Beijing warned Brussels not to “fantasize” about forcing China to make concessions by adopting tough positions. At the same time, the EU confirmed its plan to introduce a radical new mechanism, known as the “emergency cutoff mechanism,” which would allow Brussels to immediately exclude China from the EU single market.
According to the South China Morning Post on October 17th, just a week after the unexpected agreement was reached between the two parties to limit the number of Chinese hybrid vehicles exported to Europe, tensions have once again risen.
The Chinese Ministry of Commerce issued a statement on Friday stating that the European side should not hope for benefits through pressure, and should not underestimate China's determination and ability to safeguard its own interests. We urge the European side to work towards a common goal with China, in order to promote the healthy and stable development of China-EU economic and trade relations.
Previously, two member states of the European Union, France and Germany, jointly proposed to introduce a new trade measure aimed at countering China's so-called coercive actions and economic distortions. Before this week’s European Council summit, it was widely believed that the EU's "dual-track" strategy—diplomatically engaged on one hand, while threatening with action on the other—had been effective.
The Chinese Ministry of Commerce pointed out that China and Europe have reached an understanding regarding hybrid vehicles, based on the three principles of abiding by WTO rules, adhering to facts, and non-discrimination. This understanding is mutually beneficial and equal. It effectively safeguards the actual interests of Chinese enterprises and addresses the concerns of European parties, preventing the escalation of trade tensions between China and Europe. The claim that "European pressure has worked" is baseless.
According to Reuters, European Commission President Ursula von der Leyen said on Friday that the Commission will propose restrictions on more Chinese imported products. The scope of these measures will extend beyond the safeguard measures previously agreed with Beijing, which aim to cut the export volume of Chinese hybrid vehicles to Europe by half.
Földelein said at a press conference after the end of the EU summit that the agreement reached between the EU and China cannot address the structural imbalance in trade between the two sides. Currently, the EU's trade deficit with China exceeds 1 billion euros per day (approximately 112 million US dollars).
She said, “This is why we must take action. Our industrial sector has been calling for action, and we heard their voices. We will respond accordingly, including taking more protective measures.”
She stated that this approach has clearly received support from the leaders of EU countries.
Fraudelein said she welcomes a document issued by France and Germany last month. The document proposes that the EU establish a new rapid response mechanism to take countermeasures against countries that harm the interests of the EU, thereby enhancing the resilience of the EU economy.
She stated that the European Commission will develop a new tool to quickly restrict the entry of relevant countries into the EU single market, in accordance with EU interests.
She also stated that the European Commission, as the EU administrative body, will propose a new tool in December to reduce the dependence of EU companies on single sources for certain key supplies.
The European Commission will also propose the establishment of a “solidarity mechanism” to assist member states or industries that are under coercion or retaliation from countries outside the EU.
According to The South China Morning Post, during the lunch meeting discussions, German Chancellor Merz was one of the leaders who criticized Chinese policies most harshly. This shift in stance is particularly noteworthy for a leader who called for signing a free trade agreement with Beijing just over half a year ago.
Currently, EU officials say that Berlin hopes to play a leading role in the EU's policy towards China. German officials confirmed during the summit that the current policy shift is irreversible. They expressed excitement, stating that other member states have already supported the concept of a so-called “emergency cut-off mechanism”.
Although Földelein did not publicly state which industries she would target, she has informed EU leaders that the chemical and machinery industries are priority areas.
French President Macron said at a press conference after the summit that the EU should focus on measures regarding chemicals, plastics, and ferroalloys.
According to official sources, they hope to introduce this new tool in December as part of a package of measures. The plan also includes a ‘diversification tool’ that aims to reduce corporate dependence on supplies from China, as well as a ‘solidarity mechanism’ designed to compensate companies or parties affected by Beijing’s countermeasures.
They stated that if Beijing takes coercive measures against Europe, such as cutting off exports of rare earths to Europe in response to the EU's intensified trade investigations, the EU will utilize this tool.
To activate this tool, the support of at least 13 out of the 27 member states of the European Union is required. However, all parties also acknowledge that ensuring that this tool complies with World Trade Organization rules will be challenging.
At the summits held on Thursday and Friday, leaders of other EU member states also expressed their support for the EU's "dual-track" strategy towards China.
Belgium’s Prime Minister Bart De Wever said at a press conference: "All parties involved agree that we need to address these issues. Currency devaluation, overcapacity caused by subsidies, and creating artificial dependencies in key areas and weaponizing them are all problems that must be dealt with."
Lithuania's President Gintas Naouseda told reporters during the summit that if "China engages in certain unfair trade practices," the EU would implement a so-called "emergency cut-off mechanism" to "restrict Chinese products from entering European markets, including by completely closing our markets."
Naoseda added, "That would be an extreme measure, and a very strict tool."
According to sources familiar with the matter, European officials are currently analyzing the possible escalating actions by Beijing and the corresponding responses from Europe. China has been trying to test the unity of the European Union and foment tensions between its member states. EU officials expect that China will resort to the same tactics again.
China holds a dominant position in the key rare earth supply areas, and has used this as leverage in trade negotiations with the United States. This gives Beijing a powerful deterrent, as Europe attempts to restrict imports of Chinese goods while also needing to ensure that its domestic factories have access to the necessary raw materials. 46% of the EU’s rare earth imports come from China, and the import of heavy rare earths depends entirely on China. Heavy rare earths are crucial for manufacturing permanent magnets, which are essential components for defense systems and electric vehicles.
The verbal confrontations between the two sides may indicate that the situation will be very challenging in the coming months. The EU must proceed with caution while advancing its economic security agenda, in order to maintain dialogue with Beijing. These tensions are likely to intensify when Maros Sefczyvic, the EU's trade affairs chief, continues to hold consultations with Chinese officials next January.
The Wall Street Journal quoted Andrew Smoller, director of the Asia program at the European Commission's Foreign Affairs Department, saying: "The proposals contained in the French-German joint document were completely unimaginable in the past. In a sense, this represents a rather dangerous political trend for China. Therefore, the strategy that China is more likely to adopt is actually to try to undermine this emerging alliance within Europe."
Europe faces the challenge of maintaining its current stance of unity. In the coming months, Europe will hold several elections, including one in France that could lead to political turmoil. These elections may make it more difficult for countries within the EU to take concerted action.
Located in Berlin, NIOA BARQUIN of the Rongding Group analysts stated that if China takes strong countermeasures, it could also cause European officials to retreat.
He said, "No matter how united Europe is today, this unity will be tested if China launches a strong counterattack."
