Will the EU Join the Economic War Against China?

As the US goes down the trade war route with China, it’s looking for others to join the party. There are numerous reasons to believe the entire project will go down in flames like the effort to isolate Russia.

What of its Project Ukraine partner in crime, the EU? Is it game for another ride at the imperial rodeo? On April 16 the Wall Street Journal reported some of the more unsurprising recent news: that the U.S. plans to use global tariff negotiations to isolate China. The Irish Times on the same day had the scoop that any Washington-Brussels deal over tariffs will likely involve an agreement for the bloc to fully join the US in the economic war against China, which the EU is open to, although it has some qualms about other aspects of the Trump team’s proposed terms:

They suggest that the overall US strategy is to decouple from China, and that any country who wishes to have a trade deal with the US will also have to distance itself from Beijing…

At present neither US beef nor chicken can gain entry to the EU market because of strict EU rules – something which has repeatedly been complained of by the Trump administration. But senior Irish and EU sources dismissed any chance that the EU would change its standards on, for example, hormone-treated beef and chlorine-washed chicken.

The EU is also standing firm —for now— on Washington’s demands it abandon its efforts to regulate American tech behemoths operating in Europe. There are not, however, strong objections to the demands on China.

The EU was already heading down this path anyway with its recent “de-risking” campaign. In 2023, Italy abandoned its lackluster participation in Beijing’s Belt and Road Initiative. Germany faces an internal battle over its China policy, but incoming Chancellor Friedrich Merz is among those with a more hawkish tone. Still, it’s more likely that he and his coalition will continue the untenable balance of political hostility toward Beijing while maintaining the economic relationship. That arrangement favors some of Germany’s biggest companies, which continue to make significant amounts of money in China. Meanwhile, the US, European Atlanticists, and workers will push for a tougher policy. In the end, it could be decided by market developments in China. Should Germany’s Big Three auto companies continue on the path to irrelevance in the Chinese market and be overtaken by Chinese companies elsewhere, that would drive Berlin to embrace a more confrontational policy.

At the EU level, Ursula von der Leyen and many others are fully aboard the derisking train.

EU member states added new instruments to Ursula’s toolbox during her first five-year term, such as the Foreign Subsidies Regulation, International Procurement Instrument, an Anti-Coercion Instrument, the Corporate Sustainability Due Diligence Directive, the EU Critical Raw Materials Act, and the NZIA (Net-Zero Industry Act), which aims for the EU to process 40 percent of the strategic raw materials it uses by 2030. Taken together, they mean Ursula can do serious damage to trade with China if she convinces herself —or Washington does— it’s the best course of action.

The EU is making noise about cozying up to China as a counterweight to the Trump’s hardball negotiation tactics, but we’ve seen this before, and it’s best to wait and see. The EU bigwigs are not going to Beijing until late July, and both Washington and Brussels aim to iron out a deal before then ahead of the end of Trump’s 90-day tariffs pause. That reprieve was announced on April 9, which means a deadline of July 8.

Say the EU more fully commits to this path of “de-risking” from China. What will it mean for the bloc? And what knock on effect will it have on the US, which has increasingly been the recipient of transshipped Chinese goods through the EU?

In an August paper from the Peterson Institute for International Economics Mary E. Lovely and Jing Yan lay this out in detail. Aptly titled, “While the US and China decouple, the EU and China deepen trade dependencies,” the following chart tells a big chunk of the story:

What does this mean? Here’s the Conversable Economist to decipher:

In short, these patterns seem to suggest that imports not coming from China to the US economy are, in a substantial way, ending up in the EU economy instead. This pattern suggest that if the goal of US trade policy is to reduce China’s footprint in the global economy, it is unlikely to do so.

Well, unless Washington can get Brussels to once again shoot itself in the foot. What is the EU importing from China? Gone are the days when it mostly consisted of textiles, shoes, and furniture. They are now pharmaceutical ingredients, chemicals, critical raw materials, and machinery.

