The EU will ‘pull its punches’ on China despite growing trade war talk: analysts

The European Union is likely to avoid a full-blown trade confrontation with China due to internal divisions in the bloc and fear of retaliation, according to a prominent research firm.

The projection comes amid speculation that the two sides are on the brink of a trade war, with European policymakers raising the alarm about a looming “China shock 2.0” and pushing for stronger measures to protect domestic producers from Chinese competition.

But the bloc would “continue to pull its punches” in any confrontation with Beijing due to a lack of consensus among and within Europe’s member states, the London-based Capital Economics said at an event in Hong Kong on Wednesday.

The EU also had “concerns over retaliation” if it stepped up trade tensions with China, the research firm said, and held “lingering hopes to save the rules-based global trading system” that had helped Europe in the past.

“At least on the Chinese side, there’s some concern that Europe is going to be more aggressive towards restricting exports from China, but our view is it will continue to follow a cautious approach,” said Marcel Thieliant, head of Asia Pacific for Capital Economics.

“Europe is very dependent on China for lots of goods including critical minerals, and there’s a clear … concern about retaliation.”

Responsibility for trade policy in Europe remains “split” between the EU itself and the governments of its member nations, the firm said in an outlook report circulated at the event. The EU decides tariffs, for example, while member nations chart investment policies, according to Thieliant.

China and the EU struck an agreement earlier this month to restrict Chinese hybrid vehicle exports to Europe, a deal that was widely seen as an attempt to take the heat out of rising bilateral trade tensions.

The deal will reportedly involve hybrid car exports being capped at 350,000 vehicles per year, with the quota then rising by 6 per cent annually over the next four years. That represents a sharp reduction in shipments, with the EU originally projecting imports of 800,000 Chinese hybrid cars this year.

Tensions between the two sides have been growing mainly due to a stark trade imbalance favouring China: the EU’s trade deficit with China ran at over €1 billion (US$1.12 billion) per day last year, according to European Commission data, and has continued to rise this year.

The bloc has increasingly hit Chinese producers with tariffs and trade probes over the past two years, with some warning that European industry could soon be decimated unless the EU takes more urgent action.

China will remain an avid exporter nation until 2030 because it sees that direction “as evidence of policy success” at a time of cutthroat price competition and weak demand at home, according to the outlook report.

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Capital Economics also forecast on Wednesday a 50 per cent probability of a “crisis” erupting within two to three years if China continues to gain export share, including in Europe, and if “populist and nationalist policies” emerge in the West over increased competition with China.