Trade 'defense' risks becoming a subsidy for EU's inefficiency

Although German Chancellor Friedrich Merz told reporters on Monday that "we do not want a trade war with China", he was quick to add that at last week's European Union summit in Brussels the 27 member states had been strikingly united on a range of trade and economic issues, ranging from "industrial subsidies" and "manufacturing capacity" to "currency exchange rate" and "trade surplus", that he has repeatedly laid at China's doorstep.

Earlier this month he joined France's president, Emmanuel Macron, in advocating so-called stronger "defense" instruments.

Protection can redistribute economic pain but it cannot manufacture competitiveness. This is the central contradiction in the EU's China trade policy. The EU complains that Chinese manufacturers are too competitive, then proposes measures that would make goods more expensive for European consumers and businesses. Tariffs might protect particular factories, but they also raise costs for downstream industries, delay the green transition and reduce pressure on domestic producers to innovate. Europe's industrial troubles have deeper roots: expensive energy, fragmented capital markets, sluggish investment and a regulatory environment that often makes scaling innovation unnecessarily difficult. None will be remedied by restricting Chinese imports. Indeed, European manufacturers depend on Chinese components, materials and markets. A trade war would therefore disrupt the very industrial ecosystem Brussels claims it seeks to defend. Treating Chinese products' competitiveness as proof of "unfairness" risks turning trade "defense" into a permanent subsidy for European inefficiency.

Fortunately, diplomacy has already produced an alternative. Earlier this month, China and the EU reached understandings during trade and investment consultations in Beijing. Their significance lies in the possibility of replacing reciprocal "defense" with reciprocal accommodations.

Brussels should now concentrate on implementing its part of those commitments. That includes addressing restrictions on dual-use goods exports, improving investment conditions and advancing workable arrangements on trade remedies. The objective should be to expand mutually beneficial commerce, not merely redistribute an existing trade surplus.

A trade deficit is not, by itself, evidence of exploitation. It reflects differences in production, demand, savings and competitiveness. Restricting imports does not create corresponding exports. If the EU wants to sell more to China, improving its products' competitiveness and removing unnecessary restrictions on what it can sell would be more productive than erecting barriers against what it buys.

China has reinforced this argument through intensive diplomacy. Since Chinese Foreign Minister Wang Yi spoke with his German counterpart, Johann Wadephul, on Sept 21, he has engaged multiple European officials. His recent visits to Croatia, Montenegro and Bulgaria involved discussions with presidents, prime ministers and foreign ministers about investment, infrastructure, technology and trade.

In Sofia, capital of Bulgaria, on Monday, Wang emphasized trust, friendship, cooperation and partnership. Across the three dimensions of state-to-state relations, regional cooperation, and China-EU relations — which develop in parallel and reinforce one another — the core focus is the cultivation of partnerships. Overall, the China-EU relationship is healthy and stable. Differences regarding economic and trade issues have emerged as cooperation has continued to evolve; these can, and should be resolved through dialogue, without undermining the broader China-EU ties.

To that end, trust should serve as the cornerstone of peace, friendship as a precious asset, cooperation as a robust driving force, and partnership as a shared objective.

Merz is right to reject a trade war. But he is plainly talking out of both sides of his mouth. He essentially fears the damage a China-EU trade war would inflict on Germany, yet refuses to acknowledge that Germany, if not the EU, has structural challenges of its own to fix. So he is left oscillating between a carrot and a stick.

Brussels has negotiated a path toward practical accommodation with Beijing. It should follow the path before protectionism becomes a substitute for structural reform.