As the world's second — and third-largest economies, China and the EU together account for roughly one-third of global nominal GDP and 30 percent of global trade. They are indispensable partners. China is a major supplier of industrial raw materials and intermediate goods to Europe, while the two sides have strong complementarity in the service trade. In 2025, the EU recorded a surplus of approximately €21.3 billion ($24.53 billion) in service trade with China. Strengthening predictability in this relationship is therefore vital not only for the two economies but also for the resilience of global value chains.

Over two decades, China-EU ties have evolved beyond simple commodity exchange to deep industrial integration. In sectors such as automotive, machinery and chemicals, European companies continue to expand their "In China, For China" strategies, benefiting from China's sophisticated supply chains and innovation momentum.

China's strengths in electric vehicles, lithium batteries and photovoltaics have become cost-effective enablers of the EU's green transition. As former European Central Bank president Mario Draghi noted in his report "The Future of European Competitiveness", leveraging Chinese supply chains is the fastest and cheapest path to decarbonization, though it poses competitive challenges to European industries. This dilemma actually underscores the necessity of coordinated cooperation.

At the same time, the EU's green transition offers significant opportunities for Chinese new energy enterprises. Driven by this synergy, Chinese investment in the EU reached €10 billion in 2024 — a 47 percent year-on-year increase — accounting for more than half of China's total investment in high-income economies.

However, in recent years, the EU policy toward China has moved beyond "anti-dumping" measures on specific products toward broader and more systemic forms of protectionism. The proposed Industrial Accelerator Act aims to increase manufacturing's share in the EU's GDP to 20 percent by 2035. It targets strategic sectors, including EVs, batteries and photovoltaics. By imposing strict conditions on non-EU enterprises — such as a 50 percent local employment mandate and technology transfers for large-scale investments — the IAA is an aggressive shift toward European industrial autonomy.

Equally contentious is the increasing securitization of investment. Since the start of the year, the EU has used the Foreign Subsidies Regulation and cybersecurity amendments to exclude "high-risk" suppliers.

Despite the mounting tensions, there are signs of pragmatic rethinking across European capitals. A recent summit of European leaders "opted for dialogue" rather than an immediate trade war with China. In the past year, high-level engagements have signaled that many European policymakers recognize the value of engagement. German Chancellor Friedrich Merz's visit in February was followed by Spanish Prime Minister Pedro Sánchez's trip to Beijing. Both visits reflected efforts to preserve established trade ties while scouting for new growth drivers. The launch of the Open Coalition on Compliance Carbon Markets is a big step toward harmonizing multilateral carbon pricing rules, proving that despite differences, the appetite for pragmatic cooperation remains strong.

Three major concerns are driving the current deadlock. The first is the "trade imbalance". Deficits are increasingly linked to concerns about deindustrialization and job losses, turning economic data into politically sensitive issues.

Second is industrial competition. Disputes in sectors such as new energy technologies are no longer about market share. They now center on deeper issues such as "subsidy transparency" and reciprocal market access.

The third concern is supply chain security, particularly as the concentrated dependence on sources of critical raw materials has fueled the "de-risking" narrative.

In this context, simply emphasizing the sheer volume of bilateral trade is not enough. The challenge is to build institutional arrangements that enhance transparency, predictability and reciprocal openness.

China and the EU should adopt a pragmatic and cooperative approach to stabilize relations. Increasing imports of high-end European equipment and premium consumer goods, leveraging platforms like the China International Import Expo, and expanding pilot programs for standards recognition could address EU concerns about the so-called "imbalances". However, efforts are required from both sides, and Brussels particularly needs to avoid excessive securitization.

Meanwhile, the varied interests of EU member states may require tailored cooperation priorities. For instance, with France, the focus could be on green finance, high-standard service sector opening, and third-party markets, while with Germany, industrial and supply chain synergy can take precedence.

Both sides should also establish a critical raw materials stability initiative that combines policy dialogue with long-term commercial agreements. Such a mechanism would transform supply anxieties into stable cooperation.

Finally, green governance offers an ideal starting point for rebuilding trust. Issues that are not politically sensitive, such as methane control, green shipping and battery recycling, offer practical opportunities for standards alignment and confidence building.

China-EU economic relations are at a crossroads. While competition is inevitable, it should remain rules-based and predictable. In an increasingly fragmented global economy, sustained dialogue serves the long-term interests of both sides far better than escalating confrontation.

Source｜China Daily

Author：Zhao Xinge, the director of the Institute of European Economics at the China Europe International Business School