WARSAW—As cheap Chinese cars, batteries, steel, and electronics flood European markets, the European Union (EU) is trying to build a strategy that protects its industrial base without triggering a full-scale trade dispute with Beijing. What started as a debate over Chinese electric vehicles has evolved into a much broader confrontation with the structural consequences of China’s industrial overcapacity.
The scale of the challenge explains the scale of the response. China now accounts for roughly 30 percent of global manufacturing output while representing only 13 percent of global consumption. According to European Commission estimates, global steel overcapacity could reach 721 million tonnes by 2027—nearly five times total EU steel consumption. Meanwhile, Chinese car exports to Europe rose 26 percent between 2024 and 2025, to almost 1.2 million vehicles, despite tariffs introduced only a year earlier. Imports of Chinese hybrid vehicles surged by 155 percent.
For Brussels, the conclusion has become unavoidable: product-by-product tariffs cannot contain an economy-wide overcapacity shock. In response, the EU is developing several important new tools to address this issue.
A question of decoupling
France has emerged as the intellectual and political driver of Europe’s tougher approach. After returning from Beijing in December 2025, French President Emmanuel Macron warned that Europe could eventually be forced to “decouple” from China in strategic sectors if Beijing failed to address widening trade imbalances.
Paris has also pushed to place currency distortions and global imbalances back onto the Group of Seven (G7) agenda. The debate increasingly centers on whether China’s growth model itself—characterized by weak household consumption, excess industrial investment, and persistent trade surpluses—is compatible with open global trade.
The renminbi may be undervalued by around 20 percent, which is strengthening the French argument. In February 2026, the French Haut-Commissariat à la Stratégie et au Plan went further, proposing either a blanket 30 percent tariff on Chinese imports or a 20–30 percent depreciation of the euro against the renminbi. While Paris later distanced itself from the proposal, it shifted the political debate in Brussels. Measures that once seemed radical now appear moderate.
The second part of the EU response is the much more aggressive use of trade defense instruments. The clearest example came in steel. Beginning in July 2026, the EU will cut tariff-free steel quotas by 47 percent, from roughly 33 million tonnes to 18.3 million, and will double out-of-quota duties from 25 percent to 50 percent through 2031.
The mechanism also introduces “melt and pour” rules designed to prevent Chinese steel from bypassing tariffs through third countries. Brussels increasingly recognizes that narrow safeguards are ineffective if Chinese firms can reroute exports through intermediary markets.
The EU’s earlier experience with electric vehicles reinforced this lesson. Tariffs on Chinese electric vehicles introduced in 2024, including 17 percent on BYD, 18.8 percent on Geely, and more than 35 percent on SAIC—as well as a 9 percent tariff on Tesla vehicles produced in China—failed to significantly slow Chinese market penetration. Producers simply shifted toward hybrid vehicles and adjusted their supply chains. As a result, Brussels launched thirty-three trade investigations in 2024, and a similar number in 2025, many of them targeting China.
More industrial policy
At the same time, the EU is moving beyond traditional trade defense toward industrial policy. The Industrial Accelerator Act, published in March 2026, marks a historic shift away from Europe’s market-neutral model. The legislation creates a de facto “Made in Europe” framework through procurement rules, local-content requirements, and investment restrictions.
To qualify as a “European vehicle” under future procurement rules, manufacturers will need final assembly inside the EU, at least 70 percent local content, and 50 percent European sourcing for critical components such as batteries and semiconductors. The rules will initially apply to subsidized company-car purchases beginning in 2029—a market representing roughly half of all EU vehicle sales.
The law also introduces new conditions for foreign investors. Chinese-linked firms may need to spend at least 1 percent of global revenues on EU-based research and development, source 30 percent of components within the EU, and comply with foreign ownership caps limiting participation in joint ventures to 49 percent.
Yet the legislation also exposed Europe’s internal divisions. France pushed for stricter local-content rules, while Germany and several Nordic countries demanded broader definitions that would include suppliers from the EU’s seventy-six free-trade-agreement partners, including the United Kingdom, Japan, South Korea, Canada, and Turkey.
Germany remains Europe’s central strategic contradiction. Berlin is deeply dependent on China both as an export market and as part of industrial supply chains. It opposed earlier electric-vehicle tariffs, weakened parts of the Industrial Accelerator Act during negotiations, and removed “Buy European” provisions from its own EV subsidy programs after lobbying pressure from German carmakers.
The internal divisions go beyond electric vehicles. EU member states remain split over how aggressively to screen Chinese investment in ports, telecommunications, and critical infrastructure. While the European Commission has pushed for stronger foreign direct investment screening mechanisms, smaller member states dependent on Chinese capital—particularly in Southern and Central Europe—have resisted measures they fear would dry up inflows at a time of sluggish growth. The result is a patchwork of national approaches that Beijing has proven adept at exploiting.
Taming Chinese overcapacity
The most consequential proposal now under discussion is the so-called “overcapacity instrument.” The mechanism would effectively create the EU’s version of Section 301 of the US Trade Act.
Unlike traditional World Trade Organization–compatible safeguards, the instrument would allow Brussels to respond directly to systemic distortions rather than requiring proof of injury sector by sector. It could target industries such as chemicals, machinery, semiconductors, batteries, and clean technology while maintaining restrictions as long as the underlying imbalance persists.
The final pillar is deterrence. Europe’s Anti-Coercion Instrument, adopted in 2023, allows Brussels to retaliate against economic pressure using tariffs, procurement restrictions, and financial-access measures. Although it has never been used, China’s rare-earth export controls in 2025 exposed Europe’s vulnerability in critical minerals and advanced manufacturing supply chains.
That vulnerability has accelerated a broader rethinking of Europe’s supply chain architecture. Brussels is now funding strategic stockpiling programs for seventeen critical minerals, expanding the Critical Raw Materials Act’s domestic extraction targets, and deepening partnerships with resource-rich democracies in Africa, Canada, and Australia. The goal is not autarky but enough domestic capacity and partner diversification to survive coercion without abandoning globalized trade altogether.
The EU has a long institutional history of building mechanisms it then deploys only reluctantly—the Anti-Coercion Instrument being the most obvious example. A year or two from now, the overcapacity instrument could be mired in legal challenges. The more optimistic reading is that Europe has now assembled, for the first time, a genuinely comprehensive toolkit. What the EU still lacks is the political cohesion to wield these instruments consistently, and the willingness to absorb the short-term economic pain that any serious decoupling from Chinese industrial capacity would require.