Comparative advantages give China-EU economic relations notable resilience

In 2025, economic and trade relations between China and the European Union demonstrated notable resilience despite intensifying geopolitical tensions, slowing global growth and the disruptive shock to the world economy brought by the United States.

According to China’s General Administration of Customs, China’s total trade with the EU reached 5.93 trillion yuan ($862.8 billion) in 2025, up 6 percent year-on-year. The EU accounted for 13 percent of China’s total foreign trade, contributing 0.8 percentage points to overall trade growth. European data shows that in the first 10 months of 2025, EU trade with China exceeded $700 billion, representing 14.5 percent of the bloc’s total external trade and contributing more than 0.8 percentage points to EU trade growth. The China-EU economic relationship remains highly complementary, with deeply intertwined interests.

In terms of the trade in goods, China’s position as the EU’s largest source of imports and third-largest export market remains firmly intact. Supply and demand complementarities in sectors such as machinery and electrical equipment, green energy and advanced chemicals have strengthened rather than weakened. Although the EU’s anti-subsidy investigation into electric vehicles created temporary friction, it also stimulated increased trade in components and intermediate goods, reinforcing industrial linkages. The EU’s rigid demand for Chinese photovoltaic and lithium battery products under the European Green Deal essentially reflects the structural complementarity of the two sides within global supply chains.

Trade in services has emerged as a new growth driver and stabilizing mechanism in China-EU economic relations. The EU has long maintained a surplus in its services trade with China, supported by strong exports of knowledge-intensive services such as engineering design and financial services. Meanwhile, China’s exports of digital services and cross-border e-commerce logistics to Europe are expanding rapidly. However, the EU’s services surplus is still insufficient to fully offset its goods trade deficit. This dynamic helps explain why, even while benefiting from low inflation and supply stability brought by Chinese manufacturing, the EU continues to emphasize the need for “rebalancing” economic relations with China at the political level.

China-EU two-way investment has shown a pattern of stabilizing flows and deepening stocks. Annual bilateral investment remained at around 10 billion euros ($11.5 billion) in 2024, increasingly concentrated in high-value sectors such as automobiles and information and communications technology. Investment logic is shifting from scale expansion toward structural optimization. European companies in China are attracted by incentives such as tax credits and are showing a stronger willingness to reinvest profits, increasingly extending their presence into R&D centers and regional headquarters. Major companies such as Volkswagen and BMW are expanding local innovation capabilities, signaling that China-EU industrial integration has entered a deeper phase characterized by the principle of “in China, for China”.

At the same time, China-EU economic relations are undergoing institutional adjustments triggered by geopolitical pressures, with bilateral interaction evolving from straightforward trade disputes to deeper rule-based competition. The EU has increasingly deployed trade defense instruments such as anti-dumping and anti-subsidy measures, as well as the Foreign Subsidies Regulation. Regulatory scrutiny has expanded from traditional manufacturing sectors to emerging industries such as electric vehicles and wind power, while also extending upstream into investment, mergers and acquisitions, and public procurement. The lengthening of review cycles has significantly increased the institutional transaction costs faced by Chinese companies.

In response, China has used rule-based mechanisms to safeguard its interests — including the anti-dumping investigation into European brandy — marking a new phase in which bilateral interactions emphasize procedural compliance and the strategic use of trade rules. As a result, China-EU economic relations exhibit a pattern of friction and cooperation proceeding in parallel.

The EU Carbon Border Adjustment Mechanism has moved into its payment phase, and together with mandatory carbon footprint reporting requirements under the EU’s new Batteries Regulation, these measures are strengthening green trade barriers.

At the foundational level of supply chains, the EU’s Critical Raw Materials Act introduces a “single-source dependency” cap of 65 percent, significantly increasing the institutional complexity of China-EU cooperation in sectors such as renewable energy and advanced manufacturing.

Yet despite rising regulatory barriers, the China-EU supply chain has not experienced a systemic rupture. Instead, it is undergoing structural recalibration under stricter compliance frameworks, forcing both sides to search for new operational logics within increasingly complex policy boundaries.

Following recent visits to China by several EU member state leaders, including French President Emmanuel Macron and German Chancellor Friedrich Merz, bilateral engagement has entered what may be described as a phase of “pragmatic recalibration”.

During his visit, Merz emphasized the need for a “balanced, reliable, regulated and fair” partnership with China. This wave of high-level diplomacy has provided an important political buffer for bilateral investment. Despite slowing global growth, the attraction of the Chinese market and Europe’s value as a strategic foothold for Chinese enterprises remain fundamentally intact.

At the same time, external geopolitical shocks have further complicated the outlook. The escalation in the Middle East following Israeli and US strikes on Iran triggered severe volatility in global energy and logistics markets. Instability in the Strait of Hormuz has pushed oil prices sharply higher and caused significant fluctuations in maritime and air freight costs. Shipping capacity along Asia-Europe routes has been disrupted, creating new pressures on global supply chains. Such geopolitical risks may compel Europe to search for new compromises to maintain supply-chain stability.

Given the structural constraints created by the deep integration of China-EU industrial systems, both sides should adhere to the principle of “seeking common ground while managing differences”. New growth drivers can be explored in areas such as advanced manufacturing, green hydrogen, artificial intelligence and biomedicine.

The two sides could also expand cooperation in third-party markets — for example, in infrastructure and renewable energy projects under China-Africa cooperation frameworks. By strengthening pragmatic local cooperation and improving the business environment for small and medium-sized enterprises, China and the EU can ease competitive pressures and tap the potential of cooperation within a broader framework.

Ding Chun is the director of the Center for European Studies at Fudan University. Wu Jiwei is a postdoctoral fellow at Fudan Institute of Belt and Road & Global Governance.

The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.