EU-China Relations Face an Existential Test, but Escalation Is Not Inevitable

The European Union and China are trapped between two competing imperatives: protecting their economic interests while avoiding a cycle of retaliation that could further damage an already strained relationship, and ironically those same economies they are trying to protect. As both the United States and the European Union engage China in discussions on trade practices and broader economic issues, with outcomes expected in the coming weeks, it is increasingly important to understand China’s position, what is achievable, and what the future is likely to hold.

Expectations that China will fundamentally alter its growth model remain unrealistic. Despite years of debate about rebalancing, household consumption still accounts for only around 40 percent of GDP, and after a record year in 2025, China’s exports show no sign of slowing down in 2026, registering a year-on-year growth of 23.8 percent in July and 25 percent in August. These figures reflect a political economy that remains deeply committed to production, industrial upgrading, and manufacturing competitiveness rather than a shift toward a consumption-led model.

Brussels has so far shown remarkable restraint, partly because many European policymakers genuinely want to avoid escalation, but also because acting decisively is difficult in a union of 27 member states whose interests do not always align. Even trade defense measures, where unanimity is not required, often demand significant political capital to advance.

China, meanwhile, has been trading some of its traditional restraint for a more assertive approach. The continued holding hostage of rare earth export licenses for European firms, as well as the sanctions imposed on 14 European entities in July—a response to EU sanctions against 14 Chinese entities over their support for Russia—point in the same direction: Beijing is increasingly willing to respond quickly and assertively to a wider spectrum of actions rather than merely protest.

When it does protest, it makes sure the message is clear. The latest example is China’s publication of its “Position on the So-called Excess Capacity Issue.” For years, Beijing relied on statements, diplomatic exchanges, and technical submissions to rebut foreign concerns about Chinese overcapacity. This time, it chose to produce a comprehensive document aimed at systematically dismantling the case made by trading partners such as the United States and the European Union.

What matters most about the paper is not the strength of its arguments, but what its release reveals about Beijing’s thinking. China is signaling that its growth model is off the negotiating table. If that is the case, a durable resolution to EU-China trade tensions becomes increasingly unlikely, and a relationship defined by managed friction is here to stay.

China’s overcapacity paper advances three broad arguments:

1. Overcapacity is not uniquely Chinese. Throughout modern economic history, countries at different stages of industrial development have produced more than domestic demand could absorb and relied on exports to sustain growth.
2. Claims that Chinese overcapacity is the result of unfair subsidies are exaggerated or selective. Beijing’s argument is straightforward: Governments everywhere support strategic industries. The United States subsidizes semiconductors through the CHIPS and Science Act, the European Union supports clean technologies through state-aid mechanisms and industrial initiatives, and Japan and South Korea have long nurtured key sectors. China therefore rejects the notion that its support measures are somehow illegitimate while others are acceptable.
3. China’s industrial rise should be seen as an opportunity rather than a threat. Chinese production lowers costs, accelerates the green transition, and expands access to advanced technologies. In Beijing’s view, concerns about excess capacity are little more than a pretext for protectionism.

Condensing the 40-page paper into these three points is perhaps unfair. Yet the significance of the paper lies less in the arguments themselves, which can be challenged, than in what their publication reveals.

This matters because position papers are not casual publications. Beijing tends to use them to establish official, long-term positions. Whether on Taiwan, Russia’s invasion of Ukraine, development cooperation, or foreign policy principles, Chinese white papers and position papers often serve as enduring reference points for future policy. They are signals of intent as much as policy explanations. In this case, the paper provides two signals about Beijing’s state of mind:

1. China is preparing for a more confrontational economic environment. Beijing’s warnings reveal the assumptions that will shape its future responses: Measures aimed at reducing dependence on, or imports of, Chinese manufacturing—let alone directed at structural changes—are increasingly viewed as direct challenges to China’s development model and long-term prosperity. As a result, the paper is not simply an explanation of China’s position, but a warning that it is prepared to defend the economic approach that others identify as the source of overcapacity. This reflects a wider evolution in Chinese economic statecraft, marked by a greater willingness to absorb economic costs and retaliate in defense of strategic interests.
2. China is worried about a situation where trade partners will become increasingly less open to Chinese products and services. If concerns about overcapacity were considered irrelevant, there would be little need to devote such effort to rebutting them. The publication itself suggests Beijing understands that the issue has become politically salient in the United States and Europe, and it could pick up pace in other places, too, potentially endangering one of China’s main growth engines: exports.

What Does This Mean for Europe?

Brussels and Beijing have effectively given themselves until the visit to Beijing of EU Commissioner for Trade and Economic Security Maroš Šefčovič in October to find a way forward. The timeline is short, but both sides appear to have had an intense summer of engagements. The four working groups established after recent high-level meetings have reportedly met several times already, suggesting that neither party is ready to abandon dialogue.

