Europe needs a broader trade-defence toolkit against a mounting China shock

The European Union is experiencing a severe and accelerating ‘China shock’. We predict the EU’s trade deficit with China to reach €400 billion in 2025 – more than double the level before the pandemic – despite the euro area as a whole continuing to run a trade surplus of over €400 billion with the rest of the world. In this context, the China imbalance stands out.The imbalance traces back to pandemic-driven global supply-chain disruptions and the energy crisis price shock following Russia’s invasion of Ukraine, both of which caused producer prices to rise sharply in Europe. During the same period, China entered a prolonged deflationary phase, stemming from overinvestment in manufacturing, creating the overcapacity we see today. This divergence in costs for European versus Chinese producers has given Chinese exporters a decisive price advantage in many sectors, including machinery, chemicals, electric vehicles and green technologies.The textbook adjustment mechanism that should have mitigated this gap – appreciation of the renminbi against the euro in response to increased European imports of Chinese goods – has not occurred. Instead, the renminbi has remained remarkably stable, even losing some ground against the euro. The result is precisely what economic theory would predict: a loss of European market share in the Chinese market, third-country markets and increasingly its own market. This is particularly surprising given that Europe maintains a trade surplus with the world, which should indicate healthy global competitiveness for Europe.EU trade-defence instruments, such as anti-dumping and anti-subsidy measures, are useful but do not have the scope for the magnitude of the problem. These tools are slow to be activated, resource-intensive, firm- and product-specific and blind to economy-wide distortions that affect thousands of goods simultaneously. Waiting for case-by-case investigations while Chinese exports flood the market is not a viable strategy when the damage to European industry is becoming structural.Domestically sourced input requirements are sometimes proposed as a countermeasure, but these would further raise production costs for European manufacturers and potentially disrupt international supply chains, ultimately making the EU less competitive internationally.What Europe needs is a more comprehensive and responsive trade-defence toolkit that can address systemic distortions – not just isolated instances of dumping or subsidies. The current instruments should be reformed to become faster and to cover broader product categories where there is clear evidence of generalised unfair advantages. The EU also needs new instruments that can recognise and react to the effects of large and persistent real-cost divergences between major trading partners.One promising tool would be explicitly focused on monitoring and responding to significant inflation-driven (and to a lesser extent exchange-rate driven) differences in competitiveness. Such an instrument would complement rather than replace existing anti-dumping and anti-subsidy measures. It would allow the European Commission to track sectoral price developments, set transparent thresholds for concern, engage in structured consultations with China and – if they do not work – apply calibrated measures against the market distortions stemming from the inflation differences.This would be more automatic and economy-wide than today’s fragmented approach, while remaining targeted enough to avoid indiscriminate protectionism. Critics may rightly point to potential tensions with narrowly interpreted World Trade Organization rules, yet the EU has already demonstrated that it can act decisively when core industrial interests are at stake – the carbon border adjustment mechanism (or levy on imports of certain carbon-intensive goods) being a prominent example. A case brought by the EU to the WTO alleging ‘nullification and impairment’ of trade benefits could provide legal and diplomatic cover for the more assertive use of trade-defence.The China shock derives from a combination of genuine Chinese industrial upgrading and powerful, artificial price advantages. China’s current policy trajectory, as signalled in its latest draft Five Year Plan, shows no imminent shift away from investment-led growth and manufacturing overcapacity. Waiting for Beijing to rebalance voluntarily is not a realistic plan. If Europe fails to adapt its toolkit to respond to the scale of the problem, the consequences will be continued deindustrialisation, accelerated job losses in strategic sectors and a dangerous erosion of the manufacturing base required for technological sovereignty and economic resilience.This is not a call for protectionism. It is a call for proportionality and realism in the face of a structural challenge that existing rules are not designed to handle. The EU cannot be constrained by narrow, slow procedures while its industry is steadily eroded. A stronger, more complete trade defence toolkit is essential.This is a reprint. This article has been published as part of Bruegel Zhonghua Mundus Newsletters within the EU Project China. /bruegel/zhnghu-mundus-10631731