Dealing with China Just Became Even More Difficult

A number of writers—including this one—have advocated to seek with China what we have called a "reverse Deng" investment strategy: stemming an unsustainable tsunami of imports with joint ventures localizing part of China’s industrial onslaught inside Europe. With the proper conditions—majority share for European stakeholders, employment and supplier quotas from Europe, technology transfers rather than "black boxes", transparent and verifiable IT— this would represent a viable compromise between China’s overseas ambitions and European economic security in the broader sense: preserving employment and industrial capacity, saving the trade balance, upholding market competition by needling European firms without asphyxiating them.

Will China’s Rigidity Persist?

All of this was premised on the notion that the Chinese leaders must come to their senses, cannot maintain a "winner takes all" strategy, even with subsidies, deflation, undervaluation of the currency, and the world’s most active industrial policies. The EU, now the world’s most open market, does not want a backlash to extend all the way to decoupling. To avoid that outcome, China must also be amenable to compromises—something it has not practiced so far beyond nice but vague speeches. 

And we just saw, with Canada, a more classic compromise on the same issue - a quota of EV exports to Canada against forfeiting Chinese special tariffs on canola.

This compromise with the EU (which has yet to be confirmed) is suboptimal in our view - but still an inch forward. Informal concessions to member states already announced by China are of the traditional variety (beef and pork to individual EU countries, just like canola with Canada, airplane purchases that have long been in the works anyway). For European EV and car manufacturers or for the European budget, having high prices generate profit to Chinese firms rather than custom proceeds for the EU is a Pyrrhic victory. China’s auto manufacturers, engaged in a downward spiral on their own turf, will welcome the additional profits from these higher prices in Europe.

But let’s not pickle. Compromises from Beijing with the EU have been non-existent or exceptional for a decade, and they are usually made with member states (the old "divide and rule" tactic) rather than with the EU itself. 

Donald Trump Creates the Risk of Mutually Assisted Suicide

Well, the stakes just changed overnight. Donald Trump is extending tariffs as tools of diplomatic and geopolitical coercion against a select group of European member states. In one blow, this U.S. administration goes farther than China ever did (over Lithuania for example) with the EU. It is neutering a trade agreement painfully reached in the summer of last year, an agreement which itself was already seen as biased towards U.S. interest. The prevailing view that a Donald Trump pledge counts for nothing is once more vindicated. The president threatens to break international law against an EU sovereign state in an open fashion that China avoids, whatever it does in practice. 

On January 17, she basically tweeted that one could hear champagne corks popping in Beijing and Moscow. On trade, Donald Trump and his immediate entourage wholly embrace a vision of purely bilateral negotiations with each country—the smaller the better, of course. His spontaneous response to Canada’s deal with China over EVs is a reflection of his true mind: "If you can get a deal with China, you should do that". The MAGA crowd clearly does not value any role for partners with similar interests (let’s not speak at this point of values). Since the U.S. is still the biggest kid on the block, they figure they’ll do better with China than anybody else.

Or perhaps, less worse? In American lingo, there is a form of suicide called "suicide by cop" (you run with a weapon towards a cop, whose orders are generally to shoot first, and ask questions later). We should add a new recipe: "mutually assisted suicide". This is where both the EU and the US, as the result of Donald Trump’s antics, are in a predicament with China. One new problem does not chase away an older one. The US president is making it unavoidable that Europe reply, threaten in turn, and generally retaliate, starting from the trade, financial and possibly digital fronts. Counter-arguments—which we held—that this might destroy areas of necessary coordination are now dead in the water. Any sense of trust has disappeared, not to mention hope in the "adults in the room" or with an imaginary deep state which the president abhors except as an extension of his whims. And of course, he remains a dealmaker, likely to pivot 180° at any moment. His only moral compass is personal interest, and indeed US interests at the expense of anyone else, from family and cronies to the capture of natural resources: oil, metals, rare earths, you name it. He plays the game everywhere, including with Russia: lowering the price of oil (a catastrophe for Moscow but excellent for the mid term elections) takes precedence over a subservient diplomacy. One should not look for a rationale.

This will provide a real "once in a hundred-year opportunity" for Xi Jinping to play his game with both the United States and Europe. Let’s not get into long term strategies: they clearly have no place here. For the first time, Xi can afford to be purely reactive, abstain from any ugly words and watch who comes first towards him: Donald Trump in search of an optic success at any cost before the midterm election (and therefore weakened towards Beijing), or Europe which cannot afford a trade war on two fronts? What has just happened with Canada is indicative that Xi can be economical with his concessions and still come back from deep feuds of the recent past. Mark Carney may not be an angel, but he is also a realistic former central banker who knows how to deal with a situation where one is the underdog.

