U.S. tariffs take center stage but China and EU are quietly clashing

The U.S. tariff saga has stolen global spotlight from trade tensions between China and the European Union, which are now heating up.

Accusations and investigations over each other’s trade practices have long been a staple of EU-China trade relations, underpinned by concerns over how domestic economies are likely to be impacted by competing imports.

In recent weeks, EU restrictions on Chinese companies taking part in public tenders for medical devices were quickly met with China imposing import curbs on such products. Separately, long-threatened Chinese duties on brandy from the EU came into force earlier this month, and both Beijing and Brussels have ramped up criticism of each another.

Altogether, EU-China trade relations are now “quite poor,” according to Marc Julienne, director of the Center of Asian Studies at the French Institute of International Relations (Ifri).

“What was once a domain of great opportunity and enthusiasm for the bilateral relationship has now become more about risks than opportunities,” he told CNBC earlier this week.

EU and China relations are encumbered by many challenges and risks often linked to clashing economic positions, Grzegorz Stec, senior analyst at the Mercator Institute for China Studies, suggested.

“The EU and China are broadly on a colliding trajectory in terms of their trade and industrial policy concerns,” he told CNBC. Bones of contention include the challenge of China’s overcapacity and trade diversion to Europe, Stec, who is also head of the Mercator Institute’s Brussels office, explained.

“Beijing’s increasingly pressing need to export contradicts the EU’s need to protect its own industrial base,” he added.

China’s economy is facing a gap between its production capacity and demand. It is also struggling with sluggish growth, while exports, which long boosted the economy, have been under pressure amid global trade tensions and lower demand.

Ifri’s Julienne also flagged a series of concerns that make the EU-China relationship tricky, including an increasingly difficult environment for foreign companies operating in China and Europe’s growing trade deficit. Additionally, he said Beijing was “weaponizing” trade to put pressure on Europe — like they did with the brandy tariffs.

China first started investigating European brandy imports after the EU began slapping levies on Chinese-made electric vehicles last year, which pose steep competition to Europe-made alternatives.

U.S. President Donald Trump’s recent tariff regime could have been an opportunity for China and the EU to improve their relations, according to Ifri’s Julienne.

“It should have had a positive impact on the bilateral relationship, in the sense that — facing economic coercion from the United States — [the EU and China] — might have been expected to negotiate and compromise in order to make the most of their trade relationship amid the US tariff war,” he said.

This has yet to materialize.

Jean-Marc Fenet, senior fellow at the ESSEC Institute for Geopolitics & Business, suggested one reason for this failure could be that Beijing feels it has come out on top in its own trade drama with Washington.

“The need for a common front with the EU is therefore less necessary,” Fenet said. “In fact, the fear now in Beijing is rather that the EU will accept an alignment with an anti-Chinese line that the American administration would impose on the sidelines of the trade negotiations.”

After initial sharp escalations and tense negotiations, China and the U.S. confirmed a trade framework agreement in June, including provisions around hotly contested rare earths and tech regulations. Earlier this year, Beijing had imposed export restrictions on several rare earth elements and magnets, which are often used in the automotive, defense and energy sectors, as part of its response to initial U.S. tariffs.

The Mercator Institute’s Stec argued that a solution is “unlikely to be found” on the lingering points of trade contention between Beijing and Brussels, instead foreseeing further issues.

“The overcapacity and trade diversion issues paired with Beijing’s willingness to use rare earths export controls as leverage in EV tariffs negotiations signal more turbulences to come,” he said.

Tensions over the EU’s measures to boost its autonomy and China’s attempts to prevent these efforts can also be expected according to Stec.

Fenet struck a similarly skeptical tone.

“The significant hardening of the European Commission’s positions and the increase in the power of the protection tools it has equipped itself with in recent years, make it likely that there will be growing frictions, as shown by the recent measures taken against Chinese medical equipment and as we will undoubtedly see at the EU-China Summit on July 24^th in Beijing,” he added.

His hopes for the summit — which sources told CNBC will include a meeting between European Commission President Ursula von der Leyen and Chinese President Xi Jinping — are also low.

“The two parties already seem to be anticipating a difficult and probably inconclusive meeting,” Fenet said.

— CNBC’s Silvia Amaro contributed to this report.