EU prepares trade confrontation with China: France and Germany are pushing for a quick market exclusion mechanism

Driven by Merz and Macron, the EU is arming itself for trade wars. Handelsblatt reveals the details of an economic weapon that Beijing is supposed to bring to the negotiating table.

Emmanuel Macron and Friedrich Merz: France and Germany are pushing for an even stricter EU mechanism. Photo: Oliver Berg/dpa

Brussels, Berlin, Paris, Beijing. Germany and France want to equip the EU with new, far-reaching powers in order to assert themselves in the trade dispute with China. The Commission should be authorized to expeditiously exclude Chinese companies from the European internal market. The Handelsblatt learned this from diplomats and top officials.

The background is the concern that China will respond to planned EU protective measures for European industry by banning the export of critical raw materials. Such restrictions had already forced European factories to reduce production last year.

In order to no longer be open to blackmail, the EU must be able to strike back, is the belief in Berlin and Paris. There is no reason “why we should not react when our sovereignty is at stake,” said French President Emmanuel Macron recently. Chancellor Friedrich Merz (CDU) has also called on the EU to take more consistent action against Chinese market distortions.

Merz and Macron want to formulate their demands in a joint paper before the EU summit on October 15th and 16th. Work on the powerful new trading instrument is already underway in the Commission. According to senior EU officials, Commission President Ursula von der Leyen could announce the move at the summit. The commission will then “present its torture kit,” says a senior official.

China

China's domestic economy is becoming increasingly weaker

A top diplomat explains: “China’s most vulnerable point is its dependence on the European market.” The country is dependent on exports to the EU, which is exactly where the EU must start in an emergency.

Time is running out. Chinese companies produce significantly more than they can sell in their own country. They use predatory prices to penetrate export markets - and in doing so put German industry in particular under great pressure. Economists speak of a “China shock”.

Since the USA has sealed itself off with high tariffs, even more Chinese imports are reaching Europe and are exacerbating the industrial crisis. According to the Federation of German Industries (BDI), 15,000 industrial jobs are lost in Germany every month.

Chancellor Merz accuses China of deliberately linking market economic dynamics with state interventions, with overcapacity, aggressive pricing, with an undervalued currency and with highly subsidized exports. “This puts massive pressure on our companies in the EU internal market and also on third markets,” he said in mid-September at the Entrepreneur Day of the Federal Association of Wholesale and Foreign Trade.

EU should respond within days

The threat of market exclusion is supposed to be the last resort. Berlin and Paris hope to persuade China to make concessions by sending a signal of European determination so that the new trade instrument never has to be used.

The federal government continues to fundamentally rely on open markets. It has no interest in actually blocking China's access to the internal market. The consequences would be catastrophic for both sides. China is the EU's second largest trading partner with a trade volume of 759 billion euros. Berlin wants to bring Beijing to the negotiating table with the deterrent mechanism - and if necessary also the USA.

Diplomats emphasize that the project is not directed against specific countries, but is “agnostic”. In fact, it is primarily US President Donald Trump's harsh trading methods and the conflict with China that are driving Europe to upgrade its trade policy.

The countermeasures should range from the exclusion of individual companies from the internal market to trade restrictions against an entire country. In principle it would amount to a kind of “kill switch”. The Commission could trigger this itself in an emergency.

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Member States could then change or stop the decision by qualified majority. For this to happen, at least 55 percent of the member states would have to come together, which also represent at least 65 percent of the EU population.

High-ranking officials emphasize that rapid deployment is crucial: the current EU protection instruments only take effect after months of review periods and lengthy negotiations in the Council of Member States. The new instrument is intended to enable Brussels to respond to attempts at economic blackmail from other states within a few days.

Lesson from the dispute over rare earths

The trade conflict between Europe and China is currently resembling an arms race. The EU is preparing protective tariffs on Chinese hybrid cars. A step that, according to expectations in Brussels, could trigger a Chinese counterattack.

Just a few days ago, the Chinese Ministry of Commerce warned Europe not to introduce “discriminatory restrictions” against Chinese companies or products. In this case, Beijing will “respond decisively.” These threats are taken very seriously in Berlin, Brussels and Paris. If China stops exporting rare earths, the EU will be defenseless, says a senior official.

Deterrence only works if it is credible German government official

The idea for a kill switch is not new. At the end of 2023, the EU decided on the “Instrument against Economic Coercive Measures”. If the Union or an individual member is blackmailed economically, for example with tariff threats, financial sanctions or delivery stops, Brussels can propose countermeasures. However, the Member States must first determine, by a qualified majority, that there is indeed a case of economic blackmail. This gives powerful countries like China and the USA the opportunity to paralyze the EU before the Commission can act.

The weakness of this regulation was already discussed in Brussels back then. During the negotiations, however, the member states insisted on maintaining control. In particular, then-Chancellor Olaf Scholz was against expanding the commission's power, those in the know report. The “instrument against economic coercive measures” is therefore hardly practical.

Germany and France now want to correct this design flaw. “Deterrence only works if it is credible,” says a senior Berlin official.

The Chancellery takes over

The federal government receives support from the Bundestag. “We have to prepare for a tough confrontation with the Chinese leadership,” says Green Party politician Toni Hofreiter. “If we want to save European industries and the jobs associated with them, Europe must be resilient.”

Because German industry has invested heavily in China, especially car manufacturers, Berlin has long shied away from confrontation with Beijing. There are still discrepancies. In recent months there has been intensive discussion in the Chancellery about the extent to which Germany should support a stricter trade policy against China.

But it is now clear that Berlin is prepared to do much more than was the case in the past. This concerns new tariffs for strategic industrial sectors, where, according to government circles, there are already fundamental agreements with France, and also the “kill switch”.

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The Federal Ministry of Economics, which is also led by the CDU, is much more cautious and fears the backlash from China. According to those involved, this only plays a minor role in the negotiations. The Chancellery is said to have largely taken over the talks with France, while the Ministry of Economic Affairs is often only informed about the status of the proceedings after the fact, if at all.

A rethink has also begun in German industry. Companies such as Mercedes, VW and BMW, which had spoken out against trade barriers for years out of concern for their business in China, are now under so much pressure from Chinese competitors that they too are in favor of targeted protective measures.

The next conflict is already programmed

The German Auto Industry Association (VDA) recently stated that new tariffs against China would be justified under certain conditions. “Trade protection instruments” could be used “from a certain point of distortion of competition,” said VDA President Hildegard Müller to the Handelsblatt. The affected sectors must be closely involved - also with regard to “effects on the European market and the risk of possible countermeasures”.

This aspect is “extremely important,” emphasizes Jonathan Hackenbroich, a former EU Commission expert who worked on the old instrument against economic coercion. Politics and business must have “the most shared understanding of escalation risks and how to minimize them”. Every EU measure currently being considered requires “a sophisticated escalation management strategy”.

It is still unclear whether there will actually be tariffs against Chinese hybrid cars. Trade Commissioner Maros Sefcovic is initially relying on a negotiated solution with Beijing. He will meet Trade Minister Wang Wentao in China on October 8th and 9th. China should, if possible, undertake to limit its car exports to Europe in particular. If Beijing agrees to this, it would at least be a respite from the perspective of European officials.

Related topics

European UnionChinaBerlinGermanyFriedrich MerzEmmanuel Macron

But even a success in Beijing is unlikely to change the need for the new instrument from Germany and France's perspective. The next conflict is already looming: With the “Industrial Accelerator Act,” the EU wants to introduce “Made in Europe” requirements for strategic industries next year.

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