U.S.-China Relations
NextFin News - The European Commission is rewriting seven decades of free-trade orthodoxy, and the bloc's most export-dependent economies are pushing back. In the 12 months since Washington imposed steep tariffs on most EU exports, Brussels has assembled a widening arsenal of trade defences — steel quotas with a 50% surtax above the limit, price floors on the electrical steel inside power transformers, a foreign-subsidy probe into Chinese wind-turbine makers, and a proposed industrial law that would tie public procurement to "Made in Europe" content. The push has fractured the single market: a Czech-led coalition of eight member states blocked the Commission's local-content plans in late 2025, and Germany's manufacturers are warning that shielding industry at home may cost more than it saves.
The stakes are quantifiable. The EU's goods deficit with China reached €103 billion in the second quarter of 2026 — the highest since the third quarter of 2022 — up from €66 billion in the first quarter of 2024. The full-year 2025 gap hit €360.6 billion, a 15% increase on 2024. Against that backdrop, Brussels is betting that a more muscular trade posture can rebuild industry without breaking the open-market model that made Europe rich. The bloc's free-market stalwarts are not convinced, and their resistance is turning trade policy into the EU's deepest internal rift since the euro crisis.
The Arsenal: What Brussels Has Actually Built
The shift is not a single tariff announcement but an accumulating administrative machinery. The centrepiece is the Industrial Accelerator Act, tabled on 4 March 2026, which sets an explicit target of lifting manufacturing's share of EU GDP from 14.3% in 2024 to 20% by 2035 and links public procurement and subsidies to European-origin and low-carbon requirements. The European Parliament's own assessment confirms the architecture: origin-based "Made in EU" preferences, conditions on foreign direct investment, industrial acceleration areas and simplified permitting. Around it orbit a series of hard measures:
- On 18 September 2026, the Commission imposed provisional safeguard measures on grain-oriented electrical steel — the material inside power transformers, wind turbines and grids — in the form of tariff-rate quotas coupled with minimum prices of €2,800 to €3,400 per tonne inside the quota and €3,500 above it. China accounted for more than half of EU imports of the steel and its downstream products in 2025. The investigation had opened only in late March, and the measures apply from 25 September while the inquiry continues.
- The bloc's general steel safeguard, expiring 30 June 2026, is being replaced by a permanent regime with annual import quotas of 18.3 million tonnes — a cut of roughly 47% against the 2024 safeguard levels — and a 50% duty on steel imported beyond the quota, effective 1 July 2026. The Council and Parliament reached a provisional agreement on 13 April 2026.
- Import quotas on ferro-alloys were imposed in November 2025, steel safeguards were tightened, and the Commission is weighing the use of carbon-border levy revenues to favour EU exporters.
- Under the Foreign Subsidies Regulation, the Commission adopted enforcement guidelines on 9 January 2026 and opened an in-depth investigation into Chinese turbine maker Goldwind on 3 February 2026, after a preliminary review that began in April 2024. The Commission may impose redressive measures, including divestment, if a distortion is established.
- From 2026, the €150 duty-free threshold for small imported parcels disappears, ending a decades-old simplification aimed largely at Chinese e-commerce shipments.
Taken individually, each measure is defensible as calibrated trade defence. Taken together, they mark a break from the postwar consensus that made the EU the world's most rule-bound trading bloc. Imports from China grew to €154 billion in the second quarter of 2026, with vehicles and parts alone up €5.9 billion year on year in the first half. The imbalance is not confined to finished goods: textiles, chemicals, plastics, machinery, batteries and electric and hybrid cars have all surged into the EU in the past year, and Brussels attributes much of it to Chinese overcapacity.
The Revolt: Why Germany and the Nordics Are Balking
The resistance is coming from precisely the economies that built their prosperity on open supply chains. In early December 2025, Czechia tabled a position paper signed by Estonia, Finland, Ireland, Latvia, Malta, Portugal, Sweden and Slovakia warning that "Made in Europe" preferences would carry "unintended consequences for the openness or integrity of the single market." The paper argued that an aggressive protectionist turn would "obstruct international R&I collaboration, disrupt complex supply and value chains, distort competition, or have other negative implications for companies established in the EU that are already deeply integrated into the EU economy." The revolt forced the Commission to postpone the local-content strategy that preceded the formal legislative proposal.
