The EU Shouldn’t Fight China’s Protectionism with More Protectionism

By
Pieter Cleppe
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Copyright: "Dragon" by miheco is licensed under CC BY-SA 2.0

In recent months, the debate on the EU’s trade deficit with China has intensified. In May, the EU’s 12-month rolling trade deficit with the country reached 376 billion euro in May, according to Eurostat, which is 8% higher than a year earlier. In 2025, for the first time, every single EU member state had a trade deficit with Beijing.

In response, the European commission and a growing group of EU member states are calling for stronger measures against China. One diplomat from a major EU country recently raised the alarm, stating: “It amounts to the destruction of our industrial base.”

As has been widely documented, China’s export boom has been artificially inflated by an undervalued currency and mass subsidies.

In the past, China mostly exported cheap goods, but those days are long over, with the country now selling high-tech products to the world. In 2025, Chinese electric vehicle (EV) exports to Europe increased by 26 percent compared to the year before, despite EU tariffs introduced a year before.

At the EU Summit in June, EU leaders sounded the alarm about “global macroeconomic imbalances” but stopped short of more aggressive language. Afterwards, the EU and China agreed to enter three months of talks to try to avoid a trade war over import/export imbalance, in their first joint statement in seven years.

Germany, Spain and Greece, which have deep trade ties with China, remain reluctant to agree with protectionist measures. According to rumours,  EU quotas on hybrids and chemicals could be potential responses, to be decided this autumn.

Failing Tit-for-tat protectionism

Tit-for-tat protectionism against China has not delivered positive results in recent years.

In 2024, the imposition of EU tariffs failed to curb imports of Chinese EVs, as Chinese producers switched to hybrids and localised production in response.

Then, China launched investigations into several European exports, including French cognac, Spanish pork, and German luxury cars.

In April 2025, after US President Donald Trump ratched up tariffs for China to more than 100 percent, the country reacted by restricting exports of rare earths in a targeted way, hurting U.S. defence and automobile manufacturers as well as disrupting global industrial supply chains. Chinese exporters also simply diverted trade flows through Southeast Asia and Mexico to circumvent the U.S. tariffs. After talks with Chinese President Xi in October 2025, Trump cut some of the tariffs on China again.

Also U.S. semiconductor restrictions on China, originally imposed by former US President Joe Biden, have “backfired”, in the words of Nvidia’s founder Jensen Huang. He explained that Nvidia’s share of the Chinese market dropped from 95% to 50% during Biden’s term, while the restrictions had pushed Chinese companies toward homegrown alternatives, spurring Chinese investment in the industry.

Would the EU perhaps have more leverage than Trump? There is of course the option to impose extra restrictions on China to acquire ASML’s advanced semiconductor manufacturing equipment, but “those restrictions would take much longer to affect China than Chinese export controls would take to disrupt the supply of inputs into European industry”, according to Frances Li of the Economist Intelligence Unit.

Simulating an EU-China trade war

A new study by economists Joep Konings, Glenn Magerman and Alberto Palazzolo has simulated an EU-China trade war. The study quantifies the economic cost of various potential escalation scenarios: an extra 10 percent EU tariffs on all Chinese goods imports, an extension of such tariffs to Chinese services imports and targeted Chinese retaliation on selected EU export sectors.

Importantly, the study concludes that in the third scenario, the case of Chinese retaliation, “the EU-average GDP loss” would amount to 0.07% of EU GDP.

Thereby, it warns that “Ireland (−0.23%), Czechia (−0.25%), Slovakia (−0.20%), and Germany (−0.13%) are the most exposed, reflecting the deep concentration of Chinese retaliation on their core manufacturing sectors. (…) Germany and Central and Eastern European manufacturing hubs are hit hardest.”

In sum, EU protectionism to counter Chinese protectionism is only going to make matters worse.

The EU is protectionist itself

As much as it is fair to criticise China for protectionism, the EU is not exactly innocent either. There are the EU’s “non-tariff barriers” or “regulatory protectionism”, whereby it aims to keep out competition through bureaucracy. And there are all kinds of tariffs, with the EU’s  climate tariff, the Carbon Border Adjustment Mechanism (CBAM), which is particularly damaging to poor African economies, as the latest example.

Furthermore, an example of this month is the European Parliament’s decision to not classify soybean oil as a “high-risk” feedstock for indirect land-use change, within the framework of the Renewable Energy Directive (RED). The protectionist element here is that soybean oil is treated differently from non-European imports, like palm oil, which is now the only feedstock in the “high-risk” category.

In response, Belvinder Sron, Chief Executive Officer of Malaysia’s palm oil council, sharply criticised the decision, saying: “This is about consistency, not competition between crops. When two commodities are measured against the same rules, they must be judged by the same evidence.”

The evidence is indeed that, according to Global Forest Watch, Malaysia lost only 0.56% of its remaining primary forest in 2024. That is less than the 0.87% loss in Sweden. Local industry standards seem to have delivered a significant decrease of 13% between 2023 and 2024. Yet “deforestation” is used as the justification to make the distinction.

Chinese dumping is not the key problem

Furthermore, as Daniel Kral of Oxford Economics points out, “the EU’s key problem is not China dumping goods in the EU – as the EU’s share in China’s exports is flat. It is, first of all, a loss of EU exporters’ market share in third markets, and secondly a staggering collapse in the EU’s share of China’s imports – from 12% in 2019 to 8% now. No EU levers address these two things.

In other words, before contemplating more EU protectionism, the EU should perhaps focus more on changing domestic policies that undermine EU competitiveness. The first one that comes to mind here is the EU’s Emission Trading Scheme (ETS), a de facto climate tax. This makes EU industry uncompetitive, as it is contributing to exorbitant energy prices. Yet, despite some tinkering, the European Commission and even a number of Member States firmly support ETS.

Conclusion

Opening up trade amongst free democracies is a no-brainer, but even supporters of free trade have been struggling with the question of trade restrictions on China, with its central planning and massive subsidies. Also here, however, it may well be a mistake to introduce more protectionism.

In that respect, it is also important to question the assumption that China is as economically strong as the proponents of tariffs in the West contend. In China, state-backed “zombie” companies are estimated to account for more than 12% of all registered firms in China in 2026, more than double their share in 2018. Then we haven’t even discussed China’s dire demographics, with some estimates putting China’s population in 2100 at only 310 million, which would mean that in 75 years, the U.S. will be larger than China.

In any case, whatever the EU decides, important is that it first addresses homegrown burdens of competitiveness, before thinking of risky experimental tit-for-tat protectionism.

 

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