The Unwise and Unnecessary War
How the EU and China Lost Faith in the “Mutually Beneficial Trade Relationship” but Should Remain Grudging Partners
Ma Junjie
21 October 2026 | Issue No. 198
Ma Junjie is Writer & Translator, Research Associate at CIFE and Chief Economist, Yi China Economics.
Abstract
This paper argues that an EU–China trade war would mistake the symptoms of economic weakness for their causes. Europe’s growing anxiety over Chinese competition reflects genuine concerns about subsidies and market distortions, but it also exposes problems of productivity, energy costs, investment, and industrial competitiveness that tariffs cannot solve. China faces the mirror image of this dilemma. Weak domestic demand and an investment-heavy growth model have made manufacturing and exports increasingly important, yet foreign pressure cannot force a rapid restructuring of that model. The latest EU–China negotiations reveal the asymmetry clearly: Beijing can more easily translate political decisions into administrative restraint on exporters, while Brussels must reconcile divergent interests among member states. This gives China greater tactical flexibility, even as its deeper economic vulnerabilities persist. The experience of the US–China trade war shows where this path leads. Although trade restrictions can redirect commerce, alter supply chains, and redistribute losses, they can't shift the structural imbalances. Europe therefore has little to gain from repeating the American experiment. The more durable course is to manage trade frictions while both sides address the problems at home that made confrontation fathomable in the first place.
When the British wartime Prime Minister Winston Churchill was asked what the Second World War should be called, Churchill famously answered: “The Unnecessary War.” He believed that the catastrophe could have been stopped before it became unavoidable.1 A trade war can be unnecessary in much the same way, especially one between China and the EU, in light of the US-China trade war.
Europe has legitimate grievances against Chinese subsidies, market access, industrial policy, and excess capacity.2 China has serious problems of its own, including weak domestic demand and a growing dependence on manufacturing and exports.3 Neither side can expect trade restrictions to solve the other side’s domestic economic problems. The United States has already tested that proposition.4 Europe has little reason to repeat the experiment.
Europe Helped Build the Trade Relationship It Now Distrusts
A rumour has been circulating in Brussels for some time. Trust between European and Chinese officials, people familiar with the relationship say, has almost disappeared. Few can see how it might return. Against this background, on October 8 and 9, Chinese Commerce Minister Wang Wentao and EU Trade Commissioner Maroš Šefčovič held the second meeting of the EU-China Trade and Investment Consultations in Beijing. China agreed to moderate exports of hybrid and plug-in hybrid cars to Europe. According to Šefčovič, the arrangement could reduce projected Chinese shipments by more than half over the next four years compared with a scenario in which current trends continued. Actual exports could still rise. China also agreed to improve market access for almost €4 billion worth of European exports and to ease licensing procedures for rare earths and permanent magnets.5
The agreement manages immediate problems while leaving the economic forces behind them largely untouched.
Take cars, for example. The EU imposed definitive countervailing duties on Chinese-made battery electric vehicles in October 2024. The additional rates range from 7.8 per cent for Tesla’s Shanghai operation to 35.3 per cent for SAIC and other non-cooperating producers, on top of the standard 10 per cent automobile tariff.6 Plug-in hybrids remained outside the measure, and their exports to Europe rose sharply. By the latest round of talks, EU imports of Chinese plug-in hybrids were up 86 per cent from the previous year.7
The dispute is often described as Europe finally defending itself against Chinese industrial policy. That description leaves out much of the history. The economic relationship that Europe now finds uncomfortable was built with extensive European participation.
From 1994 onward, China generally capped foreign ownership in passenger-car manufacturing at 50 per cent. Foreign carmakers entered the market through joint ventures with Chinese companies. The wider “market for technology” strategy used access to China’s rapidly growing market to attract capital, production expertise, and technology.8 Volkswagen, BMW, Mercedes-Benz, and other manufacturers spent decades operating under this system because the returns justified it.
European participation extended far beyond cars. Companies shifted production to China, retailers bought inexpensive Chinese goods, and manufacturers built supply chains around Chinese components. European households gained cheaper consumer products, while businesses gained access to a large market and a low-cost manufacturing base. In 2021, German automotive investment alone accounted for 42 per cent of total EU foreign direct investment in China.9
For many years this was comfortably described as a mutually beneficial trade.10 What has changed is the distribution of the benefits.
Chinese companies increasingly compete in industries where European producers once possessed a large technological advantage. The latest EU figures put goods imports from China at €571.3 billion in 2025 and exports to China at €199.5 billion, producing a bilateral deficit of more than €370 billion. Imports from China have risen by more than 90 per cent since 2015.11 Yet the EU remains a major manufacturing exporter. The bilateral deficit therefore measures an important imbalance without describing the condition of European manufacturing as a whole.