"We are really going to see where the Commission comes out on this — between those who want to go in this direction and those who want to be more careful because they respect the international commitments of the EU, including those which are reflected in the trade agreements," said Ignacio Garcia Bercero, a non-resident fellow at the Bruegel think tank and a former director at the Commission's trade department.
Germany's stance captures the ambivalence of the export machine. On 25 September 2026, the BDI industry association called for a more consistent "de-risking" from China and backed targeted tools such as anti-dumping and anti-subsidy measures — while explicitly warning against broad-based protectionism and insisting that any new trade-defence measures be carefully calibrated. BDI chief executive Tanja Goenner said systemic competition with China's economy "requires an appropriate industrial and trade policy response," but the association stopped short of spelling out specific protectionist measures. Earlier in January, the BDI said Germany could grow 1% in 2026 if fresh US tariffs are avoided, while industry remains fragile.
The political economy is visible in corporate behaviour. BASF opened a €9 billion chemicals complex in Zhanjiang, southern China, in March 2026, its largest single investment ever, even as German ministers shuttle between Beijing and Brussels arguing for fair competition rather than closure. German Economy Minister Katherina Reiche led a delegation including the chief executives of BASF, ThyssenKrupp and Siemens Energy to China in late May 2026, underscoring that Germany's industrial strategy still runs through Beijing even as Brussels builds walls.
The Mechanism: Protectionism That Taxes Europe's Own Industry
The central tension is that the instruments Brussels is deploying do not just keep foreign goods out — they raise the cost of the inputs Europe's manufacturers need to compete. Grain-oriented electrical steel is not a consumer product; it goes into the transformers that electrify grids, factories and data centres. A minimum price of €3,500 a tonne above the quota is a tax on the energy transition itself, and it lands on the same industries the Industrial Accelerator Act is meant to strengthen.
"What is particularly significant is that, for the first time, an entire value chain, from electrical steel to the transformer core, is being protected rather than a single product alone," said Marie Jaroni, chief executive of Thyssenkrupp Steel Europe, one of the last European producers of the material.
Jaroni's point cuts both ways. Protecting an entire value chain means protecting both the producer and the downstream buyer — and the downstream buyer is the one writing the cheque. This is the second-order effect that the Commission's competitiveness narrative underplays. The first-order effect — shielding a struggling sector from import surges — is visible and politically immediate. The second-order effect travels through input costs, supply-chain disruption and retaliation risk, and lands on exporters who had nothing to do with the original injury. For Germany, whose industrial model depends on importing intermediate goods, assembling high-value products and re-exporting them, a Europe that fragments its own supply chains is a direct threat to the comparative advantage that generates its trade surplus.
There is a third-order channel the market has barely priced: the euro and capital flows. A protectionist Europe that raises input costs and slows growth widens the divergence with the United States, where tariffs have so far produced little visible economic damage and the National Security Strategy released in December 2025 described Europe as facing "civilizational erasure." If protectionism pushes euro-area growth down while US growth holds, the euro weakens — which helps exporters in the short run but imports inflation through energy and intermediate goods, squeezing the same manufacturers the policy is meant to help. The transmission runs from trade policy to relative growth to currency to input costs, and it loops back onto industrial competitiveness.
The structural question is whether this is a cyclical reaction to a temporary shock or a regime change. Three pieces of evidence point to structural. First, the policy architecture is being codified in law — the Industrial Accelerator Act, the Foreign Subsidies Regulation, the carbon-border mechanism — not issued as emergency decrees. Second, the geopolitical driver is durable: the United States has signalled that the transatlantic security guarantee no longer comes bundled with open markets. Third, the China trade imbalance is not a one-year anomaly but a multi-year rebalancing of global manufacturing, with the EU's share of global manufacturing value added in relative decline while China's has risen over two decades.
