EU seeks Chinese trade signal in Beijing as surplus widens

Senior EU trade officials depart for Beijing today (7 October) for two days of intensive negotiations.

Expectations in Brussels regarding the outcome of the discussions remain tempered, however.

EU Trade Commissioner Maroš Šefčovič will meet his Chinese counterpart, Wang Wentao, on Thursday and Friday.

The meeting comes three months after their last engagement in Brussels, where the Europeans set an end-of-October deadline to see signs of rebalancing in trade relations.

Continuous working-level talks have proved difficult, with virtually no sign of contraction in the lopsided trade balance.

Indeed, Beijing’s colossal trade surplus with the 27-member bloc widened further in the previous quarter.

Beijing is nevertheless understood to no longer outright dismiss the suggestion that problems exist in its trade relationship with Europe.

Sources close to the talks told the South China Morning Post (SCMP) that Brussels hopes the Chinese Ministry of Commerce will agree, by the end of Friday, to reduce exports in a single sector.

This would serve as a “proof of concept” arrangement that could subsequently be extended to other sectors.

Even such a narrow outcome would allow both sides to declare the initial rounds of the process, termed the “Trade and Investment Consultations”, a success.

Andrew Small, director of the Asia programme at the European Council on Foreign Relations (ECFR), said: “The Šefčovič talks in Beijing will determine whether China is willing to put sufficiently serious offers on the table, and whether those offers are significant enough to change the underlying dynamics.”

Beijing may hope to preserve broader access to the lucrative European market at a time when its own reliance on exports is growing.

Even so, a modest breakthrough is unlikely to deter the EU from taking rebalancing into its own hands later this year.

The EU is convinced that China’s model of “state capitalism and subsidised competition” is imperilling its own manufacturing sector.

Surges of cheap Chinese imports in key sectors have been blamed for the loss of thousands of factory jobs across Europe’s industrial heartlands, particularly in Germany.

Chinese firms, once valued customers and suppliers for German manufacturers, have moved rapidly up the value chain to become fierce competitors.

German officials believe that undeclared state subsidies, an undervalued currency, and other forms of support lie behind this aggressive competition.

This dynamic has forged an unprecedented Franco-German alignment on China policy that appears set to propel the EU in a much harder direction.

“Although Germany’s cautious stance long prevented the EU from adopting a tougher line, a consensus has finally formed on Europe-wide action regarding China,” Small said.

On Monday, Paris and Berlin jointly signed a document calling for a new trade weapon that would, among other provisions, allow the EU to exclude China from its market immediately.

This represents a dramatic shift for the German government, which had for years shied away from holding Beijing to account on trade out of fear of retaliation.

A letter signed by German Chancellor Friedrich Merz and French President Emmanuel Macron, addressed to European Commission President Ursula von der Leyen, set out the rationale behind the move.

“We need a credible instrument at the Commission’s disposal that enables a decisive and systematic response: namely, acting via reverse qualified majority voting and taking robust measures that extend, if necessary, to immediate exclusion from the internal market,” the letter stated.

The letter signals an unlikely alliance: while Paris has for years been the foremost champion of greater protectionism and industrial policy, Berlin was generally the principal obstacle.

According to Bernd Lange, the European Parliament’s top trade lawmaker, “the European Council has finally woken up.”

Two heavyweights in Germany and France have acknowledged that a course correction on trade defence instruments is necessary.

“These tools must be deployed faster and more easily to protect against unfair market distortions,” Lange said.

The new mechanism would operate alongside an instrument intended to compel EU firms in key sectors to broaden their supplier bases, preventing deeper dependence on imports that could be weaponised.

The diversification instrument is likely to be unveiled in early December, together with a solidarity fund established to compensate businesses affected by trade retaliation.

China’s Ministry of Commerce said in a statement on Tuesday that it hoped “France and Germany will… refrain from encouraging the EU to resort frequently to protectionist instruments, and strictly avoid politicising or over-securitising economic and trade matters, thereby preventing missteps on the wrong path that ultimately harm their own interests.”

Leaders of the 27 EU member states will convene in Brussels next week and will receive a briefing on the Beijing talks.

At their last gathering in June, only Spanish Prime Minister Pedro Sanchez opposed a tougher trade policy.

With the socialist leader having called a snap election for November and trailing in the polls, China may soon find it has very few defenders remaining at Europe’s top table.

Speaking to the newspaper Le Monde on Tuesday, former World Trade Organization director-general Pascal Lamy said:

“Everyone is on high alert today. We need a Plan A to deal with China: that is what Šefčovič is doing. He is trying to negotiate measures with the Chinese that they would take themselves to curb their exports or dumping practices in specific sectors. But it is doubtful that this will be enough. We therefore also need a Plan B.”