And that is the position where Europe finds itself, and which both the member states and Brussels must recognize. Some basic truths still hold: failing to coordinate among member states is a recipe for disaster, since China plays a silent divide and rule game—and the U.S. a loud and provocative one. But China has used geopolitics for trading advantages, to own the 21st century’s economy. The US now uses economic leverage for geopolitical gain—seeking to resurrect the land and resource-based empire of the 19th century. China’s long-term challenge is huge, but a geopolitical threat from the United States had suddenly become imminent in ways no one could imagine. And of course, the two can compound each other: in Trump’s zero sum world, a loss by Europe is still a gain for the US, while dueling with China is a tougher game. 

Playing Well a Loser’s Hand

The European Union never ceased to seek compromises with China. To no avail. Yet a seasoned Xi Jinping is bound to know that there is no trust whatsoever to be placed in any pronouncement or pledge by Donald Trump. It does change Beijing’s short-term game. Making a deal with the EU, watching the world sour on Washington, has tangible gains. It does not shake up China’s authoritarian regime, it affords more leverage over the likelihood of renewed U.S. pressures, and it might just secure continued access to the European market where only weeks ago, obstacles and at least sectoral decoupling seemed likely.

They have provided the largest incentive ever for Europe’s strategic autonomy, which they will cynically pretend to applaud, because they want to free themselves from any global commitment. Toeing the line with the U.S. is impossible: simply because it is impossible to know what line to toe, and because it is bound to change from day to day.

This is where the need to avoid "mutually assisted suicide" comes in. Our present strength lies with trade, not with hard power. While we must at all costs strengthen our defense, facing Russia’s aggression and a U.S. blackmail, we cannot shift a global power balance either way—towards China, because it is not in our interest, and now towards the US, because it serves no purpose: Washington, like Beijing, views others’ compromises as only signs of weakness. Even Japan and South Korea will come to see that reliance on the US is dangerous, and Taiwan is bound to ponder the lesson from Greenland (after Ukraine) for China.

Meanwhile, there will not be any resurrection of European defense if it has no large financial and economic basis to build on. We can always claim to be at or near the leading edge in some systems (especially the French, with jetfighters, naval shipbuilding and electronics). Yet the need for financial scale requires Europe - and the compromises that go with it. In this context, there is unavoidably a competition with other objectives: welfare, greening, development aid. To varying degrees, these three objectives are reached at the expense of trade. Welfare, because it raises all sort of costs, from labor to overhead charges. Greening, because the price tag is huge: that is why neither China nor the US pursue it now as a primary objective, but only as a byproduct of innovation for profit. Development aid has a large domestic political cost, because voters see in front of rising emerging economies and fearing for their own threatened standard of living.

This is not the world we like. It is the world that is. Negating it will run us against the wall of reality. Empty messianism (a Europe that can perfect any miracle) courts fatalism. The backlash from the ensuing decline will bring fragmentation and identity based politics, in fact what the real MAGA is on a daily basis.

Restrict Our Ambitions and Focus on Strengthening Industry

Realism counsels another course, rather than a combination of empty messianism and fatalistic decline. Certainly, China is not the only game in town. Strong deals with third(or should we say, quaternary, after China and the U.S.!) partners are essential. They include implementing Mercosur, reaching trade and investment agreements with India, finalizing a trade deal with Indonesia, pursuing critical raw materials and connectivity deals with others who may face the same predatory or strongarming tactics is essential. None of the derisking and diversification sought by the EU in recent years should be given up. Who would have thought that the EU’s anti-coercion instrument might one day come to play first in response to the United States, and not against China?

Yet China, while not the biggest game in town, is the largest on the economic front, because it holds an advantage that individual consumers know well: price, and therefore cost of living, today combined with the innovative results of its industrial policies. Yes, these advantages are balanced by an unlevel playing field—subsidies, monetary policy, forced savings, political system. The last is what China’s leaders will not change in this generation. But accommodation is a policy to be tested again, with eyes wide open rather than shut.

We have several competing asks from China: localizing factories and employment, retaining control for the European partners of joint ventures, transferring technologies in areas where we lack them (which China in its time took decades to achieve, and with party-state strong-arming tactics and non-legal acquisitions…), greening. Of this last goal, neither the U.S. nor our less demanding European member states (such as Hungary and possibly others) will give a hoot. Ideally, a unified European push could get results—except we know that unity among member states is never fully achieved when interests come in. Neither is it in fact, among U.S. states or even China’s provinces themselves!

The paramount priority is therefore the bottom line—share of turnover achieved in Europe (including by suppliers), local employment, negotiated transfer of innovation without illusions on the short term.

The parameters can change—more European unity means more leverage, division ushers in failure. Innovation and production subsidies are the solution for Europe’s own industrial and IT firms: but we must also recognize that a closed environment will not push them forward, and will bring retaliation from elsewhere.

All the above draws for Europe a narrow but open negotiating path. The chief message from the present times is the need for reinforcement of our industrial and innovation base. Everything proceeds from there. And the chief lesson for us is therefore to choose among objectives, and prioritizing what will achieve that primary goal. We perhaps will not fix our transatlantic relation, and that relation is now of no help in dealing with China’s long term economic challenge...

Copyrights image : Andrew CABALLERO-REYNOLDS / AFP
Donald Trump and Xi Jinping on 30 October 2025 in Busan.