The European Union has temporarily refrained from imposing punitive tariffs and other trade defense measures on imports from China. Brussels aims to reach a negotiated settlement with Beijing by October to resolve an intensifying dispute over the bloc’s growing trade deficit with the Asian economic power.

EU Trade Commissioner Maroš Šefčovič confirmed this stance on Monday following intensive discussions in Brussels with Chinese Commerce Minister Wang Wentao.

The dispute stems from a significant surge in Chinese exports to the EU, which has coincided with a decline in the export competitiveness of Germany and the wider bloc. According to a study by the Kiel Institute for the World Economy (IfW), this decline is primarily driven by insufficient investment in innovation within Germany.

Conversely, Berlin contends that the German economy has fallen victim to Chinese state subsidies and a heavily undervalued Chinese currency.

While German Chancellor Friedrich Merz recently threatened to take decisive action against Beijing, experts warn that the EU would likely emerge defeated from an economic war with China.

Brussels forced onto the defensive

The expanding trade deficit between EU member states and China has long been a source of concern for Brussels, according to a report by German Foreign Policy.

Last year, the bilateral trade deficit reached €360 billion, equivalent to approximately €1 billion per day. This imbalance is driven by the People’s Republic of China’s increasing capability to manufacture high-tech products with high cost-efficiency.

The primary factors behind this competitive edge include state economic planning and economies of scale derived from manufacturing for China’s vast domestic market.

Chinese goods are increasingly competing with European products, demonstrating growing success in direct competition. This trend is particularly evident in sectors such as solar panels, wind turbines, and electric vehicles.

The EU had previously sought to promote these specific industries through its Green Deal initiative in an effort to secure a leading position for its domestic industrial base in the global market.

Faced with mounting Chinese competition that has put domestic companies on the defensive even within the EU market, Brussels and EU member states are responding with defensive trade measures.

In October 2024, the EU began imposing tariffs ranging from 17% to 35.3% on imports of Chinese-made electric vehicles. Other measures are currently being prepared, including restrictions on telecommunications technology from the People’s Republic of China over alleged security risks.

Controversy over China’s trade surplus

These defensive measures remain highly controversial for several reasons. First, China’s trade surplus is by no means an isolated global phenomenon.

Current estimates place China’s trade surplus at slightly under 4% of its gross domestic product (GDP). While this exceeds the EU’s average trade surplus, which stood at 1.9% of economic output last year, it remains significantly lower than Germany’s surplus. According to Federal Ministry of Finance statistics, Germany’s trade surplus is projected to reach 4.6% of GDP in 2025, after peaking at 5.8% in 2024.

Consequently, Germany’s criticism of China’s export surplus appears to rest on a double standard.

Furthermore, a recent analysis casts serious doubt on the assertion that the current weakness in German industry is primarily attributable to the strength of Chinese exports.

The study conducted by the Kiel Institute for the World Economy (IfW) indicates that only about one-third of the decline in Germany’s market share in third countries can be attributed to Chinese expansion.

According to the IfW, this evidence suggests that Germany’s industrial challenges are largely domestic in origin and cannot be explained solely by the rise of China. The institute concluded that a permanent solution lies in “investments in innovation and new technologies.”

France leads calls for economic sanctions against China

Despite these findings, calls for new restrictions on Chinese imports are growing within the EU, with both high tariffs and import quotas under discussion.

Thus far, France has been the primary advocate for harsh measures, while Spain has recently acted as a brake on such initiatives.

Madrid has been on a collision course with the Trump administration for some time and is attempting to improve its relations with Beijing to establish a strategic balance.

Germany long maintained a cautious stance due to the substantial investments made in China by numerous German corporations, particularly in the automotive and chemical sectors.

However, during the EU summit held in Brussels on June 18–19, Chancellor Friedrich Merz adopted a more confrontational tone.

Merz argued that the primary disadvantage facing German industry is a 30% undervaluation of the Chinese currency. He asserted that this exchange-rate disparity has allowed Chinese companies to “invade” EU markets, calling the situation “unacceptable.”

Merz also reported that he had previously discussed the matter with US President Donald Trump during the G7 summit, noting that Trump was “of the same opinion.”

