Washington and Beijing cut a trade deal – Europe picks up the tab

The rollercoaster of EU–China relations continues its descent, and it is tempting to read that slide as a purely bilateral story – of Brussels cataloguing grievances over overcapacity and market access, and Beijing answering with lectures on multipolarity.

But the steepest part of the current drop is being engineered elsewhere, in the managed-trade arrangement taking shape between Washington and Beijing. Europe is not a party to it, yet it absorbs many of its costs.

Start with the mechanism economists call trade deflection. A managed US-China equilibrium – tariffs capped, purchase commitments made, export controls loosened in exchange for concessions – does not eliminate China's structural surplus, which reached around $1.2 trillion last year (Opens in new window). That output must go somewhere. To the extent that Washington and Beijing keep their bilateral flows within politically tolerable bounds, the marginal unit of Chinese overcapacity is pushed toward the most open large market still willing to absorb it.

That market is the European Union.

This is clearest in what Beijing calls its “new quality productive forces (Opens in new window)”, including electric vehicles, batteries and the renewable-energy supply chain. Europe is now the largest external buyer of exactly these products. The US still buys, but in a managed and shrinking way – behind tariff walls, content rules of the type pioneered by the Inflation Reduction Act, and a deliberate policy of building domestic capacity. Even Europe's own anti-subsidy tariffs (Opens in new window) on Chinese EVs have proved more porous than American barriers. The asymmetry matters: every door the US half-closes to Chinese green tech raises the pressure on the one large door left ajar, and that door is Europe’s.

Why does Beijing prefer the American arrangement despite its frictions? Because managed trade with the US is favourable on China's own terms: it yields concessions Europe cannot offer. The clearest example is what China needs the most in its neck-and-neck race against the US for AI dominance, namely advanced chips. Having banned, unbanned and then conditionally re-licensed Nvidia's H200 for Chinese customers, the Trump administration has shown that even its flagship technology-denial policy is negotiable. For Beijing that is the prize: access to compute it cannot yet produce at home, extracted through the give-and-take of a managed relationship. Europe has no comparable chip to play – or might, such as with Dutch ASML’s most advanced lithography machines to build AI chips, but it does not know how to play it. Beijing knows it.

To be fair, US-China managed trade occasionally helps Europe, almost by accident.

Take rare earths. After China escalated its controls – the October wave building on the spring restrictions and the licensing it had weaponised since the end of September – European industry was hit hard, bearing the brunt of an opaque, deliberately slow process for materials indispensable to its automotive, defence and green sectors. What relieved the pressure was not a European negotiation but the Trump–Xi understanding that suspended the harshest measures until November 2026. Europe simply rode Washington's coattails, benefiting from a deal to which it was not a party.

But this is the exception that proves the rule. Europe's relief was incidental – a positive externality of a deal struck for American reasons. The structure runs the other way: when China sets its priorities in pursuing managed trade, it puts the US first and does not trouble itself to negotiate seriously with Europe. Beijing reads the EU correctly as fragmented, slow and short of the leverage that forces concessions. Why bargain with 27 capitals when one call to Washington delivers more?

This is exactly where we are now. The €360 billion annual deficit that European Commission President Ursula von der Leyen invoked (Opens in new window) at the latest European Council on 18 June is not merely the product of subsidies and non-market practices, real as those are. It is also the predictable result of a system in which the two largest players manage their mutual exposure and let the residual flow toward the open economy that still refuses to defend itself with comparable seriousness.

The conclusion is uncomfortable but clear. Europe cannot count on being a beneficiary of US–China deals, because most of the time it is their casualty. The defensive toolkit is familiar – trade-defence instruments applied swiftly against subsidised overcapacity, tighter foreign direct investment (FDI) and outbound-investment screening, the Industrial Accelerator Act, procurement rules that favour European production where security justifies it. What is new is the reason for urgency: these tools answer not only a Chinese behaviour but an American one. As long as Washington and Beijing manage their trade bilaterally, the deflected surplus will keep arriving at Europe's shores, and no amount of summitry in Beijing will change that arithmetic.

Europe's task is to stop being the residual – to defend its market with conviction and, harder still, to rebuild the competitiveness that would let it meet Chinese competition on its own terms rather than as an afterthought of someone else’s bargain. Until it does, the rollercoaster will keep heading down, and others will keep deciding how steep the drop becomes.