A sign of weakness
EU postpones resolution on trade dispute with Beijing until October and backs off punitive tariffs. Simulation by experts of an escalation confirms that China would win.
BRUSSELS/BEIJING (our own report) – The European Union is refraining, for the time being at least, from imposing punitive tariffs on imports from China or taking other restrictive trade measures. Brussels is keen to reach a settlement with Beijing by October that could resolve its dispute over the bloc’s growing trade deficit with the People’s Republic. This was confirmed by European Trade Commissioner Maroš Šefčovič on Monday following intensive talks in Brussels with China’s Minister of Commerce, Wang Wentao. The dispute stems from the fact that China’s exports to the EU are still rising, while the export performance of Germany and the EU is flagging. However, a study by the Kiel Institute for the World Economy (IfW) shows that Germany’s deteriorating trade balance with China is primarily due to a lack of investment in innovation in Germany. This contrasts with the government’s claim that the German economy is the victim of unfair Chinese subsidies and a massively undervalued Chinese currency. Chancellor Friedrich Merz recently threatened to introduce tough measures against China. But experts warn that this would trigger an economic war that EU would probably lose. This is the conclusion of a recent table-top simulation of an escalating trade conflict and the options available. The study shows that the EU’s decision to back off from imposing punitive tariffs is a predictable sign of weakness.
On the defensive
The deepening trade deficit of EU member states with China has been a cause for concern within Europe for some time now. Last year, it reached 360 billion euros. That amounts to a volume of around one billion euros a day. The reason for China’s relative strength is that its industries are increasingly able to produce goods at the highest technological standard and at very low cost. This is thanks in part to China’s capacity for economic planning and the economies of scale afforded by production for a huge domestic market. Technically sophisticated Chinese goods are increasingly able to outcompete European products. This has been seen, for instance, in the case of solar panels, wind turbines and electric cars – all green-tech products that the EU sought to promote through its Green Deal in the hope of securing leadership on the global market. With domestic companies now on the back foot across the EU, Brussels and the EU member states are responding to Chinese success by weighing further defensive measures. The EU began back in October 2024 to impose tariffs of between 17 and 35.3 per cent on imports of Chinese electric cars. Further measures are in the pipeline – such as yet more restrictions on telecommunications technology from the People’s Republic, which allegedly to poses a security risk.[1]
Home-grown problems
These measures are not without their critics for several reasons. Firstly, China’s foreign trade surplus is by no means special. According to the latest calculations, this surplus amounts to just under 4 per cent of China’s overall economic output.[2] Although this is more than the EU’s own average trade surplus, which stood at 1.9 per cent of the Union’s GDP last year, it is significantly less than Germany’s trade surplus, which amounted to 4.6 per cent of German GDP in 2025, according to statistics published by the Federal Ministry of Finance. Indeed, in 2024, it had even reached 5.8 per cent.[3] So German criticism of China’s export surplus is, once again, based on double standards. What’s more, a recent study casts considerable doubt on the notion that the current weakness of German industry in particular is primarily attributable to growing Chinese exports, seen as “unfair”. As the study conducted by the Kiel Institute for the World Economy (IfW) finds, “only around one-third of Germany’s market share decline … can be mechanically attributed to China’s expansion.” The truth, the analysis concludes, is that there are “more home-grown challenges” and the problem cannot be explained solely by the rise of China.[4] A “lasting solution”, the policy brief argues, lies in “investment in innovation and new technologies”.
Going on the offensive
This insight will not prevent louder calls within the EU for new restrictions on Chinese imports. High tariffs and import quotas are both under discussion. France, in particular, has been calling for tough measures, while Spain, in particular, is worried about any push towards a trade war with China. Madrid, finding itself on a collision course with the Trump administration, is seeking to offset US pressures by improving relations with Beijing. For a long time, Germany kept a low profile on this question – out of concern for the substantial investments made by a number of major German corporations in China, particularly in the automotive and chemical industries. At the EU summit on 18–19 June in Brussels, however, Chancellor Friedrich Merz decided to strike a tougher note. In particular, he claimed German industry was at a disadvantage primarily because the Chinese currency was undervalued by 30 per cent. This allegedly helped Chinese companies to “flood” European markets and was “unacceptable”.[5] Merz had previously reported that he had discussed the matter on the side-lines of the G7 summit with President Trump, “who sees it the same way”.[6] The view that the yuan is undervalued is widely repeated. However, the “30 per cent” figure cited by Merz can only be seen as confrontational. The International Monetary Fund (IMF) estimates the undervaluation figure at no more than 16 per cent.