Disrupting that trade would be another death blow to European industry. As a recent report for the European Commission notes:

Member States with more industry-oriented economies typically exhibit higher exposure to Chinese imports. This is the case for Member States such as the Czech Republic’s (33% of total Czech extra-EU imports originate in China), Romania, Poland, Slovenia, Slovakia and Germany, underlining the important role of China as source of inputs for EU industry.

There would likely be product shortages as China is the main source of the EU’s “strategic product dependencies.” It is the primary source of 64 such products out of a total of 204 identified by the EU.

The report for the European Commission notes:

For some specific products, the EU’s import concentration on China is at very high levels of 90% and more (e.g. certain pharmaceuticals,chemicals, raw materials). Together, the wide scope in the nature and type of dependencies (“where to start?”) and deep levels of reliance on China in specific cases (“how to diversify?”) underline the complexity of de-risking import dependencies from China.

Indeed, the EU is completely reliant on China for magnesium, which is used in aerospace, automotive, electronics, and other industries for components like aircraft parts, car frames, mobile phone housings. Problem is that over 94% of the world’s magnesium export production now comes from Chinese producers. Russia makes up a big chunk of the rest. Oops.

And before Beijing threw in the towel on its zero-Covid policy, it was leading to shortages in the EU of medicines, ranging from children’s fever reducers to eye drops and antibiotics. About 80 percent of active pharmaceutical ingredients used in Europe and about 40 percent of finished medicines sold in Europe come from China or India. The EU joining the economic war against China could see a return to those days of shortages:

[China] is a major producer of older unbranded medicines that are routinely used in hospitals. Antibiotics, for example, have become increasingly outsourced to Asia, with China dominating. The country has cornered the market for the key ingredients that go into making penicillin. China also is a key exporter in other categories such as blood pressure drugs or painkillers.

Naturally, the EU plan to fix this involved “reviving investment and boosting access to affordable drugs,” as well as requiring companies to hold bigger stocks of medicines deemed essential, but did nothing to fix the underlying problem, and that pretty well sums up the story across various industries. The problem is that neoliberal motivations planted the seeds of China’s dominance today (and good for Beijing for handling those gifts responsibly).  Now Western officials say they want the jobs and industry back, and in a sense they do. China has moved too far up the value chain and is no longer under their thumb. But that does not mean industrial manufacturing that left will be making a return to Detroit and Dusseldorf, Toledo and Turin.

That’s because it is not possible to simultaneously embrace neoliberalism while pursuing an industrial policy, and that’s not the goal anyways. Instead, the very same forces that shipped Western industry East are exploiting anger over those lost jobs and living standards and directing it toward China for “stealing.” And all the big money thinks it can get supply chains up and running via “friend shoring” that excludes China and runs seamlessly from other polluted slave labor centers to their garden doors.

Why would the EU be up for another economic shootout at the US’ side?

Aside from the oft-cited reasons of its misleadership class, racial motivations, and power delusions, the US does remain the most important economic partner for the bloc — just not for essential items:

At an aggregate level, the US is still the EU’s main economic partner as of today (Figure 4).8 Only for imports of goods, China stands out as more important for the EU in relative terms than the US. In other dimensions (goods exports, services imports and exports as well as inward and outward FDI), the EU-US relation is significantly more intense. A similar picture exists from the perspective of the US, with the EU as a more important economic partner across all dimensions considered.

Prior to her humiliating 2023 trip to Beijing, von der Leyen elaborated on her “de-risking” strategy in a speech on EU-China relations at the Mercator Institute for China Studies and the European Policy Centre. Here’s a key excerpt:

The starting point for this is having a clear-eyed picture on what the risks are. That means recognising how China’s economic and security ambitions have shifted. But it also means taking a critical look at our own resilience and dependencies, in particular within our industrial and defence base. This can only be based on stress-testing our relationship to see where the greatest threats lie concerning our resilience, long-term prosperity and security. This will allow us to develop our economic de-risking strategy across four pillars. The first one is: making our own economy and industry more competitive and resilient.

