San Francisco Frontiers - EU, China to hold Beijing talks to avert trade war

The European Union has toughened its stance towards Beijing to defend businesses against what it believes is unfair competition in critical sectors including cars.

Increasingly European leaders and observers warn of a "China Shock 2.0", used to describe Chinese firms' shift into more high-tech manufacturing, which is threatening many traditional EU industries.

The first shock in the early 2000s saw a glut of cheap, more low-tech exports from China hurt manufacturers not just in Europe but around the world.

EU and Chinese officials have been locked in talks since June to address Brussels' concerns about the current trade imbalance.

The EU is simultaneously preparing to boost its trade defence toolbox -- but Beijing has threatened to retaliate against any moves targeting China.

Sefcovic raised the stakes for this week's meetings in summer when he warned the EU expected "tangible results by October" from the process.

But experts cautioned against expecting too much from this week's meetings.

"There may be a few crumbs, but I would not expect any kind of major breakthrough," Penny Naas, director of the Brussels office of German Marshall Fund of the United States (GMF) think tank, said.

There could be "agreements on some specific issues, rather than any broad settlement of the trade relationship", said Zhu Tian, professor of economics at the China Europe International Business School (CEIBS) in Shanghai.

It is clear Brussels is aware the talks won't solve all of its woes, with the commission working in parallel on new tools to protect European industries, which are expected to be presented to leaders in December.

- 'Worrying trends' -

What the EU wants is to cut its trade deficit with China.

It hit around 360 billion euros in 2025, meaning the EU imported far more from the Asian nation than it exported there. China has a lower figure of around $292 billion but expects the deficit to rise further this year.

The EU's trade enforcement chief, Denis Redonnet, said sectors facing "sustained and abnormal" import increases included machinery, textiles, basic metals and chemicals.

There were "potentially worrying trends for almost a quarter of all imports into the EU at the moment", driven mainly by Chinese goods, Redonnet told the European Parliament last week.

Sefcovic said the EU wanted to deliver on three main objectives including tackling export surges from China to the bloc's market, especially in critical sectors, and increasing exports from Europe to China.

Brussels also wanted "a system of export licensing for rare earths and other products" after major producer China introduced restrictions on them last year.

Europe hopes to manage Chinese exports through voluntary limits, for example on hybrid cars shipped to the bloc, but an EU official said Brussels wants to include other products. Beijing has said it firmly opposes import quotas.

China has limited room for manoeuvre because of weak domestic demand, which means the government relies on exports to sustain growth levels.

- Diversifying suppliers -

Since the bloc does not expect significant changes by China, the EU official, speaking on condition of anonymity, said it was also steaming ahead with preparing new tools.

Several EU nations including France have pushed for a "European equivalent of Section 301" -- the trade tool US President Donald Trump used to probe foreign practices Washington deems discriminatory, and retaliate with tariffs.

Responding to reports last week about such a tool, Beijing warned it would "respond resolutely" to "discriminatory restrictive measures".

The EU knows they are not empty threats: China previously retaliated against the bloc's trade defence moves with duties on European cognac, and conducted anti-dumping probes into pork and dairy products.

Brussels is also developing a tool that would support businesses, through funding, to diversify their suppliers in critical sectors.

It is still unclear, however, how far the EU as a whole would be willing to go against China -- for fear of provoking Beijing.

Germany, which is especially exposed since its biggest trading partner is China, has been especially cautious -- though Berlin's stance has hardened as it worries Chinese overcapacities are hurting its export-led economy.

Europe has "the ability to do something more aggressive to stem this China 2.0 shock", GMF's Naas said. "The question is, will they?"

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G.Allen--SFF