‘China Shock 2.0’: EU primed for action?

Stemming the tide of Chinese goods pouring into the bloc of 27 member states was high on the agenda at the recent June European Council Summit of EU leaders.

What was discussed and decided on behind closed doors has been kept deliberately vague and terse - a “strategic debate on global macroeconomic imbalances”, feedback from the meeting suggests that the European Commission has been handed the daunting task of developing tools to address the issue while staying on the right side of the Chinese.

Certainly, the latest import and export data from the EU statistics body, Eurostat, not only provides plenty of food for thought but also serves as a rallying call to action.

They reveal that the gap between imports from China and exports to China amounted to €31.9bn in April. The expectation is the approximately €1bn-a-day trade deficit will very likely be maintained in the EU’s May and June figures, to be released later this summer.

Strengthening bloc’s defenses

In an Opinion column published by Euractiv, a publication specializing in EU affairs, Alicia García Herrero, Senior Fellow at Bruegel and Chief Economist for Asia Pacific at French investment bank Natixis, didn’t minch her words, claiming bloc was on the brink of a full-blown trade confrontation with China.

“What Brussels calls “China Shock 2.0” – the flood of subsidized exports in electric vehicles, solar panels, batteries, steel and chemicals – is no longer a theoretical risk. It is here.”

She said what emerged (from the European Council Summit) “looks like a mandate for the European Commission to strengthen the bloc’s defenses against China’s overcapacity and unfair trade practices.

“This represents a step forward from pure diplomatic ambiguity. For months, Brussels has been preparing measures such as the Industrial Accelerator Act - which is intended to boost demand for European Union-made, low-carbon steel, cement, clean technologies and electric vehicles – and potential new instruments to counter Chinese overcapacity in electric vehicles, batteries, steel and other sectors. The Council appears to have given political cover for the Commission to move ahead with concrete proposals over the summer.”

She alluded to a significant hardening in Germany’s position, Chancellor Friedrich Merz stating that China was “flooding markets” through “high subsidies” and that “subsidizing overcapacities” combined with a “currency that isn’t convertible freely” was “not acceptable”. He even floated the idea of “Plaza Accord”-style talks on the yuan.

Credible ‘Shock Plan’

However, two major question marks hang over this apparent mandate, Ferrero noted. First, will member states stay aligned when the Commission returns with specific proposals?

“The Council’s coded language and the decision to defer detailed discussion until October suggest that unity remains fragile. While France and others have pushed for tougher measures, several capitals remain deeply concerned about Chinese retaliation, the impact on their own exporters, and the risk of fragmenting the Single Market”.

Second, and more fundamental: what happens to fair competition based on China’s genuine innovation and scale?

“Protection against subsidies and overcapacity is necessary, but it is not sufficient. China has built real technological and manufacturing strengths in several strategic sectors. Simply shielding European industry from the worst distortions will not restore competitiveness if European companies continue to lag in innovation speed, permitting, access to critical raw materials, and scale-up of new technologies.

Without a credible “shock plan” to accelerate European competitiveness – faster permitting, coordinated public and private investment, skills programmes, and a genuine industrial strategy at EU level – protection alone risks becoming “a slow-motion managed decline.”

‘Perfect storm of challenges’

Europe’s automotive industry has arguably been the most impacted by China’s export drive. Last year, just over one million Chinese brand vehicles were shipped to the EU compared to around 770,000 in 2024 – despite imposition of tariffs on electric models in October of that year.

Chinese car sales have soared across Europe thanks to a wave of imports, accounting for 8.6% of the western European market in the first three months of the year, nearly double the same period a year before, according to Matthias Schmidt, a Berlin-based automotive analyst, interviewed by UK newspaper, The Guardian.

“The European automotive industry is facing a perfect storm of challenges,” said Frank Schnelle, executive director of the Association of European Vehicle Logistics (ECG). “The industry is having to deal with significant production overcapacity, which is not only a European issue, but a global one.”

Exports are falling sharply, those to the US down approximately 13.5% last year, to around 668,000 vehicles, as Trump’s import tariffs kicked in. And more recent data shows the pace of decline went up a couple of gears in January and February, year on year.

“The decline in EU exports to China is even more notable, having been one of the most important markets for European vehicle manufacturers,” Schnelle said. “Concurrently, Europe is experiencing a sizeable increase in vehicle imports from China, fundamentally changing the balance between export and import flows”

More Tariffs?

Brussels’ response to the Chinese export surge appears to focus on strengthening the barriers of entry to the EU market. Having introduced customs duties on electric vehicles in 2024, the European Commission is now thought to be mulling a tax on plug-in hybrids (PHEV) - seen as a way of plugging a gap in a customs loophole which certain Chinese manufacturers have exploited by shifting their product range towards this type of powertrain.

Furthermore, these new customs duties would complement the proposed industrial accelerator scheme, which provides for the introduction of a minimum European content threshold as a condition for receiving public support.

‘Made in Europe’

However, many Chinese manufacturers are choosing to establish a production presence in Europe in anticipation of further tariff implementation. BYD, for example, is setting up an assembly plant in Hungary this year, whilst SAIC (MG) has chosen Spain as a base.

Irony writ large, a number of European automakers, faced with overcapacity issues, appear to be more than ready to offload their certain assembly lines or whole plants, to their Chinese rivals even though it is helping them to increase market share.

Chery is in discussions with Nissan to take over part of the latter’s only European plant in north-east England, having already acquired a plant from Nissan in Barcelona.

Meanwhile, Geely has reportedly agreed to buy part of Ford’s plant in Valencia in southern Spain while Stellantis has announced that two of its Spanish plants would manufacture cars for Leapmotor.

Production bases for Chinese brands in Europe would mean that the introduction of new customs duties would be a temporary and short-term temporary measure as the new ‘Made in Europe’ rules are not expected to come into force for several months, or even several years.

Boost for Automotive LSPs

Chinese automakers’ export surge to Europe and the prospect of them manufacturing vehicles across the continent has sent the alarm bells ringing among their incumbent counterparts and triggered action from EU authorities.

However, in an interview with AJOT, earlier this month, Sander Van Der Meer, SVP Vertical Market Hi-Tech and Automotive at Geodis, highlighted how Chinese brands were emerging as the main driver of demand for automotive logistics services in Europe.

“Chinese OEMs are already a material part of the European automotive story and it’s only going in one direction. The shift from import-only to local European production is accelerating and with it, growth in supplier networks, inbound parts, finished vehicle distribution, and after sales. Chinese OEMs are absolutely on our radar — they're a priority for us. We have a strong existing customer base in the automotive vertical and we're actively engaging with Chinese brands that are expanding in Europe.”