A new Plaza Accord
It is highly unlikely that the European Union will succeed in forcing China to devalue its currency – all the more so since Merz has spoken of achieving “a new Plaza Accord”. Under the Plaza Accord of 22 September 1985, the US, the UK, France, West Germany and Japan agreed to bring about a targeted devaluation of the US dollar and revaluation of the deutschmark and the yen. This move was intended to help the US escape its huge trade deficit. In fact the Plaza Accord was only partially successful: the US trade deficit with West Germany was reduced, but the trade imbalance with Japan remained. And for Japan, the arrangement triggered a recession in Japan, with considerable long-term economic damage, ushering in the country’s ‘lost decade’. It certainly cannot be assumed that China would agree to a comparable measure – with potentially similar consequences for its own economy. Indeed, the view from Beijing is that calls for a new Plaza Accord are merely intended as a means of exerting political pressure.[7]
Defeat in the trade war
Upping the ante in this way can be just as risky as introducing trade barriers. The Financial Times reported in mid-June on a ‘table-top simulation’ of how a trade war between the EU and China would unfold. Think-tank experts and academics played through various war-game options. Their scenarios included the use of what is arguably the EU’s most potent weapon: an embargo on products from the Dutch company ASML, which makes semiconductor manufacturing machinery on which China remains dependent. In the simulation China reportedly responded by imposing an embargo on rare earths and on raw materials essential to Europe’s pharmaceutical industry.[8] Unlike a move to halt further exports of the ASML chip-making machines, both of China’s retaliation options would take effect at relatively short notice and would be capable of quickly inflicting serious damage on European industry. The Financial Times noted that, in this simulation, the EU’s firepower was inadequate. Brussels would have to accept mere token concessions from Beijing in order to avoid an all-out economic war, which Europe was bound to lose. Although the EU has now made a strategic decision to secure its own access to rare earths, this is likely to take years, if not decades.
Postponed until October
Following talks with Germany’s Economic Affairs Minister Katherina Reiche on Sunday, China’s Minister of Commerce Wang Wentao met with EU Trade Commissioner Maroš Šefčovič on Monday for in-depth discussions. Šefčovič subsequently stated that “constructive” negotiations had taken place and that both sides aimed at reaching a mutually acceptable solution. This is supposed to be achieved by October.[9] Reiche, for her part, had already made similar conciliatory comments. It can be concluded that Berlin and Brussels are aware of China’s “escalation dominance”. Realising they are likely to lose a trade war, the Europeans are refraining from a hot conflict with China for the time being – not, of course, for the sake of peace but in acknowledgement of their own weakness.
[1] Kelvin Chan: EU plans phase out of high risk telecom suppliers, in proposals seen as targeting China. apnews.com 20.01.2026.
[2] Global imbalances have little to do with Europe’s industrial woes. economist.com 25.06.2026.
[3] Leistungsbilanzsalden im internationalen Vergleich. bundesfinanzministerium.de 20.02.2026.
[4] Martin Greive, Julian Olk, Olga Scheer, Moritz Koch: Deutschlands China-Schock laut Studie größtenteils hausgemacht. handelsblatt.com 19.06.2026.
[5] Finbarr Bermingham: Germany backs EU’s tough China line with call for ‘Plaza Accord’ talks on yuan. scmp.com 20.06.2026.
[6] Jakob Hanke Vela, Martin Benninghoff, Martin Greive, Olga Scheer, Julian Olk: Wie die EU sich auf einen Showdown mit China vorbereitet. handelsblatt.com 18.06.2026.
[7] The world does not need a new ‘Plaza Accord’: Global Times editorial. globaltimes.cn 21.06.2026.
[8] Alan Beattie: If Brussels starts a trade war, Beijing will finish it. ft.com 16.06.2026.
[9] Peggy Corlin: EU sets October deadline to get ‘tangible’ results with China. euronews.com 29.06.2026.
