EU and China need a grand bargain to avoid a trade war
As European leaders convened at the European Council meeting in Brussels this month, the spectre of a full-blown trade war with China cast a long shadow over the proceedings. Amid ongoing anti-subsidy probes into Chinese green technology and the looming threat of retaliatory tariffs, the economic bedrock of the China-EU relationship appears increasingly fragile. Yet, beneath the hawkish political rhetoric, recent high-level meetings between European officials and their Chinese counterparts...
By Yan Shaohua
As European leaders convened at the European Council meeting in Brussels this month, the spectre of a full-blown trade war with China cast a long shadow over the proceedings. Amid ongoing anti-subsidy probes into Chinese green technology and the looming threat of retaliatory tariffs, the economic bedrock of the China-EU relationship appears increasingly fragile.
Yet, beneath the hawkish political rhetoric, recent high-level meetings between European officials and their Chinese counterparts underscore a mutual desire to avoid a zero-sum confrontation.
To pull back from the brink, Brussels and Beijing must look beyond short-term political posturing. Avoiding a mutually destructive trade war requires action on three vital fronts: exercising strategic patience, acknowledging a new economic reality through a grand bargain, and pivoting towards investment as a viable rebalancing tool.
First and foremost, both sides must exercise strategic patience. The EU’s goods trade deficit with China, which exceeds €300 billion (US$342.76 billion), has become a convenient political flashpoint.
However, European policymakers must recognise that this imbalance was not created overnight. It is the culmination of decades of shifting global supply chains, international divisions of labour, and robust European consumer demand. It is a macroeconomic illusion to believe that such deep-rooted structural dynamics can be undone in one go, or reversed with a swift barrage of unilateral tariffs.
More importantly, the geopolitical context of the China-EU relationship differs fundamentally from that of the United States and China. Brussels and Beijing do not view each other as existential security threats in the traditional military sense.
Without the overwhelming burden of an existential security competition, their current frictions are fundamentally economic in nature. History and economic logic show that as long as paranoia about security does not entirely hijack the agenda, trade disputes remain highly manageable through pragmatic dialogue and negotiation.
Second, avoiding a trade war requires abandoning outdated assumptions and building bilateral frameworks based on a new economic reality. For decades, the China-EU partnership thrived on a comfortable complementarity, with Europe providing advanced technology, high-end machinery and luxury brands, while China offered low-cost manufacturing and a vast consumer market.
That era is definitely over. China has moved rapidly up the value chain, showing world-class competitiveness in digital innovation and the “new three” green technologies: electric vehicles, lithium batteries and solar panels.
This diminishing complementarity naturally generates friction, as Europe’s firms now face intense competition from Chinese companies both in the Global South, and within the European single market itself.
To manage this newly competitive dynamic, the EU and China should make a grand bargain rather than take a sectoral approach. Negotiating trade disputes sector by sector is a game of regulatory whack-a-mole that is insufficient for such a complex relationship between the EU and China.
Instead of putting out individual fires, a grand bargain would establish a comprehensive, overarching framework that is based on the new economic reality of China’s enhanced competitiveness. Such a macro-level deal would transcend narrow squabbles to define mutually acceptable boundaries for industrial subsidies, harmonise standards for green technologies and guarantee reciprocal market access.
Third, one of the most feasible ways to address European anxieties and rebalance the economic relationship is to encourage investment. Compared to the mature, highly saturated trade in goods, the potential for two-way investment remains vastly untapped.
We are witnessing the dawn of a new “reverse Deng” approach whereby China helps modernise the continent’s manufacturing. Just as European firms once flocked to China to build its industrial base, highly competitive Chinese enterprises are uniquely positioned to invest in Europe. By implementing an “in Europe, for Europe” strategy, Chinese EV and battery giants are establishing manufacturing hubs in countries like Hungary, Germany and Spain. This is the ultimate win-win scenario.
By localising supply chains, Chinese firms generate European tax revenue, create thousands of local jobs and share the dividends of innovation. This shift from simple commodity export to deep industrial integration naturally reduces the trade deficit while accelerating Europe’s own ambitious climate transition goals.
However, this capital flow and technology transfer should not be taken for granted by Europe. For Chinese investment to truly scale in Europe, the European Union should provide a predictable and secure environment. Brussels needs to move beyond discriminatory economic security tools and discuss investment protection, offering legal certainty for Chinese firms navigating the single market, something already covered by the frozen Comprehensive Agreement on Investment.
Furthermore, European policymakers should also take into account China’s legitimate concerns regarding industrial transfer. Having observed the painful socio-economic consequences of deindustrialisation in the US and Europe over recent decades, Beijing is understandably cautious about hollowing out its own hard-won manufacturing base.
Meanwhile, China is working to accommodate European firms. Initiatives highlighted by the Ministry of Commerce, such as the “Invest in China” campaign, signal a renewed commitment to expanding market access. By lowering entry barriers in services, telecommunications and healthcare – sectors where European firms still hold a significant competitive edge – China is offering tangible pathways to narrow the trade gap.
The discussions in Brussels this June should serve as a wake-up call. A China-EU trade war would be a disaster for both economies and a severe blow to the global green transition. By exercising strategic patience, negotiating a comprehensive grand bargain that reflects today’s competitive realities and unleashing the power of cross-border investment, China and Europe can successfully navigate this turbulent era.