EU’s China trade breakthrough risks taking pressure off Beijing

The EU’s new trade deal with China has eased fears of an escalating trade war, but it could also weaken the political momentum behind Brussels’ plans to take a tougher stance against Beijing’s economic practices.

After four months of negotiations, Brussels and Beijing struck a deal on Friday under which China agreed to curb its hybrid car exports to the EU and ease restrictions on rare earths licensing.

The European Commission has framed the agreement as the first phase of talks launched in June to rebalance trade relations. The EU runs a trade deficit of more than €1 billion a day with China, whose exports are putting growing pressure on European industry.

The deal comes just a week after French President Emmanuel Macron and German Chancellor Friedrich Merz called for a new EU trade defence instrument to counter foreign economic distortions, potentially including measures to restrict access to the European market.

But with EU leaders due to discuss China at this week’s summit, there are concerns in Brussels that the agreement could take the urgency out of efforts to develop tougher trade measures.

“It is quite a good deal, but I am afraid it might create relaxation at the European Council,” an EU official told Euronews, speaking anonymously. “If anything, the agreement shows that, when the EU flexes its muscles, it has an effect.”

Trade war averted. For now.

Friday’s agreement appears to have shifted the debate among member states, easing the immediate threat of an escalating trade war with Beijing.

That risk had grown after the joint letter from Paris and Berlin signalled an unusual degree of alignment between the EU’s two largest economies on the need to confront China’s trade practices – a position that would have been difficult to imagine just months ago.

Spain, which like Germany has traditionally favoured a more conciliatory approach towards Beijing, faces snap elections in November.

The agreement also offers a reprieve for Merz and Germany’s car industry, which has been struggling with fierce competition from Chinese manufacturers.

Under the deal, the EU will introduce country-specific quotas allowing 350,000 Chinese hybrid cars onto the European market annually over four years, with a fixed annual adjustment rate of 6%.

“This will cut by more than half the current exports to the EU, which we estimate are likely to reach up to 800,000 units in 2026,” a second EU official said.

According to Alicia García-Herrero, an expert at Bruegel, a Brussels-based think tank, Merz is in a weak position to reject the agreement.

“He will drag his feet when it comes to new measures because Germany will prefer to cash in this goody as the deal will reduce competition.”

“Not the end of the story”

The agreement could provide a model for combining trade pressure with diplomacy, with China making concessions before Brussels imposed safeguards it was already preparing.

Chinese car exports to the EU are worth around €15bn, small next to the EU’s €360bn bilateral trade deficit with China.

The EU also secured tariff liberalisation for car parts, footwear, ice cream and olive oil, saving at least €225 million in duties, according to the Commission. While welcome, those concessions will do little to close the wider trade gap.

EU trade chief Maroš Šefčovič is due to hold a video call with his Chinese counterpart in January, followed by another round of political talks in March.

“Last week’s deal shows that the Chinese are now beginning to take Europe seriously and realising that there’s a serious political issue, not just an economic issue,” Peter Chase of the German Marshall Fund told Euronews.

Even if EU leaders deem the deal good enough for now, all eyes are on the next chapter. “It’s not the end of the story,” an EU diplomat said. Some fear member states may now lower their guard.

Trade defence

The Commission promised EU ambassadors on Sunday that it would present proposals for the tool requested by Macron and Merz, to react systematically to market distortions, before the traditional December EU summit.

The proposed mechanism was already under consideration as part of a broader overhaul of the EU’s trade defence toolkit.

Other measures under discussion include a diversification instrument to help companies reduce their dependence on single suppliers of strategic products, and a solidarity mechanism to support member states facing trade retaliation.

Yet some fear that, having secured concessions, member states may back down and withhold the strong political mandate needed to keep working on these tools.

“The Chinese well understood the message. They want to work with us on this. But because it showed it worked, we need to continue to keep the guns on the table,” the first EU official said.

Others within the Commission argue that Brussels already has considerable powers at its disposal, including the anti-coercion instrument, which has yet to be used, as well as anti-dumping measures and investment screening.

“We have a lot of instruments,” the second EU official said. “But as always, we can do more, and we can be better. And I think that is the discussion that will take place this week.”

Source: www.euronews.com