated job losses in strategic sectors and a dangerous erosion of the manufacturing base required for technological sovereignty. The EU is no longer pretending the problem doesn’t exist. Whether it can move fast enough — and stay united enough — to do something about it is the question that will define European industrial policy for the rest of this decade. Samsung

Related reads:

China Shock 2.0: How China’s high-tech export surge is hitting Europe harder than America

The EU has a China trade problem — and the tools it’s building to fix it may make things worse

China’s EV strategy targets Spain — and it’s a challenge the whole of Europe needs to answer