The European Union and its member states remain deadlocked over how to halt the decline of the Continent’s industrial base, exposing deep divisions over economic strategy as pressure mounts from global competitors.

The depth of the industrial crisis Brussels is seeking to avert was underscored by Volkswagen’s plans to lay off 100,000 workers and close four factories in Germany.

In response to such challenges, European leaders aim to finalize negotiations by the end of this year on the landmark Industry Accelerator Act (IAA). The legislation is designed to channel billions of euros in public procurement spending toward European firms, helping them withstand a surge of cheap exports from China.

“The latest news from Germany shows how urgent it is to act decisively to protect our markets from the unfair practices of our global competitors,” EU Industry Commissioner Stéphane Séjourné told POLITICO, describing the IAA as a “decisive” tool.

At the center of the legislative proposal is the “Made in Europe” preference provision, which is designed to prioritize locally manufactured goods.

While proponents argue that the time has come for the EU to defend its industrial sector, others view the provision as protectionist and are calling for the brakes to be pulled. Critics warn that the proposal risks creating a “legal labyrinth” for businesses, driving up the cost of European-made products, and potentially shut out close trading partners such as Canada, the UK, or Japan.

“What is happening at Volkswagen is worrying, but it is not an isolated case,” said Christophe Grudler, a French liberal Member of the European Parliament (MEP). “It is the result of years of European naivety, while our global competitors have pursued clear and aggressive industrial strategies.”

Negotiations between EU member states and MEPs are only now beginning, following a three-month delay by the European Commission in presenting its proposal in March. Officials acknowledge that time is running out to reach a compromise by the end of the year, a deadline set under the EU’s “Single Market” roadmap.

A primary obstacle in the negotiations is reaching an agreement on which countries should be included on a list of “trusted partners.” Products from these designated countries would be treated as equivalent to European goods in certain public procurement and funding areas.

The debate largely pits free-trade opponents, led by France, against export-oriented economies led by Germany, alongside the Netherlands and the Nordic countries.

“If we had ‘Made in Europe’ and a strong IAA, we could have cushioned this shock for Volkswagen and its employees,” Pierre Jouvet, a prominent Socialist MEP, told POLITICO. Jouvet favors establishing a restricted list of trusted partners chosen through a carefully vetted “opt-in” mechanism.

Such proposals have met with strong resistance from the European Commission’s powerful trade department, where chief negotiator Maroš Šefčovič has focused efforts on expanding, rather than restricting, the bloc’s trade relationships.

Séjourné’s industrial policy initiative is driven by the belief that the EU’s historic commitment to free trade has failed. Brussels continues to search for a coherent response to the challenge posed by China’s bilateral trade surplus with the EU, which now reaches €1 billion per day.

“We must not only think about new tools, but we must also immediately use all our existing trade instruments,” Séjourné said.

Additional measures under consideration include forcing companies to diversify their supply chains for critical inputs away from China, alongside potential trade investigations into plug-in hybrid vehicles, chemicals, and machine tools.

However, new defensive trade mechanisms may prove ineffective if member governments remain reluctant to deploy them. For example, the EU’s Anti-Coercion Instrument (ACI)—frequently described as the bloc’s trade “bazooka” for responding to economic bullying—has never been used.

“The IAA is only one side of the coin,” said Kathleen Van Brempt, a Belgian Socialist MEP and a lead lawmaker on the trade committee. “The Commission must also act to protect the European market with a stronger and more effective trade defense strategy.”

As the legislative process continues, questions remain over whether the IAA, despite its broad objectives, will deliver a decisive impact once enacted.

While the business community has broadly welcomed the “Made in Europe” concept, many industry representatives argue that its proposed application is too narrow to prevent entire supply chains from leaving the Continent.

“Overall, the approach presented by the European Commission does not appear sufficient to address the challenges facing European industry,” the leading Italian business lobby Confindustria wrote in a position paper. The group criticized the bill’s narrow focus on greening industry and its “trusted partners” list, which it argued remains too broad.

According to the Bruegel think tank, the IAA’s rules of origin could also backfire on major manufacturers like Volkswagen.

“Protecting the upstream aluminum sector from import competition will increase input costs for European carmakers, who rely on competitively priced, low-carbon aluminum to maintain global competitiveness in electric vehicles,” the think tank noted.

Before the legislation can take effect, a compromise must be brokered among the EU’s three co-legislative bodies: the European Parliament, the Council of the European Union, and the European Commission. Currently, prospects for meeting the year-end deadline appear weak.

With three separate parliamentary committees reviewing the IAA, at least 150 MEPs are expected to submit formal opinions on the draft.

Furthermore, during its presidency of the Council in the first half of the year, Cyprus managed to draft compromise texts for only portions of the 100-page bill. It deferred negotiations on the highly contentious “Made in Europe” provision to the incoming Irish presidency, which begins on Wednesday.

An Ankara-based delegation led by the European Union’s High Representative for Foreign Affairs and Security Policy, Kaja Kallas, has held talks with Turkish President Recep Tayyip Erdogan.

Kallas conducted the visit as part of a three-member delegation alongside Commissioner for Enlargement Marta Kos and Commissioner for Migration Magnus Brunner.

The closed-door meeting was also attended by Turkish Foreign Minister Hakan Fidan, Presidency Communications Director Burhanettin Duran, and Akif Cagatay Kilic, the Chief Advisor to the President on Foreign Policy and Security.

“Türkiye is a key partner in security, migration, and energy, as well as an EU candidate country. It was positive to speak with President Erdogan today about further strengthening EU-Türkiye relations and the importance of good neighborly relations,” Kallas said. She emphasized that the discussions also covered the war in Ukraine, conflicts in the Middle East, and preparations for the upcoming NATO Summit in Ankara.

Kallas added that Türkiye makes a significant contribution to protecting NATO’s “Eastern Flank,” while Kos remarked, “We have a lot to gain by working closer with Türkiye.”

Ahead of the visit, POLITICO highlighted that the high-level trip aimed to forge deeper ties with Ankara at a time when the wars in Ukraine and the Middle East are reshaping Europe’s security priorities.

A member of Kallas’s team told POLITICO: “Türkiye is an indispensable partner in defense, migration, trade, and regional stability. Tuesday’s [June 30] talks will address the way forward on issues such as Iran, Syria, Gaza, and Russia’s war against Ukraine—areas where Türkiye carries significant weight.”

According to the report, beyond security matters, Brussels is keen to advance plans to reduce trade barriers and develop the so-called “Middle Corridor,” a trade route linking Asia and Europe while bypassing Russia.

Speaking to POLITICO prior to the visit, Kos said: “Closer cooperation between the EU and Türkiye is in all our interests. Together with Türkiye, we want to move toward increasing stability and certainty in the wider region.”

During the visit, Kallas spoke to the Anadolu Agency (AA), pointing to the significance of the upcoming NATO summit in Ankara. “Every summit is called historic, but this time it truly is. Transatlantic relations have recently come under severe pressure. Therefore, delivering a message of unity is extremely important,” she said.

Indicating that Türkiye is a “strategically important partner,” Kallas also drew attention to its role in defense and regional stability, alongside issues such as migration.

Kallas continued: “When we look beyond the Middle East to the Caucasus, we see that Türkiye plays a very important role. That is why it is important to hold these talks and evaluate what we can do together.”

Arguing that Europe does not need a joint army but rather needs to strengthen the European pillar within NATO, the EU foreign policy chief stated that Europe also has much to learn from Ukraine regarding new capabilities.

Reiterating that Türkiye holds a “highly significant position” within NATO, Kallas expressed that the EU and Türkiye must also address the Cyprus issue.

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.