There will be a small showdown in Beijing at the end of this week. EU Trade Commissioner Maroš Šefčovič meets his Chinese counterpart Wang Wentao. The EU's future course towards China depends on whether Šefčovič returns with at least somewhat concrete commitments to reduce the Chinese trade surplus. A week later, the heads of state and government will decide at the summit whether they will embark on a confrontational course or not.
Both sides have been negotiating since June. The EU wants to reduce its trade deficit of one billion euros a day with China and protect domestic industry from Chinese competition. Šefčovič set the October deadline to start the talks.
The negotiations are going slowly. “We are definitely not at the finish line,” admitted Šefčovič in an interview with the Politico portal at the end of last week. However, he continues to hope for concrete approaches on how Chinese exports can be limited in important sectors. The EU also needs clarity on the export restrictions for rare earths.
Germany and France obviously don't want to wait any longer. In the coming days, Chancellor Friedrich Merz (CDU) and French President Emmanuel Macron want to present a position paper on China. According to information from the F.A.Z. for a new trade defense instrument with which China can be expeditiously excluded from the internal market. EU diplomats speak of a “red button” that takes effect within 24 hours.
The European Commission should be able to activate the instrument if China attacks the EU economically. It is a defensive tool that Europeans can use to defend themselves against Chinese pressure. The member states should only be able to stop the Commission if they organize a qualified majority against it. This gives the Commission great scope for action. As a result, China could no longer prevent decisions by getting individual EU states on its side through pressure and promises.
The easiest way to achieve this would be to modernize the existing anti-extortion instrument (ACI), said the chairman of the Trade Committee in the European Parliament, Bernd Lange (SPD). The commission came up with this in order to be able to react quickly to attempts at economic blackmail by China and other countries. But that went too far for the EU states. They ensured that Brussels can only act with the consent of a qualified majority. This is one reason why the instrument has never been activated since it came into force at the end of 2023.
“Apparently some capitals are now able to learn,” says SPD politician Lange. This is probably aimed primarily at Germany. The federal government has long resisted taking a tougher stance towards China. She didn't want to risk German business there.
In the meantime, the “China shock 2.0” has reached Germany with force. Key sectors such as the automotive industry, mechanical engineering and the chemical industry are under pressure. The employer-related Institute of the German Economy (IW) estimates that 400,000 jobs have been lost in Germany since 2019 because China is literally flooding the world with cheap exports. Merz therefore adopted a different tone towards China at the EU summit in June.
The Commission should work out exactly what form the new instrument will take. Germany and France are counting on the summit to give them a clear mandate to do this. Whether it can be activated within 24 hours or a few days is not important, diplomats say. Macron's old demand for an instrument modeled on the USA's Sector 301 investigations is apparently off the table. The EU could then aggressively impose tariffs if a third country's practices are unfair and burden trade.
In the best case scenario, however, it will probably take a few months until the necessary law is passed. This also applies to the diversification instrument that the Commission is working on. This law is intended to ensure that companies do not become too tied to individual suppliers.
According to information from the F.A.Z., one option is to levy tariffs on products from industries particularly affected by the “China shock” and on raw materials if a state’s share of supply exceeds the threshold of 40 percent. Here too, the member states should only be able to prevent these tariffs with a qualified majority.
Another option is to place a greater obligation on companies themselves to diversify their supply. However, this raises a number of questions: It would be a far-reaching interference with entrepreneurial freedom. In addition, similar to the Supply Chain Act, it would not be possible to do so without a great deal of bureaucratic effort.
The big question is how China responds. The hope is apparently that Beijing will initially keep quiet because neither the diversification law nor the Franco-German proposal is formally directed against China, but should apply to all trading partners. At the end of September, the Ministry of Commerce in Beijing reacted sharply to rumors about the German-French plans: “If the EU insists on introducing discriminatory restrictions, China will react decisively.”
The federal government has no illusions that China can continue to cause significant economic damage to the EU and Germany. For some rare earths, even a diversification instrument will not change the fact that there will be no other suppliers in the foreseeable future, estimated SPD politician Lange. The necessary processing capacities for lithium or tungsten would not be available for at least two years.
