EU-China trade relations hit crunch time as Brussels pushes for rebalancing

The European Union finds itself in a critical juncture regarding its trade relations with China, as Brussels seeks to rebalance the economic ties. This shift is prompted by the rising tide of Chinese exports, which pose a significant challenge to European manufacturers. Policymakers are considering stricter trade measures, even though this could invite retaliation from Beijing.

On Friday, the EU and China reached a preliminary agreement to restrict Chinese exports of hybrid and plug-in hybrid vehicles to Europe, reduce duties on certain European goods, and simplify Chinese export licenses for rare earths and permanent magnets. However, this agreement marks just the beginning of addressing a trade imbalance that exceeds €1 billion ($1.16 billion) daily, according to European Trade Commissioner Maroš Šefčovič.

A Deutsche Bank report from October 7 labeled EU-China relations as being at "crunch time," emphasizing the urgent need to counter Chinese competition while bolstering Europe's industrial competitiveness. Germany, in particular, is vulnerable as its traditional export sectors—automobiles, machinery, and capital goods—are facing increasing competition from China and other markets.

China's share of global car exports has climbed from 5% in 2013 to 11% in 2023 and is projected to reach 15% in 2025, matching Germany's share. Machinery, transport equipment, electrical machinery, green technologies, and industrial intermediate goods are experiencing the most intense competition. The share of EU exports directly competing with Chinese products has surged more than threefold over the past three decades, constituting about 7% of the EU's gross domestic product (GDP).

Expanding this to include sectors where China might soon surpass Europe raises the exposure to over 10% of GDP, a figure more than double the 1996 level. While Europe still holds advantages in specific chemical, pharmaceutical, precision instrument, and specialized industrial areas, the balance is tilting unfavorably. The Chinese agreement could curtail Chinese hybrid and plug-in hybrid car exports to the EU by several million vehicles over four years.

China has also pledged to enhance access for approximately €4 billion worth of EU exports and streamline licenses for rare earths and permanent magnets, though the specifics remain undisclosed. China's exports to the EU totaled $560 billion in 2025, compared to $268.3 billion in European exports to China, as per UN Comtrade data.

Deutsche Bank's projections suggest that while cheaper Chinese imports are beneficial for consumers and downstream industries, they risk undermining European manufacturers' margins and investment. Should concessions fall short, the EU may investigate Chinese plug-in hybrid vehicles for subsidies, potentially imposing provisional tariffs as early as early 2027.

France and Germany have advocated for a trade defense mechanism that would allow for dispute resolution within 24 hours, and the Commission is developing DiversifyEU to mitigate dependence on strategic suppliers. Deutsche Bank posits that achieving enduring competitiveness necessitates domestic reforms, such as reducing energy costs, expediting permitting processes, enhancing infrastructure, and strengthening capital markets.

As of July, Deutsche Bank reported that the implementation of Mario Draghi's recommendations was 16% complete, or 41% when including partially executed measures.