EU and China launch trade consultation to address €360bn deficit

The EU and China launched a Trade and Investment Consultation Mechanism on Monday, seeking to stabilize a relationship strained by a €1 billion-a-day trade deficit that European leaders have called unsustainable.

"We simply cannot afford to continue in the unsustainable growth of the trade deficit from the European perspective," Maroš Šefčovič, European commissioner for trade and economic security, told reporters after meeting Chinese Commerce Minister Wang Wentao in Brussels.

The mechanism covers four pillars: trade and investment rebalancing, export controls, intellectual property rights and World Trade Organization reform. A joint monitoring system will track trade flows in granular detail, with political-level discussions triggered if either side enters what Šefčovič described as an "amber or red" danger zone. The two sides issued their first joint statement since 2019.

The consultation buys three months for negotiations before Šefčovič's planned visit to Beijing in October, when he said he hopes to present "first tangible results." Failure to narrow the gap could trigger EU quotas on Chinese hybrids and chemicals as soon as autumn, according to people familiar with the commission's planning.

The €1 Billion-a-Day Imbalance

Eurostat data published June 15 showed Chinese exports to the EU exceeded imports from the bloc by €1 billion each day, a shortfall Šefčovič described as unsustainable. The EU's trade deficit with China has widened steadily since 2020, driven by surging imports of electric vehicles, batteries, solar panels and industrial chemicals — sectors where Chinese state-backed overcapacity has pushed global prices below European production costs.

The European chemicals industry has been hit particularly hard. Manufacturers are closing plants and cutting jobs as cheap Chinese imports flood the market, according to industry groups including the European Chambers of Commerce in China, which warned that the export surge threatens to "cannibalise" EU factories reliant on Chinese components.

Rare Earths and Export Controls

Šefčovič welcomed Wang's assurance that China's existing export controls on rare earths and permanent magnets would not disrupt EU supply chains. China dominates the global supply of rare earth elements, having briefly throttled exports last fall during a tariff dispute with the United States. The inclusion of export controls as a dedicated pillar in the consultation mechanism signals that both sides view technology supply chains as a potential flashpoint.

The EU's 2024 imposition of tariffs on Chinese electric vehicles failed to curb import volumes, pushing Brussels to consider alternative measures. Quotas on hybrid vehicles and chemicals are among the options being prepared for autumn should the consultation fail to produce results, according to people familiar with the matter.

What Comes Next

A roadmap with expected deliverables is due in the coming days, Šefčovič said, with a first assessment of progress expected in September. The joint monitoring mechanism will go beyond headline trade figures recorded by Eurostat and China's customs database, enabling both sides to identify sudden surges in specific product categories.

The last time the EU and China issued a joint statement on trade was in 2019, before the pandemic and a series of escalating tariff disputes reshaped global supply chains. The current consultation represents the most structured attempt at de-escalation since tensions began rising in 2023, when Brussels first warned that Chinese overcapacity posed an existential threat to European manufacturing.

Wang was due to travel to Britain on Tuesday for separate trade talks, as the UK navigates its own post-Brexit trade relationship with China.

This article is for informational purposes only and does not constitute investment advice.