The European Union (EU) is approaching a moment of truth in its attempt to reset trade relations with China, which would have significant repercussions for ocean and air freight traffic, whatever the outcome.
In short, the 27-member bloc is primed for action in response to what has been described as “China Shock 2.0”—the flood of subsidized exports in electric vehicles, solar panels, batteries, steel and chemicals.
€1 Billion-a-Day Deficit
However, the chances of success appear slim, given China’s strong bargaining position—it took on the Trump administration and basically won—and the fact that its economic strategy has pivoted from exports and imports moving in tandem to one centered on running surpluses with its trading partners.
Data from the EU statistics body, Eurostat, has revealed the scale of Chinese trade dominance: The gap between imports from China to the EU and exports from the EU to China amounted to €31.9 billion in April—an approximately €1 billion-a-day trade deficit.
Strongly Worded Letter
Šefčovič heads to China under pressure to deliver, and no doubt the contents of a surprisingly strongly worded letter, jointly written by the heads of state of Germany and France, will be at the forefront of his thoughts.
In the letter, addressed earlier this week to European Commission President Ursula von der Leyen, German Chancellor Friedrich Merz and French President Emmanuel Macron highlighted “a massive industrial shock … affecting sectors at the heart of the European industrial model and of systemic relevance—pharmaceuticals, aerospace, automotive, machine tools, chemicals, etc.”
The letter’s authors were explicit in demanding the rapid imposition of measures in what they called a “lean and non-bureaucratic way.”
They recommended “the full use” of the EU’s existing trade-defense instruments and a “comprehensive framework” with new legal instruments.
Attached to the letter was a document with a list of proposals designed to rein in China’s export dominance. They included a new tool to be placed in the hands of the Commission to allow a “decisive and systemic reaction” that could lead to “an immediate cut-off from the internal market if needed.”
This would appear to advocate the rapid implementation of significant tariffs or other trade restrictions on numerous types of imports from China.
The tool would be activated by the Commission unless a qualified majority opposed it, a voting system that Merz and Macron hope will facilitate EU action and make it swifter.
German U-Turn
Given its strong tone, the letter marks a departure, certainly in the case of Germany, from the standard EU stance to date, which has been to stay firmly on the right side of China and not rock the boat.
Germany’s U-turn indeed marks a turning point: the realization that its economy, the biggest in the EU, is increasingly exposed to Chinese competition.
At the end of last month, a report by the Federation of German Industries, the BDI, underlined that “systemic competition with China’s economy is increasingly calling into question the resilience of the open social market economy.”
It continued: “Even if de-risking entails costs—including in the form of countermeasures—inaction would be significantly more costly economically in the long term and irresponsible from a security policy perspective.”
How Will the Chinese React?
Little progress has been made in the negotiations between the EU and China since they began last June.
The priority for China is to maintain access to the EU market, while the Commission wants to push through import quotas by product. However, China holds a trump card in the discussions: its dominant position in the mining and processing of rare earths, on which the EU’s clean-technology, defense and automobile sectors are heavily dependent.
Last month, in response to the spectacular growth in sales of Chinese hybrid vehicles in the EU, the Commission reportedly requested that the Chinese authorities voluntarily impose restrictions on shipments. It warned that, short of agreeing to such action, safeguards, including quotas, could be imposed. It is not known how this was received, but previous comments by Chinese officials have described such restrictions as contrary to the principle of fair competition.
It is interesting to note that the soaring imports of hybrid vehicles into the EU are a direct consequence of the hefty tariffs placed on electric vehicles from China in 2024. This demonstrates just how ably and quickly Chinese manufacturers can adapt and pivot when confronted with trade barriers.
Šefčovič flies to China in the hope of bringing back “tangible, meaningful and measurable” results ahead of a summit meeting of EU leaders in Brussels on October 15. A clearer picture may have emerged by then on whether a full-scale trade war has been averted.
Impact on Freight?
Finally, how might the EU’s trade negotiations with China impact freight traffic, given that the bloc’s main objective is to increase demand for European goods in European markets, to the detriment of imports from China?
The arguably unparalleled surge in imports from China to Europe in the past year or so has been a major driver of strong growth in container shipping on this trade lane.
Therefore, any action to reduce or suppress Chinese imports would have a direct bearing on volumes and lead to some shift to other trades.
There is also a strong likelihood that the Chinese would retaliate, with EU goods flows into China affected.
