Germany and France want EU storm gates for China’s trade surge

ON THE LONG list of things on which France and Germany disagree, economic policy and trade usually rank high. But on October 5th the pair sent an astonishing letter to the European Commission with far-reaching proposals on how to deal with China’s increasingly intimidating export machine (without explicitly mentioning the country). The letter will help shape last-gasp negotiations between the European Union’s trade commissioner and his Chinese counterparts later this week. Next week a summit of European leaders will decide whether to follow the Franco-German lead. Now that Germany has made up its mind on China things could take a decidedly protectionist turn.

For years Germany had resisted a significant hardening of the EU’s stance. (Reuters)Europe has a long list of grievances. Chinese firms are threatening Europe’s industry with superior products and lower prices. That, Europeans allege, is in part the result of unfair subsidies and an undervalued currency. Nor is China willing to share its technology when investing in Europe. Then there is China’s weaponisation of its control over critical inputs, such as rare earths, needed by defence-related firms, among others. China’s support for Russia’s war in Ukraine also infuriates Europeans.

For years Germany had resisted a significant hardening of the EU’s stance. True, parts of German industry have turned hawkish in recent years. But German politicians long remained reluctant to seek confrontation. They even resorted to signalling deference towards China, such as when Germany voted against EU tariffs on Chinese EVs, which the club nonetheless approved in 2024. But with Chinese exports now eating into Germany’s industrial machine, this year has seen a dramatic shift. “There is a wide consensus now that things cannot continue like this,” says Oliver Richtberg of the VDMA, Germany’s association of machine makers.

The letter shows it. If implemented through the EU’s law-making apparatus, it would mark a dramatic shift in how the bloc intends to confront China. The main novelty is a “second-strike capability”, as Sander Tordoir of the Centre for European Reform, a think-tank, puts it. Emmanuel Macron, the French president, and Friedrich Merz, the German chancellor, want to grant Brussels powers to hit back quickly at countries that retaliate when the EU imposes trade measures over allegedly unfair competition. But the scope of their proposal is so wide as to amount to a vague threat of hitting back at anything that Europe deems unfair.

“It is a political signal to show Beijing that Europe, and Germany, mean business,” says a German official. Some, however, may conclude that Europe is close to a nervous breakdown. The letter refers to a “massive industrial shock…hurting the economic fabric of European societies”. This is creating economic dependencies that jeopardise “the EU’s position as a sovereign…actor”. To mitigate these, France and Germany call on the EU to ensure fair competition and diversify supply chains.

A second proposal is for something called a diversification tool. Details are scant, but the idea is to reduce European firms’ supply-chain dependencies and prevent new ones from emerging. The EU recently admitted that previous attempts at encouraging diversification had failed. Yet the letter says nothing about sharing sensitive data among European countries, which many see as a prerequisite for more effective diversification. In line with the EU’s recent trade agreements, some of which France rejected, the letter calls for co-operation with third countries to boost resilience of supply chains and to “de-risk” (read: from China).

The letter’s other proposals are familiar. France and Germany call on the EU to use existing trade-defence instruments more aggressively. The current rules for imposing tariffs in case of unfair subsidies are cumbersome to invoke and narrow in scope. The letter calls for speeding the process by staffing up the EU’s trade desks and, importantly, broadening the rules to apply to whole sectors rather than individual firms.

The letter also mentions reforming “safeguards”: counter-duties that can be imposed on all countries when imports surge. (Some EU analysts talk about targeting these solely at the countries from which the surge originates—read: China.) And it calls for more enforcement of regulations at the border and, for repeated offences, tougher punishment such as restricting access to the EU market.

France and Germany are also promoting a European industrial policy, but they differ on its scope. The letter says that the EU should expand production in “strategic” sectors and introduce Buy European clauses (“European preference”, as they call it). But they remain vague on what sectors these might be, and whether Europe’s closest economic allies would be included.

All of this will irk leaders in Beijing. In the letter, France and Germany state that they expect retaliation. Even before it was published, the Chinese commerce ministry said that a show of strength against China while negotiations were ongoing would damage trust and disrupt the process. China plainly understands the letter as a negotiating tactic to strengthen the EU’s hand in this week’s talks. On Saturday it sent another message by launching an anti-dumping investigation into European chemicals exports, after Europe had opened three such investigations aimed at China last week.

The European Commission said the letter was a “valuable contribution” that aligns with its “clear stance on competitiveness and the approach to trading partners, including China”. But it is unclear whether this Franco-German effort to raise the stakes will render China more pliant. Europe’s economy has proven more resilient to the recent energy shock than many expected, which should boost its position in the talks. China, on the other hand, has just decided to put together another massive infrastructure package to stimulate its troubled economy. The European hope is that China’s leadership will refrain from further retaliation to avoid emboldening Europe’s hawks just as Germany has joined their flock.