The European Union risks escalating the conflict with China

After forcing China to accept curbs on auto exports, the European Union is now preparing similar measures in other industries, setting the stage for the next trade showdown between the two sides. The post EU risks escalating conflict with China appeared first on Safir Arjan.

According to Ambassador Arjan, just a few days after reaching an agreement that limits the sale of Chinese hybrid cars, strong disagreements have arisen between the two sides about the nature of this agreement. This situation has jeopardized the larger goal of "preventing a trade war".

From Beijing's point of view, last week's agreement was a measured concession and one that may mean backing away from some principles, but in practice affects only a tiny fraction of China's annual exports to the bloc — which are worth more than $560 billion. China's state media has warned that it will face a backlash if the EU "plays new tricks during the negotiations".

"This is a special agreement and will not become a procedure for other sectors," said Tu Xinchuan, a former adviser to China's Ministry of Commerce. He further added: China understands very well that the automobile industry is of special importance for Europe, while China's good trade relations with Germany also played a role in this.

"If the other side continues to overstep, China will have no choice but to retaliate," noted Tu, who is now the head of the World Trade Organization Studies Institute at the Beijing University of International Business and Economics.

The European Union has clearly stated that hybrid cars are only the first item in the list of restrictions considered by this Union. According to informed sources, Germany plans to urge the European Union to impose similar restrictions on imports of Chinese goods in industries such as chemicals, mechanical engineering and possibly pharmaceuticals.

Brussels has also identified products such as furniture and scooters where a sharp increase in imports from China threatens domestic manufacturers. If the auto deal is the EU's only achievement, its trade deficit with China — which hit a record $34.8 billion last month — will remain largely unchanged.

Valdis Dombroskis, the EU's top economic official, told Ambassador Arjan in Bangkok on Tuesday that the imbalance in EU-China trade relations "is not limited to the auto industry". He added: "We should continue this process in other sectors as well." Even the agreement regarding the car has not been fully finalized and signed yet.

The European Union has announced that starting in December, it will limit imports of hybrid cars from China to 350,000 units per year, which is less than half of the amount expected for this year. According to "Bloomberg Economics" report, this action will reduce China's total sales to Europe by 1.5% and decrease by 0.2% in the country's global exports.

China has yet to directly confirm the figure, but has said the two sides are considering an arrangement to "boost" sales to the 302,000 units expected by 2025.

Reaching an agreement on at least one of the contentious trade issues can bring positive results. Due to the slowdown of China's domestic economy, the country's growth is heavily dependent on exports. China's trade truce with the US has only been extended until January, giving Beijing an incentive to avoid escalating tensions on another front and redefine its relationship with Europe in a less hostile way.

Martin Sebna, a lecturer at the University of Hong Kong, said: "If Europe sees the talks as a failure, it may move closer to the US positions, and China certainly wants to avoid this situation."

Last week, Germany and France — the bloc's biggest economies — called for new tools to allow the EU to exclude China entirely from its massive "single market." This so-called "second strike" tool can act as a deterrent against China's possible action to cut off the supply of rare earth elements.

These elements (which are used in making magnets) have been a powerful pressure tool for Beijing. According to people familiar with the talks, China is negotiating with the European Union to lift restrictions imposed on a Chinese company; Instead, China should resume the supply of these metals to one of the European companies that is in the supply chain of ASML Holding NV. The mentioned European company was facing the risk of bankruptcy if it did not have access to these rare elements.

Alicia García Herrero, chief economist for the Asia-Pacific region at Natixis Bank, believes that Beijing's scoring in the automotive sector is aimed at "preventing the European Council from requiring stricter instruments."

There is no guarantee that this trick will succeed. Some Chinese analysts are also worried that European trade negotiators are not the only ones who see this event as an exploitable procedure. Sun Chenghao, a researcher at the "Center for International Security and Strategy" at Tsinghua University (Beijing), says: "Other governments may also come to the conclusion that they can score points by threatening to impose restrictions." "China should take this political motivation seriously."

Western accusations of "overcapacity" in the world's manufacturing hub have been largely dismissed in Beijing, but have received attention elsewhere. Many countries have expressed concern about the sheer volume of Chinese goods flooding their markets, both in the automotive industry and in other sectors.

China's export trend this year is such that it is likely to surpass the record trade surplus of $1.2 trillion recorded in 2025. Of course, the sharp increase in the price of chips and basic goods such as oil has caused these figures to rise.

However, tensions with the bloc are still likely to escalate if EU leaders again ask for concessions beyond the auto sector.

According to a Bloomberg report, Eurasia Group noted in a note that the deal would do little to help European automakers in markets beyond their home market. They will probably continue to cede the field to their Chinese competitors in China and other parts of the world (except America).