China’s trade surge: October turns red

Bonjour ! This is Anna, writing from London, where relations with the EU seem to thaw by the day. Today is 5 October, and here is your weekly update on what matters most in the European Union.

This week’s briefing digs into China’s trade surge, and its potential impact(s) on the EU. We were very happy to get François Chimits to cover it. François is Head of the Europe Program and a Resident Fellow at Institut Montaigne, specialising in economic security, EU trade policy, and the EU-US-China triangle. He previously spent four years on MERICS’s economic team in Berlin and Brussels, worked at France’s Direction Générale du Trésor in Singapore, Beijing, and Paris, and taught the Chinese economy at Sciences Po Paris from 2019 to 2024.

Also in this newsletter, we update you on the EU’s budget fight between Germany and seventeen other Member States, eurozone inflation hitting a three-year high, Burnham’s breakthrough on a UK-EU summit, and Washington’s pressure campaign over European diesel reserves. Don’t miss my selection of suggested good reads at the end of the newsletter.

A big thanks to Joe Pearn for his help putting this edition together. Feel free to share this newsletter with friends and colleagues, follow us on LinkedIn, and feel free to reach out at contact@whatsupeu.co

Best,

Anna Morin

Facing a worsening bilateral trade deficit set to top €400 billion in 2026, Europeans have given Beijing an ultimatum: find a solution by mid-October or face unprecedented tariff barriers. The uncertainty is no longer about whether new protective measures are coming, but how far-reaching the shift will be and how intense the resulting tensions will prove.

A European response to the second China shock takes shape

The second China shock refers to the new wave of Chinese exports that began in the early 2020s. The term echoes the “first shock” of low-cost exports that followed China’s accession to the WTO in 2001.

This new wave of Chinese goods is the product of the techno-industrial pivot launched under Xi Jinping. It cements China’s position as the world’s leading supplier of manufactured goods, at levels unmatched in 50 years. Meanwhile, Chinese imports and consumption, discouraged under an economic model built around production and self-sufficiency, have not kept pace.

For Europe, the challenge is all the greater because this second China shock hits its strongest sectors, from chemicals and machine tools to green industries and cars. And this time, the other major developed economy, the United States, is partly closed to Chinese goods, leaving Europe as the main outlet for China’s many excess capacity in the mid- and high-end segments.

Chinese goods benefit from subsidies with no equivalent anywhere else in the world (4.4% of GDP a year, according to the IMF) and a currency undervalued by 20% (also per the IMF). This influx is also deepening Europe’s dependence on China, a country that routinely resorts to economic coercion and remains the main backer of Russia’s war effort in Ukraine.

After a relative lull in 2025, Europeans have revived the trade-defence measures first launched in 2024.

Tariffs have been imposed this year on around a dozen categories of Chinese goods (chemicals, steel, tyres and agriculture), and roughly ten investigations have been launched in the same sectors. New measures are almost certain to be taken by the end of October, covering chemicals, hybrid vehicles and machine tools.

At the same time, the EU has finalised extraordinary measures against small parcels (€50 billion worth of EU imports in 2025), 90% of them tied to Chinese e-commerce, cutting that flow by nearly half. Its steel sector has also benefited from exceptional measures, cutting China’s quota by two-thirds, doubling the out-of-quota tariff and introducing anti-circumvention safeguards, extending in places to certain downstream sectors.

Europe’s response to the influx of Chinese goods goes beyond tariff barriers. The Foreign Subsidies Regulation has already hampered several Chinese players’ access to the single market by blocking the acquisition of a German electronics retail chain, excluding China’s leading rolling-stock manufacturer from public tenders, and taking action against suppliers of scanners and wind turbines.

On a different front, several pieces of legislation under negotiation aim to introduce a European preference in public procurement and subsidies, feeding into this broader response to Chinese competition. Measures are likewise being finalised to reduce the EU’s dependencies and vulnerabilities in three key areas: critical minerals, new information technologies and green industries.

Planned tightening of environmental standards on the European market would also hit Chinese products particularly hard, covering goods at risk of driving deforestation, and the carbon costs captured under the Carbon Border Adjustment Mechanism (CBAM). The same goes for the forced-labour regulation, which should come into force in the coming months.

Lastly, investigations into Chinese e-commerce players for breaching digital rules have multiplied, resulting in roughly €2 billion in fines since early 2025.

Threats of retaliation, negotiation and a deadline

True to its culture of retaliation, Beijing has threatened countermeasures in response to each of these steps. However, in late June both sides launched a dedicated negotiation framework built around working groups on trade and investment, export controls, intellectual property and WTO reform, with mid-October as the deadline. According to European officials, voluntary export restraints have been discussed.

European leaders have placed conclusions on trade relations with China on the agenda of the 15-16 October European Council. The Commission is expected to receive final clearance for some of the new barriers under consideration, with their scope depending on the first results of the negotiations.

Whatever happens, unilateral measures are now unavoidable. The EU’s chief trade-defence official, Denis Redonnet, put it plainly: “dialogue alone will not be enough.”

