Why the EU is Starting a Trade War with China

Added: 2026-05-30

[00:00:00]Last week, five EU countries, France, Italy, Spain, the Netherlands, and Lithuania, penned a joint letter to the European Commission urging the EU to use more protectionist measures like tariffs and trade practice probes against China.

[00:00:13]This comes after months of escalating trade related tensions as Chinese exports to Europe have surged while its imports have flatlined. So, in this video, we're going to explain why trade related tensions are flaring and why another EU China trade war now looks pretty inevitable. European politicians don't really talk about the energy transition anymore, but that doesn't mean it isn't happening. In fact, Europe has quietly redoubled its effort at decarbonization. In the latest issue of our magazine, we look at this rare good news and why the energy transition has ended up looking different to the one we envisioned.

[00:00:56]That's just one of 80 pages in the magazine because there's more in too long than you'd expect. Purchase your copy by clicking the link in the description. So, broadly speaking, European policy makers have two issues with the EU China economic relationship at the moment. The first is general concern about China's trade imbalances.

[00:01:14]As you probably already know, China runs a persistent trade surplus. That is, it exports more stuff than it imports. In 2025, for instance, China ran a trade surplus of more than $1 trillion, more than double what it was only 5 years ago. Lots of policy makers in Europe and elsewhere see this is evidence of China's unfair trade practices. For context, persistent and large trade surpluses like the ones we see in China shouldn't really happen, at least according to orthodox economics. After all, when you export loads of stuff, this either means you get lots of foreign currency if your exports are priced in foreign currency, which you can then use to afford more imports, or it creates demand for your currency if your exports are priced in your currency, which should thus appreciate and allow you to afford more imports.

[00:02:02]Even if it's true that Chinese industry is great and the world thus wants lots of Chinese exports in a functioning economic system, this should just mean that China can afford a lot of imports.

[00:02:14]Not only is this not happening, but the subsequent trade surplus also looks like a deliberate policy choice from the CCP, who have continued to actively devalue their currency while explicitly pursuing a policy of economic self-sufficiency, which means less imports. Now, it's probably worth mentioning that European policy makers haven't really been entirely consistent in their outrage here. European policy makers and politicians weren't that fussed about China's trade surplus in the 2010s when American politicians first started complaining about it. This was at least in part because the EU was actually running some pretty big trade surpluses itself. In fact, relative to GDP, the EU actually ran larger surpluses than China for most of the 2010s. However, as Europe's overall trade surplus has shrunk and its bilateral trade deficit with China has grown, European politicians and policymakers have suddenly become a lot more interested in China's alleged imbalances.

[00:03:11]Quite a lot of this has to do with Trump. Trump's tariffs have both hurt European exports to the US, bringing down Europe's overall trade surplus and caused Chinese exporters to redirect their exports away from the US towards the EU, increasing the EU China trade deficit. Anyway, alongside this generalized anxiety about China's trading imbalances, this second point of tension in the EU China economic relationship is that China is putting pressure on certain specific and politically sensitive European industries. The most obvious case is cars where Chinese upstarts like BYD and Sherry have been gaining market share in both Europe and the rest of the world, especially when it comes to electric vehicles. This has provoked real anxiety in the EU. The car industry is not just economically significant. Cars are the EU's biggest single export and the industry employs millions of people.

[00:04:03]It's also politically significant and central to Europe's sense of itself.

[00:04:08]Chinese companies also dominate in so-called green industries in clean tech where Europe was once a market leader and which was supposed to be the basis for Europe's re-industrialization via policy initiatives like the Green New Deal. China's clean tech exports have grown steadily for the past couple of decades. China now accounts for the vast majority of Europe's solar panel and battery imports. While its clean tech imports have actually declined since about 2016, China's growing industrial dominance is not just bad news for European exporters and the European economy. It's also created some uncomfortable dependencies in certain strategically significant areas. Like everyone else, Europe is very dependent on China for rare earths. 17 metallic elements that are critical for modern technologies whose processing and production are dominated by China.

[00:04:57]European drone manufacturers also rely heavily on Chinese imports for their components. And China accounts for a large and growing share of global steel production. So you get the idea.

[00:05:07]European policy makers are both worried about China's overall trade imbalances and about how China's industrial prowess is undermining certain strategically significant industries. This all raises the question, what can Europe actually do about any of this? Well, somewhat confusingly, we're going to start with the second problem, the threat that China apparently poses to certain strategic industries in Europe. The first thing the EU has to do here is to decide which industries are actually quote unquote strategic. European politicians generally agree that Europe needs to defend it so-called strategic autonomy. But this disguises the fact that there's a lot of disagreement over what strategic autonomy actually requires and which specific industries require protection. The French, for instance, have a notoriously expansive understanding of the term. In the 2000s, they famously prevented PepsiCo from acquiring the French yogurt company Danon on strategic grounds with the then prime minister describing Danon as a flower of French industry at the time.

[00:06:07]Traditionally, Germany has been on the other end of the spectrum, less willing to intervene in the economy and more willing to let the market do its work.

[00:06:15]This ideological gap has become apparent in the ongoing debate over European rearmament. France wants EU member states to spend their new defense budgets in Europe on European-made systems. While Germany has been happier to spend these new monies abroad on, say, American or Korean-made systems, the point we're trying to make is that before retaliating against China, the EU needs to actually align on which industries are actually strategic. And then the EU can impose targeted protectionist measures like tariffs on Chinese exports or subsidies for domestic companies within those industries to either encourage domestic production inside Europe or at least encourage diversification away from China. European politicians should also make it clear to their electorates that this won't be painless. Protectionist measures will effectively make Chinese imports more expensive for consumers at a time when inflation is already running hot thanks to Trump's war in Iran and China will probably retaliate as it did against Trump's tariffs. When it comes to the more general issue of China's trade surplus with not just Europe but also with the world more widely, Europe doesn't have that many great options.

[00:07:21]The EU could impose some sort of flat tariff like the US has, but this wouldn't be great for the European economy and would probably provoke a dramatic retaliation as happened after Liberation Day. This is a reminder of why we created multilateral institutions like the WTO in the first place. To resolve any big and persistent trade imbalance, you sort of need to get both the surplus and deficit countries around the table. The latest issue of our magazine is out now. And if you want our best value ever, subscribing and using code summer26 gets you your first copy for as cheap as £4.99, as well as 20% off as long as you stay subscribed. I told you about one of the articles at the start of this video, but this issue is truly jam-packed with content from all around the world. Obviously, the headline section is our rundown of Trump's wars around the world, discussing all of the different countries and regions which have faced Trump's military wrath, going nation by nation through the timeline and reaching the ultimate question, has Trump created the modern holy war. From there, we dive into our regional sections, starting with the UK, where we unpack the results of the recent elections, take a look at the UK's odd foreign posture, and discuss if Britain has become ungovernable. Then in the EU section, we discuss how Russia's sphere of influence is fading, why Europe's energy transition isn't what you expect, as well as looking at the euro's missing members. Finally, in the global section, we discuss if we're seeing echoes of the First World War, what's next for Iran, as well as what really came from the Gen Zed protests we saw emerging last year.

[00:08:56]That's not even everything. With this 80page issue, our joint longest ever, there's even more to read than I've even been able to mention here. So, click the link in the description to learn more and grab your copy today.