Rising Tensions: Europe Grapples with Trade Imbalances and Potential Conflict with China

Kaja Kallas, a top diplomat for the European Union, recently likened the effort to end the continent’s economic dependence on China to treating a disease, suggesting that “chemotherapy”—a painful but necessary process—might be required.

This stark rhetoric reflects a shifting attitude within the EU toward China, its second-largest trading partner. As Beijing implements more aggressive trade strategies and imports surge, European policymakers and corporate leaders are increasingly alarmed by their reliance on Chinese goods and are debating the best methods for decoupling.

Jeromin Zettelmeyer, director of the Brussels-based economic think tank Bruegel, described the current atmosphere as one of “panic,” noting a pervasive fear regarding the imminent collapse of domestic industries.

This anxiety in Brussels is being met with hostility from Beijing, where officials have warned of retaliatory measures against any protective trade policies. Tensions are expected to escalate in the coming weeks, with global economic imbalances on the agenda for an upcoming G7 meeting in Evian, France, followed by a summit of the EU’s 27 top leaders.

Additionally, the EU’s executive arm is scheduled to hold preliminary debates this Friday to establish a strategic direction for the bloc’s dealings with China.

While European officials still hope for a cooperative resolution to trade imbalances—which have widened as China boosts exports to drive domestic growth—they are simultaneously considering more stringent industrial measures to protect sensitive sectors from Chinese dominance.

Reducing this dependency is a complex challenge. Politicians and businesses fear Chinese retaliation, while consumers remain attracted to affordable Chinese goods, particularly electric vehicles (EVs), which have flooded the market despite EU attempts to restrict them.

Rebecca Arcesati of the Mercator Institute for China Studies noted that the EU is in a precarious position. She argued that short-term political pressures and voter concerns make it difficult for leaders to counter Chinese imports, adding that existing European systems were not designed to handle such a systemic challenge.

China’s industrial strength is bolstered by extensive government subsidies. Following a domestic property crisis, Beijing has shifted its growth engine toward manufacturing. Furthermore, as U.S. tariffs have limited access to American markets, Chinese producers have pivoted their export focus toward Europe.

Recent data highlights the severity of the shift. An analysis by the Mercator Institute for China Studies and the newsletter Soapbox indicates that trade imbalances hit record levels in the first quarter of this year, driven largely by a surge in EV imports. This trend was fueled by slumping domestic demand in China and a shift toward green energy in Europe, spurred by rising fuel costs linked to conflict in the Middle East.

This dynamic follows a substantial goods trade deficit of approximately $418 billion in 2025. The resulting pressure is threatening European manufacturers and workers, particularly in Germany, where the automotive and chemical sectors are struggling to remain competitive.

In response, several European leaders are advocating for bolder action. French President Emmanuel Macron has urged the EU to implement strategic industry protections similar to those used by the United States.

Even Spain’s Prime Minister Pedro Sánchez, typically seen as more diplomatic toward Beijing, recently stated that China must “open up” to prevent Europe from feeling forced to “close itself off.” Spain, along with France, Italy, Lithuania, and the Netherlands, recently drafted a paper urging the EU to respond aggressively to partners characterized by “systemic and structural industrial overcapacity.”

Brad Setser, an economist at the Council on Foreign Relations, observed that while fear of retaliation has historically led European leaders to tread lightly, the fear of total manufacturing loss may soon outweigh those concerns, even in Germany.

The EU is already exploring defenses, such as the proposed Industrial Accelerator Act. This policy aims to rebuild the bloc’s manufacturing base and would effectively prevent Chinese firms from accessing certain key subsidies, thereby supporting European EV production.

Beijing has denounced these plans as protectionist and has hinted at retaliation. In fact, China has already restricted exports of rare-earth minerals and magnets in response to U.S. tariffs—a move that directly impacted Europe’s high-tech and green-energy sectors and exposed the continent’s vulnerability.

Furthermore, Beijing recently introduced rules allowing officials to examine corporate records, interrogate staff, and restrict the travel of executives suspected of helping companies relocate supply chains out of China. The European Chamber of Commerce in China warned that these measures could cause “unprecedented” economic damage to Europe.

Noah Barkin of the Rhodium Group suggests that China is leveraging the occasional friction between Washington and Brussels to weaken the unified front against its trade policies. According to Barkin, Beijing’s message to Europe is clear: the U.S. is not a reliable enough partner to risk a trade war with China.

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