Are The EU And China Heading For A Trade War? | Explained

The European Union's trade deficit with China is growing, prompting Brussels to take protective measures against everything from electric vehicles to e-commerce platforms and deepening fears of a trade war.

Beijing has called for dialogue but warned it could retaliate against protectionist policies.

As European leaders gather for a summit on Thursday, AFP looks at the factors behind their brewing trade conflict with China.

How big is the deficit?

The European Commission said last month its trade deficit with China had become "unsustainable".

In April alone, the gap stood at 31.9 billion euros ($37 billion), according to Eurostat, the EU's statistical office.

"Our trading relationship with China has reached a point that requires a reset. Not confrontation, but rebalancing," said European Commissioner for Trade Maros Sefcovic on Monday.

China's ambassador to the EU, Cai Run, said last month that Beijing was "fully aware" of the bloc's concerns, adding that it had "never deliberately pursued a trade surplus" and was "willing to... address this issue".

He pointed to measures China had already taken, such as increased market access for European agricultural products, the removal of tax rebates for Chinese solar products exporters, and export restrictions for Chinese electric vehicles (EVs).

Beijing rejects the claim that the overseas success of Chinese firms is built on massive state subsidies, arguing it is due to innovation, economies of scale and its industrial base.

Where do relations stand?

EU-China ties have worsened this year as Brussels seeks to strengthen its legislative arsenal to counter Beijing.

The EU fears that the dominance of Chinese companies in certain sectors, particularly EVs, chemicals and green technologies, could crush its own industries.

The bloc is also demanding more access to the Chinese market, arguing that Beijing does not give reciprocal freedoms to European firms.

China, meanwhile, has promised "countermeasures" if the EU pushes through a draft "industrial acceleration" bill that would exclude certain products manufactured outside the bloc from public procurement, and restrict the takeover of European companies.

The European Commission has reviewed its cybersecurity rules, aiming to exclude suppliers deemed high-risk -- such as Chinese firm Huawei -- from telecom networks.

And since 2024, Chinese EVs exported to Europe have faced extra customs duties.

How likely is a trade war?

"Emotions are high and unstable. The risk of a trade war between EU and China is real," said Xu Dingbo, a professor at the China Europe International Business School (CEIBS) in Shanghai.

Elvire Fabry, a trade geopolitics specialist at the Jacques Delors Institute, an EU-focused think tank, said it was "essential today for Europeans to show their determination and establish a balance of power".

However, both sides have an interest in reconciling, according to Zhu Tian, an economist at CEIBS.

"Neither side benefits from escalation: Europe would face higher costs and slower green transition, while China would lose access to a key market," he said.

How could China react?

Beijing has a wide range of tools at its disposal if the EU further ratchets up measures to protect its firms.

"China could respond with anti-dumping investigations, regulatory scrutiny, restrictions in selected sectors, or pressure on politically sensitive European products," Zhu said.

Beijing has previously imposed anti-dumping duties on European cognac and conducted anti-dumping investigations into pork and dairy products from the bloc.

This time, the EU is particularly concerned that China might restrict exports of rare earths essential for high-tech industries.

Whatever form it takes, "China is likely to respond in a calibrated way," Zhu said.

"Enough to signal that EU measures have costs, but not so much that the whole relationship breaks down."

How important is the EU to China?

The European Union is China's second-largest trading partner.

China "needs access to the European market as the US market closes", said Fabry, of the Jacques Delors Institute.

Zhu noted more Chinese investment into Europe as a way to create jobs and reassure European decision-makers that "China takes European concerns seriously".

"China can help by further opening its market and encouraging more imports and investment, but Europe also needs to strengthen its own competitiveness," he added.

Beijing can still avoid a trade war, said Joerg Wuttke, an expert at the DGA-Albright Stonebridge Group and former president of the EU Chamber of Commerce in China.

But would require China "being really open and not just pretending", he said, because "China has been talking about opening up (for) about 20 or 30 years".

(Except for the headline, this story has not been edited by Asianet Newsable English staff and is published from a syndicated feed)