Cheap Chinese imports also continue to deliver gains inside Europe. ECB research estimates that import-price shocks from China reduced euro-area non-energy industrial-goods inflation by around 0.27 percentage points by April 2026. In the most China-sensitive categories, a 10 per cent fall in Chinese import prices could reduce inflation by between 0.1 and 0.7 percentage points.12
This creates an awkward inconsistency in European trade policy. Chinese productivity attracts less political attention when it lowers consumer prices or supplies European factories with inexpensive components. It becomes much more politically salient when the same production system threatens influential industries. The EU found evidence of countervailable subsidies in its electric-vehicle investigation, and that case can be judged on its evidence. The wider problem begins when weakness in a European industry becomes sufficient reason to regard Chinese competitiveness itself as a distortion.
Both Sides Have Leverage, but Their Constraints Differ
Europe has good reason to worry about its industrial position. The Commission reports that EU labour productivity was only 77.8 per cent of the US level in 2023. European electricity prices remain structurally higher, and many companies identify regulation as an obstacle to investment.13 These are domestic competitiveness problems that trade policy cannot remove.
A tariff buys time for an industry, but it cannot lower electricity prices, deepen European capital markets, make it easier to scale a new company, or erase compliance costs created inside Europe. Trade protection becomes dangerous when it is asked to do the work of domestic economic reform.
During his February 2026 visit to China, after touring Mercedes-Benz, Unitree, and Siemens Energy, German Chancellor Friedrich Merz said he had seen “high product quality” and a “high technological standard.”14 A few months later, speaking at home, he called for “the restoration of the competitiveness” of German companies15 and said Germany had to “return to being a competitive economy.”16
China has a different problem. Fixed-asset investment fell 7.2 per cent in the first eight months of 2026. Private investment declined 10.1 per cent, manufacturing investment 2.3 per cent, and property-development investment 19.9 per cent. Retail sales of consumer goods increased by only 1.1 per cent over the same period.17 Foreign direct investment into China had already fallen 9.5 per cent in 2025.18
Correcting the imbalance would require stronger household consumption, greater income growth, better social protection, and changes in local-government and investment incentives. These reach deep into China’s development model.
Exports have become more important for Beijing precisely because domestic demand remains weak. Reuters described strong manufacturing and exports in 2026 as a critical buffer for growth while consumption, credit demand, property, and investment remained under pressure.19 Foreign tariffs can reduce the profitability of exporting a particular product. They cannot quickly repair the property market, raise household income, or change the incentives that continue to direct capital towards manufacturing.
Beijing can nevertheless make tactical concessions more easily than Brussels can.
The Chinese state has extensive influence over exporters through licensing, financing, tax treatment, and administrative guidance. In 2024, Reuters reported that the Ministry of Commerce had told Chinese automakers to pause large investments in EU countries that supported additional EV duties and to favour countries that opposed them.20 An understanding to moderate automobile exports is therefore administratively feasible even when the economic incentives behind those exports remain unchanged.
The resulting bargain contains a striking contradiction. European officials are asking the Chinese government to use administrative power over companies while Europe frequently criticises the role of the same administrative power in Chinese industrial policy. Beijing can make a diplomatic agreement work by changing the behaviour of exporters. The EU’s claim to the moral high ground is therefore at stake. Once Brussels asks Beijing to use the very administrative power it criticises, its position begins to look hypocritical.
The EU has enormous power of its own, but its difficulty is coordination. The October 2024 vote on Chinese EV duties exposed the divisions: ten member states supported the tariffs, five opposed them, and twelve abstained. France, Italy, and Poland voted in favour. Germany and Hungary voted against.
Those differences are structural. Germany has large industrial interests in China. Hungary actively seeks Chinese manufacturing investment.21 This fragmentation gives Beijing confidence. China can use bilateral economic relationships while negotiating formally with Brussels. Beijing has already shown that it is prepared to direct investment towards countries more receptive to its position. Its 2024 guidance to automakers was a clear example.
The stakes are high on both sides. China needs access to European demand while domestic consumption and investment remain weak. Europe wants to protect important industries while continuing to benefit from Chinese imports, consumer goods, and selected investment. Neither side has an easy substitute for the relationship.
Trade Protection Buys Only Time, Not Competitiveness
Brussels has built an expanding set of trade defense and economic-security instruments. These include conventional anti-dumping and anti-subsidy measures, the Foreign Subsidies Regulation, investment screening, and the Anti-Coercion Instrument.22 Beijing answers with investigations, export controls, and administrative countermeasures. Each instrument makes another response easier to justify.
France and Germany have proposed a new rapid-response trade instrument that would allow the EU to react more quickly to systemic market distortions. German officials have compared the idea with the power of the US Section 301 mechanism.23
History offers a warning, however. Tariffs imposed during the US-China trade war reduced bilateral trade and caused substantial trade diversion. IMF analysis concluded that the conflict did not improve the overall US trade balance. The bilateral deficit with China declined, while trade shifted towards other economies and the macroeconomic forces behind the imbalance persisted.
That experience shows what tariffs can and cannot do. They can redirect imports, change relative prices, and reorganise supply chains. They cannot repair the domestic economic structure that produces a trade imbalance.
Europe may change where Chinese goods are assembled or how they enter its market, but tariffs offer no automatic route to higher European productivity.
The same is true on the Chinese side. Foreign retaliation can hurt exporters and force tactical concessions. It cannot make China abandon an investment-heavy development model within a few years. The weakness of household consumption, the property downturn, local-government incentives, and the role of manufacturing in employment and growth are domestic problems.
