China faces growing EU trade threat as Brussels tightens curbs

The European Union’s existing and proposed trade measures against China could cover around 27% of China’s annual nominal exports to the bloc, highlighting the potential stakes in the increasingly tense economic relationship between Beijing and Brussels, Goldman Sachs Group Inc said, Bloomberg reports.

The measures would not necessarily translate directly into lost exports, however, as their ultimate impact would depend on the final policies and how they are implemented, Goldman economists Xinquan Chen and Chelsea Song said in a report.

“The range of the EU’s curbs does not translate directly to export loss, with actual impact contingent on final policy specifics and implementation,” the economists said. “Broader restrictions would threaten China’s market-share gains, though cost competitiveness, leverage in critical materials and Europe’s commercial interests should cushion the impact.”

Tensions between China and the EU are intensifying ahead of an October deadline to address record trade imbalances, which European leaders have increasingly described as a strategic challenge. The development comes even as Beijing’s economic relationship with the United States has stabilized following last year’s tariff confrontation.

The EU accounted for around 15% of China’s overseas sales last year, with exports to the bloc increasing in recent months. This has become “a growing policy risk for China’s export outlook,” Goldman’s economists said.

Among the EU’s key new proposals are additional tariffs on plug-in hybrid vehicles. Goldman also highlighted a potential expansion of the EU’s Carbon Border Adjustment Mechanism (CBAM), describing it as “a major escalation, with China facing the largest exposure.”

The CBAM, which is designed to impose costs on imports produced under less stringent environmental standards, could be expanded beyond basic steel and aluminum products to cover an additional $58 billion in Chinese exports, according to Goldman.

Electrical and transport equipment, along with machinery, would be among the sectors most exposed. Goldman estimates that these three sectors accounted for 4.9 percentage points of China’s 8.5% nominal export growth to the EU last year.

However, Goldman expects the broader CBAM measures to remain some distance from implementation. The bank said effective implementation is unlikely before 2028, adding that “the actual tax rate on downstream products may represent only a small share of the final export price.”

Despite warning of a “downside risk” to China’s export outlook from growing trade tensions with the EU, Goldman’s economists said they remain relatively measured about the potential impact.

China’s cost advantages and improvements in product quality “remain a significant buffer,” they said. Meanwhile, the EU’s dependence on China for more than 90% of its rare earth elements by weight gives European policymakers an incentive to preserve access to Chinese supplies.

European officials “have incentives to preserve access to the Chinese market and avoid significant retaliation,” Goldman said.

“We therefore expect EU policy to become tougher, but to stop short of measures likely to trigger a severe response from Beijing,” the economists said.

By Vafa Guliyeva