Europe’s tricky trade threesome

EUROPE IS NOW locked in intense trade negotiations with both the world’s superpowers. It faces a threat of 50% tariffs from America to be imposed on July 9th, though these have been thrown into chaos by a court ruling blocking them which the Trump administration is appealing against. At the same time, it is trying to reset its relationship with China, with a summit also due in July.

The result is a tricky triangular dynamic. Europe has to be increasingly mindful of how America’s dealings with China affect its own economy and security. “In this triangle, each side is watching the other two suspiciously,” says Steven Everts of the EU Institute for Security Studies, the bloc’s internal think-tank. And Europe is doubly vulnerable. When it comes to Russia’s ongoing war against Ukraine, Donald Trump’s America and Xi Jinping’s China both have positions at odds with Europe’s security interests. Europe’s economy, which was already flatlining, is now under renewed threat from both American tariffs and Chinese competition.

China senses an opportunity to play one side off against the other, and is engaged in something of a charm offensive with the Europeans. On April 30th it lifted sanctions on a number of members of the European Parliament and its institutions that it had imposed back in 2021. True, it was a painless concession for Xi Jinping, the Chinese leader, to make. But there are signs that China is also intensifying its subnational diplomacy. For example, the partnership between the Chinese region of Sichuan and the most populous German state, North Rhine-Westphalia, had been dormant for years. It is now being reinvigorated from the Chinese side with plans for a high-level visit.

The EU is mulling how to respond. Some see a chance for it to hedge Europe’s bets, and show Mr Trump that the EU has other options, too. “The Spanish government’s position is that the BRICS are a key piece of the new global order, and it’s essential that we learn how to work with them,” says Toni Roldan of EsadeEcPol, a Madrid-based think-tank. Germany’s new government, by contrast, still sounds distinctly hawkish. The European Commission has been given the tricky task of forging a common European position ahead of a summit between the EU and China which is due to take place in Beijing in July (it was moved to China because Mr Xi had declined to visit Brussels).

The first concern that Europe will want to raise at the summit is trade diversion. As a result of Mr Trump’s trade wars, goods that were meant for the American market seem likely to wash up on Europe’s shores. An EU task-force is monitoring customs and shipping data, the first batch of which does indeed show surging exports to Europe (see chart 1). This comes on top of Europe’s existing concerns about overcapacity in Chinese manufacturing leading to subsidised goods entering the EU market. Especially in low-carbon goods such as wind turbines, solar panels and energy-efficient equipment, China is making inroads into European domains, and importing less and less (see chart 2).

Though this will benefit European consumers, it hurts European producers. So the EU wants to add safeguards. It has just put countervailing duties on certain types of industrial equipment on top of anti-dumping duties imposed in January. On electric vehicles, it wants China to agree to price undertakings in lieu of the current tariffs, setting a minimum price on imported cars. The Europeans will argue that China needs the only market still relatively open to Chinese goods. China, however, may feel more bullish and push back, pointing to its resilient economy. Mr Xi will also have noticed that Europe’s major countries are fighting surging right-wing populists, and would struggle with the economic escalation that China can withstand.

The second European demand is for more economic upside. European firms see their market shares in China shrivelling. Meanwhile Chinese direct investment in Europe has changed from buying up European firms and technology to investing in new, Chinese factories (see chart 3). In doing so, China tries to avoid technology transfer to European firms, to prevent Europe from doing to China what China did to Europe: learning from advanced foreign tech in order to develop competitive industries of its own.

The Chinese side has floated the idea of resurrecting the comprehensive agreement on investment (cai), a plan that was proposed back in 2013, finalised in 2020 but never ratified by the Europeans, in large part because of China’s sanctions on Euro-MPs. It would have given some European firms better access to the Chinese market, and protected Chinese investments abroad, in part by consolidating 27 bilateral investment agreements with China into one. “But this is an agreement from another era,” says Janka Oertel, of the European Council on Foreign Relations, a think-tank. “A lot has changed.” EU officials consider the CAI to be dead.

The EU is more concerned to avoid a race to the bottom. Its member countries are competing to secure Chinese investment, with Hungary in the lead. That makes it hard to attach the same kind of stringent conditions on it that China has been able to impose on European FDI in China, for instance on technology transfer, local staff or integration into local supply chains. Inward investment is governed by national rather than EU rules, so the bloc is most likely to be able to agree on principles for screening incoming investment for security risks. The hope is that a political agreement with China can at least lay down some ground rules.

The third European demand concerns Ukraine. The visit of Mr Xi to Moscow for a military parade commemorating the end of the second world war on May 9th displayed solidarity with Russia. But China-watchers reckon that Mr Xi is keen for the war to end. “The EU can legitimately ask that China tackle the re-exports of EU dual-use goods from China to Russia, which are still rising,” reckons Mr Everts. And the EU hopes to convince China to become economically engaged in Ukraine.

China’s strategy for Europe remains unchanged. It would like to peel the continent away from America, weakening and dividing the West, ideally at low cost to itself. Mr Trump made that easier by undermining Europe’s security and economy. He has also made sure that the EU and its members now have to think about de-risking from both sides, which limits the ambition on de-risking from China. None of this helps the EU’s chances of getting much of what it wants when it sits down to negotiate with the dragon. ■