While the view that the yuan is undervalued is widely held, the 30% figure cited by Merz could be interpreted as a rhetorical declaration of war. The International Monetary Fund (IMF) estimates the maximum rate of Chinese currency undervaluation to be 15%.

China unlikely to accept a new “Plaza Accord”

The expectation that the EU can successfully pressure China into revaluing its currency is highly improbable, particularly given Merz’s references to a new “Plaza Accord.”

Under the original Plaza Accord of September 22, 1985, the US, the UK, France, West Germany, and Japan agreed to a coordinated devaluation of the US dollar against the German mark and the Japanese yen. The measure was designed to reduce the US trade deficit.

The Plaza Accord achieved only partial success: while the US trade deficit with West Germany decreased, its deficit with Japan did not. Instead, the agreement triggered a recession in Japan, causing severe, long-term structural damage to its economy.

China is highly unlikely to agree to any modern equivalent that could carry similarly damaging consequences for its own industrial sector. Officials in Beijing indicate that calls for a new Plaza Accord are merely intended to escalate political pressure.

Trade war simulation shows EU unable to defeat China

The implementation of such trade barriers is increasingly viewed by experts as a high-risk strategy.

In mid-June, the Financial Times reported on a desktop simulation of a trade war between the EU and China, conducted by academic experts and think-tank analysts.

The scenario included what is widely considered the EU’s most potent economic leverage: an embargo on lithography equipment produced by the Dutch semiconductor manufacturing supplier ASML, technology on which China remains dependent.

However, in the simulation, China retaliated by threatening an embargo on rare earth elements as well as raw materials that are critical to Europe’s pharmaceutical industry.

Unlike the ASML export ban, these Chinese counter-measures would take effect relatively quickly, inflicting immediate and severe damage on European industry.

The Financial Times noted that the EU failed to exert meaningful leverage over China in the simulation. Ultimately, Brussels was forced to accept minor, symbolic concessions from Beijing to avoid a full-scale economic war that the bloc stood to lose.

While the EU has resolved to secure its own independent access to rare earth elements, establishing these supply chains will take years, if not decades.

October deadline set for resolution

Following talks on Sunday with German State Secretary for Economic Affairs Katherina Reiche, Chinese Commerce Minister Wang Wentao held intensive discussions on Monday with EU Trade Commissioner Maroš Šefčovič.

Šefčovič subsequently described the negotiations as “constructive” and stated that the objective remains to reach a mutually acceptable solution.

This resolution is expected to be finalized by October. Reiche had previously made similar statements.

The diplomatic pause suggests that Berlin and Brussels, recognizing that they could lose a full-scale trade war, are actively seeking to prevent further escalation of the conflict for the time being.

Outgoing British Prime Minister Keir Starmer is pledging to secure at least £1 billion in additional funding for the defense sector, according to people familiar with the matter.

The move is being viewed as an effort by Starmer to cement his political legacy in the prime minister’s office before stepping down, the Financial Times reported.

Sources said Starmer aims to publicly present the defense sector investment plan on Tuesday, June 30, following multiple prior delays to its publication.

Under the plan, the total funding volume for the armed forces over the next four years is expected to rise approximately £14.5 billion to £15 billion above previously projected levels.

The Starmer-led government had previously proposed providing £13.5 billion in additional resources for defense needs.

However, former Defence Secretary John Healey opposed the prime minister’s proposal, viewing the amount as insufficient, and subsequently resigned from his post in June.

Healey had insisted on an £18 billion increase in the defense budget. In his resignation statement, the outgoing secretary called on the head of government to commit to raising military spending to 3% of gross domestic product by 2030.

Healey noted that the prime minister’s existing plan would only maintain this ratio at 2.68%.

Following these developments, newly appointed Defence Secretary Dan Jarvis reshaped the budget plan and made several difficult decisions, according to sources.

The new program drafted by Jarvis reportedly places a higher priority on the combat readiness of the military and the deployment of autonomous technologies—including unmanned ground vehicles—across all military units compared to the proposals put forward by the departed Healey.

A government official indicated that in the event of potential last-minute disruptions, the ultimate deadline for the announcement would be July 6, immediately ahead of the NATO summit to be held in Ankara.