Germany, on the front line of this second China shock and now under pressure from large parts of its own industry, is close to abandoning its traditional opposition to protectionist measures. Berlin signalled its support for strong measures in late August. A broader package addressing this trade challenge is due to be approved by the chancellery before the mid-October European summit.

The Netherlands, Belgium and Sweden, historically among the more reluctant to erect new barriers, are also pushing for action. The remaining resistance comes mainly from Slovakia and Spain, both keen to preserve a privileged relationship with Beijing.

Barriers and a looming flashpoint

The uncertainty now lies in how intense the coming tensions will be. The ball is largely in Beijing’s court. What concessions will be made? What retaliatory measures will be adopted?

Chinese authorities will almost certainly want to test Brussels’ resolve. Europeans should keep in mind that China, with its fragile domestic demand, cannot afford to lose its leading export market, especially for its higher-end output, which is central to its techno-industrial ambitions.

October opens a stretch of sharp tensions that will inevitably settle into a modest rebalancing of a relationship neither side can escape.

BUDGET BATTLE • German Chancellor Friedrich Merz and five other EU leaders from the Netherlands, Sweden, Denmark, Austria and Finland, have threatened to withhold agreement on the EU’s next seven-year budget unless “hundreds of billions” of euros are cut from the Commission’s proposed €2 trillion plan. The six countries account for about 40% of the bloc’s budget revenues.

Seventeen countries, led by Italy and Romania, hit back on 2 October with a letter to Irish Taoiseach Micheál Martin, who chairs the budget negotiations, demanding that nearly €900 billion in farm and regional funding be preserved. They warned further cuts would “weaken” the budget and risk undermining public support for the EU itself.

Separately, Italy and Greece have asked Brussels for more room under the bloc’s annual deficit rules, as surging fuel prices from the war in Iran strain public finances ahead of elections next year. Rome wants inflation-linked tax revenue excluded from its spending limits, while Athens wants to exclude “temporary” fuel subsidies altogether.

INFLATION SPIKE • Eurozone inflation jumped to a three-year high of 3.8% in September, up from 3.2% in August and above the 3.6% economists had forecast, Eurostat said. Energy inflation alone surged to 18.8%, its highest level since the start of the Ukraine war, as the conflict in the Middle East pushed oil and gas prices back up.

Core inflation, which strips out food and energy, ticked up to 2.5%, with the ECB’s own Isabel Schnabel warning that policymakers must act pre-emptively to stop energy costs feeding into wages. The bank has already raised rates twice this year, in June and September.

BURNHAM’S RESET • Andy Burnham, UK prime minister, cleared the way for a UK-EU summit on 20 November, after both sides agreed to shelve their dispute over Britain’s access to the bloc’s Made in Europe industrial policy until next year. The meeting, originally due in July, had been delayed since Keir Starmer’s resignation.

The two sides have agreed the outline of a deal covering a youth experience scheme, food trade barriers and linked emissions trading systems, while the EU’s demand for “home fees” for its students at British universities has been put on ice. The UK offers 50,000 youth places a year, against the EU’s push for 150,000.

Disagreement remains over the scale of the youth mobility scheme, with the UK offering 50,000 places a year against the EU’s push for 150,000. French President Emmanuel Macron and Spanish Prime Minister Pedro Sánchez have both said Britain would be welcome to rejoin the bloc.

DIESEL PRESSURE • The White House pressured European governments this week to release diesel from their strategic reserves or face a US export ban, prompting one EU official to call the threat “blackmail”. G7 countries announced they would release 100 million barrels of diesel and crude oil over the next four months.

Diesel prices have surged this year after the war Washington launched against Iran, compounding damage already done to refineries by Russia’s war on Ukraine. US officials bypassed the International Energy Agency, the traditional venue for coordinated releases, instead pressing capitals individually.

Some EU diplomats dismissed the announcement as largely symbolic, arguing it mostly reaffirms a March pledge to release 400 million barrels that never reached European markets. Macron pushed back on claims of coercion, insisting the talks with Washington had been collaborative and that no export ban was ever on the table.

• In Foreign Affairs, Kyle Chan (Brookings) and Helen Toner (Georgetown’s Center for Security and Emerging Technology) argue that Washington and Beijing have converged on the same anxiety, each fears the other holds the AI advantage, and each worries that the race for advantage, not any single breakthrough, is what ends badly. The most telling detail is how little the recent Trump-Xi meeting actually produced: an agreement, as they put it, “to start talking about talking about AI.”
• In the Financial Times, a sharper case against the states that keep vetoing EU sanctions on Russia: Hungary and Slovakia may think they are extracting leverage, but the bloc is already preparing capital controls and tariff workarounds for the next veto, and each one strengthens the argument for the qualified majority voting that Budapest and Bratislava have spent years resisting.
• Alex Kolbin, writing in War on the Rocks, traces how the sequential closure of Eurasian airspace, Russian since 2022, then Gulf airspace during the 2026 Iran conflict, has left Western military aviation with no further routes to reroute onto. His sharper point is that the Pentagon’s real vulnerability is a network-resilience problem that counting aircraft entirely misses, rather than the number of strategic airlift aircraft it owns.