Bruegel's analysis of the Industrial Accelerator Act identifies the same design flaw from a different angle: the proposal bundles decarbonisation, geopolitical de-risking and competitiveness under one framework without distinguishing the objectives or matching instruments to them. Its authors argue the 20% manufacturing target lacks an economic rationale and distorts resource allocation, that origin-based content rules risk delaying decarbonisation and raising costs for firms and consumers, and that the new foreign-investment conditionality has uncertain economic justification. In other words, the risk is not only that protectionism is wrong in principle, but that it is imprecise in execution — and that imprecision is what alarms free-market capitals more than any single measure.
The Counter-Thesis: De-Risking Is Not Naivety
The strongest case for Brussels runs as follows: Europe was naive for too long. It kept its markets open while China built state-subsidised overcapacity and the United States turned transactional. Margarethe Vestager, the Commission's competition chief, put it plainly when launching the wind-turbine probe: Chinese excess capacity "is not only dangerous for our competitiveness. It also jeopardises our economic security." Peter Chase, a visiting senior fellow at the German Marshall Fund, argued that under these circumstances "you've got to be a bit more aggressive in using the trade defence instruments you have." On this reading, the Czech-led revolt is not principled free-trade defence but the defence of incumbents with cheap foreign inputs, and calibrated measures are the price of keeping strategic industries — steel, transformers, turbines, batteries — inside Europe at all.
That argument carries weight, and it explains why even sceptical Germany stops short of rejecting trade defence outright. The BDI's own September paper backs anti-dumping and anti-subsidy tools while drawing the line at broad protectionism. The counter-thesis is strongest where the injury is demonstrable and the measure is narrow: a safeguard on electrical steel tied to a documented import surge is not the same as a blanket local-content rule that rewrites procurement law across the single market. Global steel overcapacity reached 640 million tonnes in 2025 and is projected to hit 721 million tonnes by 2027, according to the OECD Steel Committee — a distortion that does not correct itself.
But the counter-thesis has a limit. Trade defence is legitimate when it remedies a specific distortion with a sunset and a measured remedy. What alarms free-market capitals is the accumulation: quotas plus price floors plus subsidy screening plus procurement preferences plus parcel duties, all moving in the same direction with no stated end-state. A toolbox is not a strategy. And the moment "de-risking" becomes a licence for any measure that favours a domestic producer, the distinction between defending the single market and Balkanising it begins to dissolve.
What to Watch: The Signals That Will Decide Which Europe Wins
The outcome turns on three observable tests. First, the qualified-majority vote in the Safeguard Committee, where at least 15 member states representing 65% of the EU population must back definitive measures — the same arithmetic that stalled the local-content plan. Second, whether the Commission separates the Industrial Accelerator Act's legitimate objectives — permitting acceleration, clean-tech lead markets — from its protectionist instruments under member-state pressure. Third, the input-cost data: if EU producer prices for steel, electrical equipment and clean-tech components accelerate while manufacturing output stagnates, the protectionist-drag thesis is confirmed.
Scenarios split by horizon. In the short term, sentiment around European industrials will hinge on whether Brussels signals restraint — a carve-out for downstream users, a narrower industrial act, or a pause pending the Safeguard Committee vote would calm markets. Over the medium term, the earnings impact will show up in the margin bridge of capital-goods and electrical-equipment makers as input costs pass through; the electrical-steel price floor alone sets a benchmark that will ripple into transformer and grid-equipment contracts. Over the long term, the question is whether Europe can raise manufacturing's share of GDP toward 20% without fracturing the single market or pricing its exporters out of global competition.
The falsifying signal is specific: if the EU's manufacturing share of GDP climbs toward the 20% target by 2030 while input-cost inflation for steel and electrical equipment stays below the euro-area average and intra-EU trade as a share of total trade does not decline, then the protectionist turn is working and the free-market critique is wrong. Until then, the burden of proof sits with Brussels.
The deeper truth is that Brussels is trying to solve a geopolitical problem with a trade instrument, and the bill is arriving at the door of the companies it claims to protect. Europe can afford to defend its markets — but only if it remembers that its own manufacturers are the customers of last resort for every quota and price floor it writes.
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