The Financial Times pointed to the obligation to demonstrate to allied countries, most notably US President Donald Trump, that the United Kingdom is making serious investments in defense as a key source of pressure on Starmer.

According to assertions in the report, Starmer could hand over prime ministerial authority to Andy Burnham, who is seen as his strongest successor, as early as July 20.

Sources familiar with the process noted that Burnham has already begun receiving briefings on government operations.

Furthermore, sources stated that Burnham has privately agreed with arguments that the spending plan should be approved before the NATO summit rather than being delayed.

Conversely, one source did not rule out the possibility that the incoming prime minister could face more intense pressure, which could lead to a reassessment of defense funding.

Commenting on the position of the military leadership, the source remarked: “The military wing has adopted an attitude of ‘it is better than nothing,’ but we will have to renegotiate this issue with the new Prime Minister, Andy Burnham, in any case.”

Keir Starmer announced in June that he would resign following pressure from within his own party.

Starmer has led the British government for approximately two years.

European Union member states risk entering the upcoming heating season with their lowest natural gas reserves in 15 years, according to industry assessments.

A report by consultancy firm Wood Mackenzie, published by the Financial Times, warns that if current trends persist, energy markets could face a new wave of price spikes ahead of the winter period.

Analysts project that European underground gas storage facilities may reach a fullness level of only 76% by the end of the injection season, which typically runs from April to October.

After a harsh winter left storage facilities at a mere 28% capacity at the start of the season, EU nations are struggling to rebuild their reserves to historical norms.

According to data from Gas Infrastructure Europe (GIE), the current average storage fullness level stands at 48.29%.

June, traditionally the highest-volume month for filling underground storage facilities in the European energy sector, failed to deliver the targeted efficiency this year. Industry officials note that above-normal temperatures expected in July and August will drive up electricity consumption for cooling, making it even more difficult to direct gas into storage.

Having severely depleted its reserves during the past two harsh winters, Europe must store approximately 70 billion cubic meters of natural gas to prepare for the upcoming winter.

However, the storage injection rate failed to accelerate in June, falling 14.7 percentage points behind the five-year average. In the final week of June alone, this deficit widened by an additional 0.2 percentage points.

Renewable energy sources are also proving insufficient to bridge the supply gap. According to WindEurope data, the share of wind energy in electricity generation averaged approximately 14% in June.

This is down from 15% recorded during the same period last year, with the share of wind-generated electricity dropping to as low as 9% in the second half of June. A heatwave sweeping the region, with temperatures hovering two degrees Celsius above seasonal norms, represents another key factor driving up energy demand.

Multiple global geopolitical developments underpin the natural gas shortfall confronting Europe. Disrupted shipments of liquefied natural gas (LNG) through the Strait of Hormuz due to hostilities between the US and Iran, combined with production declines in Qatar and the United Arab Emirates (UAE), have tightened global supply.

Meanwhile, in line with decisions by the Kyiv administration, the transit pipeline carrying Russian natural gas to Europe through Ukrainian territory has been completely shut down. The EU must now secure gas not only for its own domestic consumption but also to supply facilities in Ukraine.

In an effort to bypass this halt in Gazprom’s pipeline gas through increased LNG imports, EU countries purchased 109 million tons (approximately 142 billion cubic meters) of LNG last year, representing a 28% increase over the previous year.

However, LNG imports in June fell by approximately 17% compared to the same month last year, dropping to 7.8 million tons—the lowest level in 10 months.

Another critical factor squeezing supply in the European market is the EU’s strategy to phase out Russian energy products entirely.

Russia currently supplies 14% of Europe’s total LNG imports.

According to a phased embargo plan approved by the European Council, LNG imports from Russia will be completely banned starting January 1, 2027.

The import ban on Russian pipeline gas is scheduled to take effect on September 30, 2027. While a transition period is provided for existing contracts, member states have been tasked with the obligation to verify the country of origin for all imported natural gas.

Despite these market uncertainties, the “day-ahead” spot gas price at the Dutch TTF hub—Europe’s benchmark gas trading platform—declined to $475 per thousand cubic meters at the end of June, down from an average of $565 in May.

With a total active gas storage capacity of 109 billion cubic meters, Europe maintains its position as the largest importer in the global LNG market.