About that stress-testing. It’s strange that the trans-Atlantic relationship is never put to the same test as with Moscow and Beijing.

A Risky Bluff

At first glance it would appear that like in the case of Project Ukraine the EU would be due to suffer much more than the US in a coordinated economic war against Beijing due to Europe’s heavier reliance on China.

That might not be the case however. That’s because while the US might simply be masking its reliance on Beijing. The Mercator Institute for China Studies:

EU dependencies have since 2016 further concentrated on China, while US have diversified away – likely in part a consequence of the Trump Administration’s hawkish approach to China after entering office in 2016 and the start of trade measures in 2018. The US has seen its trade dependencies on Vietnam and Mexico increase, but they, in turn, have become more dependent on imports from China. This raises the question in how an increase in indirect dependencies could undercut the benefits of any decrease in direct dependencies.

And if Washington hopes for its economic war to succeed, it needs —and is actively pursuing as the above-mentioned WSJ article shows— other countries to join it against Beijing.

That’s when potential shortages could really start to bite (depending on China’s response). Here’s another chart from the Peterson Institute for International Economics:

And again from the Conversable Economist:

Indeed, given that imports often pass through the production process in several countries on their way to a final product, it’s plausible that some Chinese exports are going to Mexico and the EU, being incorporated into other products, and then ending up as US imports.

Let’s use the example of pharmaceuticals. US imports from the EU have exploded in recent years:

The US trade deficit with the EU in pharmaceuticals (NAICS definition, US data) is $120b — also 4x the deficit in autos …

And it clearly exploded around the time of the Tax Cuts and Jobs Act (the Trump-Ryan tax reform)

2/3 pic.twitter.com/nYEJ5rqPyL

— Brad Setser (@Brad_Setser) April 15, 2025

And we now have Trump threatening the EU with tariffs — including on pharmaceuticals — in order to get Brussels to engage in economic war against Beijing. If the EU acquiesces — or if it doesn’t and Trump follows through with his threats — Americans could end up paying even more exceptional prices for drugs. Here’s why:

Data from 2021 show that approximately 95 percent of vitamin B1 and its derivatives imported into the EU came from China. Over 96 percent of the heterocyclic compounds with an unfused pyrazole ring, APIs used in many antibiotics, are also imported by the EU from China. An even higher dependency can be found for chloramphenicol and its derivatives, reaching over 98 percent. Chloramphenicol is a key substance for a wide-spectrum antibiotic used for severe infections that cannot be treated with other antibiotics.

Moreover, even when the active ingredients or the final drugs are manufactured in Western countries or in India, production often depends on imports of raw materials from China. For example, India imports about 70 percent of APIs from China, including those necessary for the production of antibiotics, paracetamol and drugs for diabetes and cardiovascular diseases. In fact, compared to India, China is able to produce APIs 20-30 percent cheaper, depending on the product, thanks to the availability of cheap raw materials. In addition to the production of the APIs, China is also a key supplier of excipients, meaning substances that improve, for example, the absorption, taste or physical properties of the drug.

Roberta Pizzocaro, president of Olon, a Milan-based company that makes around 300 different pharmaceutical ingredients that go into finished drugs, tells Politico the following:

Many pharmaceutical ingredients are now only produced in Asia and some exclusively in China, said Pizzocaro. She said that her company could last “some time” on existing stocks, but it wouldn’t be long before shortages started to bite.

Perhaps it isn’t wise for nations to be so reliant on one country for so much of the pharmaceutical supply chain? The fact the EU does not have fallback options would seem to rule out launching a trade war, but to believe common sense will carry the day would require ignoring all the self destruction the leadership class repeatedly inflicts on its own citizens.