Yet the Chinese Ministry of Commerce’s position paper and the date of its publication, July 28, which came after the EU and China launched the Trade and Investment Dialogue and the related negotiations at the end of June already revealed the limits of what those discussions can achieve: China is signaling that structural issues such as overcapacity are not up for negotiation. While the European Union and China may find pragmatic ways to manage tensions in specific sectors through market access arrangements, purchasing agreements, export caps, minimum pricing mechanisms, or other technical fixes, they remain fundamentally divided on the root cause of the problem.

For Brussels, Beijing’s supply-driven growth model creates persistent pressure on global markets and European industry. For Beijing, that same model is a legitimate path to development and international competitiveness. China has shown some willingness to address involution, the race to the bottom that Chinese companies and local governments are lock into to outcompete each other, which it views primarily as a domestic market problem, but it rejects the characterization of overcapacity as a structural distortion requiring reform. In effect, the two sides are debating remedies while disagreeing on the diagnosis, and thus on solutions. Notably, China has reacted negatively to the European Union’s proposed Industrial Accelerator Act, submitting a strongly worded response to the European Commission. The response criticizes what Beijing views as Brussels’ attempt to adopt requirements to ultimately channel investment into broader industrial policy objectives, including the creation of positive spillovers and, potentially, the transfer of know-how.

That leaves Europe facing a difficult reality. Evidence increasingly suggests that a new wave of Chinese exports in sectors such as electric vehicles, batteries, solar panels, and industrial equipment is placing significant pressure on European manufacturers. And the anti-subsidy countervailing duties imposed against battery electric vehicles in 2024 have done little to significantly reduce the flow of Chinese electric vehicles into the European Union. The causes are not exclusively attributable to China; Europe’s own internal divisions on how to approach the challenge China poses and its competitiveness challenges matter too. Nevertheless, Chinese production capacity has become a central factor in the debate. The result is that underlying tensions with periodic spikes are likely to become the new normal in EU-China relations.

What Comes Next?

Two broad scenarios stand out.

Scenario 1: Managed Tension

The first resembles, in some respects, the emerging U.S.-China relationship.

Washington and Beijing continue to compete intensely. Export controls expand. Entity lists grow. Restrictions remain. Yet senior officials still meet, communication channels remain open, and efforts to stabilize the relationship continue.

A similar (non)equilibrium could emerge between Europe and China. Dialogue would persist through working groups and high-level exchanges, producing occasional agreements and limited solutions while helping to prevent crises. At the same time, both sides would continue introducing restrictions when they judge them necessary.

The challenge is that the European Union’s concerns strike at the core of China’s economic model. While concerns about trade deficits have long been the expression of U.S. grievances toward China, the current composition of the U.S. economy as mainly a service economy is not equally under threat as that of the European Union. The United States’ competition with China takes place primarily on national security and geopolitical grounds, particularly in areas such as tech competition. Europe’s core concern is different and, from China’s perspective, potentially more fundamental: China needs to export less and rebalance its economy. That is a much harder proposition for Chinese policymakers to accept.

Scenario 2: Escalation

The second scenario is one where efforts to stabilize the relationship pave the way for an escalatory spiral.

October passes, or a later deadline arrives, without sufficient progress. The European Union introduces additional defensive measures, and China responds. Unlike in the past, those responses are likely to be quicker and hit where it hurts; after all, China already has plenty of information and instruments at its disposal.

By that stage, both Brussels and Beijing may conclude that dialogue offers few practical gains and that deterrence requires action. The key question then becomes whether both sides can still prevent a gradual accumulation of restrictions from turning into a sustained cycle of retaliation with no end goal in sight. As this author has argued before, if escalation is the only way to achieve a more balanced relationship, then Brussels must know very clearly what it wants to achieve.

The Bottom Line

The overcapacity position paper says little that China has not argued before. Its importance lies elsewhere. It makes unmistakably clear that Beijing has no intention of recognizing overcapacity as a structural problem, let alone one that requires changes to its economic model. Yet that recognition is precisely what is necessary for a durable settlement with the European Union. Absent that, sectoral agreements can be reached, but they will not prevent additional, future escalation. The consequence would not necessarily be a trade war, but it almost certainly would be continued friction with periodic spikes.

The debate is therefore no longer about whether tensions will persist; it is about how Europe and China choose to approach and manage tensions in a world where they need each other and they will keep needing each other. Neither Brussels nor Beijing has yet found a convincing answer to that question, but if European Commission President Ursula von der Leyen’s State of the European Union address is an indication of EU preferences and hopes, the first scenario—managed tension—seems to be the desired outcome.

As the visit of Commissioner Šefčovič to Beijing approaches on October 8 and 9, it should become clearer which of the two scenarios is more likely to materialize. If the coming weeks pass without any major new EU investigations, and if both sides reach an initial—albeit likely superficial—agreement that addresses some European concerns, then the first scenario will appear the more plausible outcome. But the durability of that scenario can only be tested if, in the coming months, dialogues and access continue despite the likely tensions that will emerge.

Francesca Ghiretti is a senior associate (non-resident) in the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.