The future therefore depends heavily on what Europe does at home. A more productive EU with lower energy costs, deeper capital markets, and lower unnecessary compliance costs would need less protection from Chinese competition. Diversified supply chains would also reduce the value of Chinese export restrictions as a bargaining tool.
Failure would create a different dynamic. European industries would continue asking Brussels for relief. Chinese companies would keep adapting, moving into new product categories or manufacturing through third countries. Because member states bear different costs, trade conflict with China could then feed political conflict inside the Union itself.
China faces limits of its own. Export strength cannot indefinitely compensate for weak domestic demand. Administrative controls can restrain car exports, yet they cannot repair the domestic imbalance that created the pressure. The Chinese state has shown a high tolerance for imposing such concentrated costs, although that tolerance is not unlimited.
The understanding reached in Beijing is useful precisely because it is modest. Šefčovič called it “a crucial first step, but only a first step.”24 Hybrid-export restraints, tariff concessions, and easier rare-earth licensing can slow escalation. They cannot redesign either economy.
Trust and structural adjustment will both take time. Europe needs to improve competitiveness. China needs to strengthen domestic demand and reduce its dependence on manufacturing investment and exports.
That is why the lesson of the US-China trade war matters: tariffs won’t salvage the trading partnership as long as structural economic problems remain unaddressed.
The EU and China should remain grudging partners because their economies are still tied together more deeply than their politics would suggest. The complementarities that once gave the phrase meaning, however, have not disappeared.
Europe cannot expect every consequence of that integration to disappear once Chinese firms become stronger competitors. China cannot expect foreign markets to absorb indefinitely the overcapacity generated by weak domestic consumption and continued industrial expansion.
The more useful task is to manage the relationship while both economies adjust. Whether another round of protection buys anything valuable will depend far more on Europe’s ability to restore competitiveness and China’s ability to rebalance its economy than on the next tariff negotiated in Brussels or Beijing.
Let the American experience be a somber warning that a broader EU-China trade war would be not only unwise, but unnecessary.
References
1 Churchill, Winston S. The Second World War, Vol. I: The Gathering Storm. 1948.
2 European Commission and High Representative of the Union for Foreign Affairs and Security Policy. EU-China – A Strategic Outlook. Mar 2019.
3 IMF. People’s Republic of China: 2025 Article IV Consultation. Feb 2026.
4 IMF. Review of the Role of Trade in the Work of the Fund. 2023.
5 European Commission. “Second Meeting for EU-China Trade and Investment Consultations”. 9 Oct 2026; Reuters. “China, EU Reach Hybrid Vehicle Trade Understanding”. 9 Oct 2026.
6 European Commission. Commission Implementing Regulation (EU) 2024/2754 on Definitive Countervailing Duties on Chinese Battery Electric Vehicles. 29 Oct 2024.
7 Reuters. “China, EU Reach Hybrid Vehicle Trade Understanding”. 9 Oct 2026.
8 U.S. Department of Commerce, International Trade Administration. China Passenger Vehicle Market.
9 MERICS. The Bumpy Road Ahead in China for Germany’s Carmakers. Oct 2022.
10 European Council. Joint Statement of the 21st EU-China Summit. 9 Apr 2019.
11 Council of the European Union. EU-China Trade: Facts and Figures. Sept 2026.
12 ECB. “What Has Kept Goods Inflation Low? The Role of the Import Exposure to China”. June 2026.
13 European Commission. Annual Single Market and Competitiveness Report 2025. 2025.
14 Federal Government of Germany. “Kanzler nimmt ‘tiefe Eindrücke’ aus China mit nach Deutschland”. 26 Feb 2026.
15 Federal Government of Germany. “Rede von Bundeskanzler Friedrich Merz beim Sommerfest des Parlamentskreises Mittelstand der CDU/CSU-Bundestagsfraktion”. 26 June 2026.
16 Federal Government of Germany. “The Federal Chancellor’s Summer Press Conference”. 15 July 2026.
17 National Bureau of Statistics of China. “National Economy Remained Steady with Innovation-Led and High-Quality Development in August”. Sept 2026.
18 Reuters. “Foreign Direct Investment in China Slides 9.5% in 2025”. 23 Jan 2026.
19 Reuters. “Tech Boom Powers China’s Factories but Economic Imbalances Deepen as Consumption Slows”. 15 Sept 2026.
20 Reuters. “China Tells Carmakers to Pause Investment in EU Countries Backing EV Tariffs, Sources Say”. 30 Oct 2024
21 Reuters. “EU Headed for ‘Economic Cold War’ with China, Hungary’s Orbán Says”. 4 Oct 2024.
22 European Commission. Anti-Coercion Instrument; Foreign Subsidies Regulation; EU Trade Defence Instruments.
23 Reuters. “France, Germany Propose New Rapid EU Trade Response Tool”. 5 Oct 2026.
24 European Commission. “Press Conference by Commissioner Maroš Šefčovič Following EU-China Trade and Investment Consultations”. 9 Oct 2026.