With the EU set to approve its trade deal with the US on 16th June, Brussels is turning its attention back to China—and tensions are flaring. We believe investors and corporates with exposure to China should pay close attention.
EU-China friction is not new. It has been brewing since President Trump’s first term, when the 2018 US-China trade war and the risk that subsidised Chinese goods would be diverted to the EU first pushed Brussels to fortify its trade defence tools. The subsequent COVID-19 crisis exposed the EU’s structural vulnerabilities and the geopolitical risks of its dependence on China, which accelerated its foreign investment screening and foreign subsidy policymaking. EU-US trade tensions have distracted Brussels and delayed action against China, but the political imperative has now returned.
After the EU College of Commissioners concluded its 29th May debate on China, European Commission President Ursula von der Leyen said that the EU-China trade and investment relationship is “not sustainable,” indicating that Brussels’ response to what it now openly calls “China Shock 2.0” is moving from rhetoric to real policymaking.
The structural imbalance is material: China’s surplus in manufactured goods has doubled since 2019, standing at approximately $2 trillion in 2026. China currently accounts for 30% of global production but just 13% of consumption. Brussels is concerned that this overcapacity will be directed towards the EU—the world’s largest open market now that the US has walled itself off. The EU’s goods deficit with China reached approximately €360 billion in 2025 and continues to widen.
The Commission is set to build on the steps it has already taken. Its 2023-2024 probes into China’s electric vehicle and wind turbine subsidies tested Member States’ appetite for confronting Beijing, revealing enough support for the EU to pursue its economic security agenda. We expect Brussels to now take a more aggressive approach to China, with action concentrated on an array of strategic sectors, including batteries, solar, wind, heat pumps, nuclear, critical raw materials, chemicals, and pharmaceuticals. This will open up opportunities for EU companies able to scale in these sectors.
As it looks to dial up action on China, the EU will draw on an expanding toolkit. The most significant measure being considered is an “overcapacity instrument”—backed by countries including France, Italy, and the Netherlands—to restrict Chinese access to sectors where imports distort competition, mirroring Section 301 of the US Trade Act. In addition, Trade Commissioner Maroš Šefčovič is pushing for a supply chain “diversification instrument,” requiring firms in critical sectors to maintain three or more suppliers across different countries. Separately, the Industrial Accelerator Act (IAA), proposed in March 2026, would create made-in-Europe content rules that could exclude Chinese firms from procurement.
These emerging trade policies are compounding China’s grievances with the EU, alongside measures such as a revised EU Cybersecurity Act targeting Huawei and expanded use of the Foreign Subsidies Regulation, which has already led to investigations into multiple Chinese companies.
The key question is how far the EU will go with its economic security agenda. For batteries, there is simply no viable, cost-effective European supply substitute for the foreseeable future. Restricting Chinese battery imports would risk raising power and storage costs. Ultimately, the EU needs to balance political and economic concerns. Tellingly, on Chinese electric vehicles, the Commission chose lower, more legally durable anti-subsidy tariffs over anti-dumping tariffs—showing that pragmatism still governs.
A potential solution that could appeal to both sides is Chinese companies opening plants in the EU—something that even Paris has expressed comfort with. However, the Commission is wary of arrangements that amount to final assembly alone, and wants genuine value addition to occur inside the EU. That is the gap the IAA’s local-content logic aims to close, and where the Chinese government will resist most fiercely.
There is little doubt Beijing will retaliate. China’s Commerce Ministry has warned it will “resolutely take countermeasures” and singled out the IAA as creating investment barriers. Investors and corporates should expect targeted Chinese measures against politically sensitive European exports, including autos, pharmaceuticals, wine and spirits, cosmetics, and agri-food. These will be calibrated to sow division amongst Member States. Beijing’s narrative will likely attribute the EU’s widening trade deficit to the region’s own structural constraints and China’s cost competitiveness rather than to Chinese overcapacity.
Despite the growing tensions, we do not expect a full-blown EU-China trade war to materialise. However, we do expect significant escalation in sectors deemed central to EU economic security. The Commission will keep testing the waters with trade defence tools and industrial policy, but the binding constraint will be Member State support—several EU countries remain reluctant to grant Brussels broad new powers.
For investors, policy now matters far more to an asset’s value than before—where a business sits relative to the EU’s economic security agenda increasingly shapes its prospects, and reading that policy direction early has become central to weighing risk and opportunity.
For corporates, policy increasingly dictates market access and supply chains—and will shape future growth far more than before.
A few upcoming catalysts will reveal more about how far the EU will go with its economic security agenda: the 15-17 June G7 Summit in France and the 18-19 June European Council meeting, where an “overcapacity instrument” could be unveiled. Von der Leyen’s annual State of the European Union speech in September will further sharpen the picture. We will continue to closely track EU-China policy developments across sectors in the months ahead.
Read more of Capstone’s trade coverage:
The Tariff Pileup: Layered Policies, Rising Prices, and Growing Risks
What to Expect from the US-South Korea Investment Deal
The Trade Tool President Trump Decided Not to Use (So Far)
