EU summit expected to discuss trade imbalance with China and responses to damage to European industry
China remains optimistic despite hybrid export restrictions, but market doubts persist
Chinese automakers expand European production, facing burdens from production costs and local sourcing rules

Trade relations with China are expected to emerge as a central agenda item at the European Union (EU) summit. As a widening trade imbalance deepens tensions between the two sides, international attention is turning to the EU's next steps. China has recently made some concessions amid the heightened trade tensions, including agreeing to limit hybrid vehicle exports. However, weak domestic demand and high barriers to alternative export markets suggest that reducing its dependence on Europe in the short term will be difficult.

EU Grapples With Trade Deficit With China

According to Reuters on the 14th (all dates hereafter are local time), leaders of the EU's 27 member states will meet in Brussels, Belgium, on the 15th–16th to discuss damage to European industries from a surge in imports of Chinese vehicles and manufactured goods, as well as potential trade responses. The EU's goods trade deficit with China reached EUR 360 billion (about USD 419 billion) last year and EUR 200 billion (about USD 233 billion) in the first half of this year. These deficits extend beyond automobiles, previously the main source of friction between the two sides, to manufacturing sectors including machinery, textiles, basic metals and chemicals. Concerns are consequently growing over weakening competitiveness among European companies and declining employment.

Against this backdrop, the European Commission's policy direction is shifting toward curbing the influx of Chinese products into the bloc. A prominent example is the imposition of high tariffs on Chinese electric vehicles. The Commission conducted an anti-subsidy investigation into Chinese EVs for about a year beginning in 2023. In July 2024, it imposed provisional countervailing duties after determining that Chinese government subsidies had distorted competition in the European market. This marked the first large-scale trade sanctions against Chinese EVs. In October of the same year, following approval from member states, the EU finalized additional tariffs of up to 35.3% on Chinese EVs, with rates varying by manufacturer. These duties are imposed on top of the existing 10% vehicle import tariff and are set to apply for five years from October 30, 2024.

Limits on Imports of Chinese Hybrids

Under this trade pressure, China has recently sought to ease tensions by offering some concessions in negotiations with the EU. On the 12th, the Financial Times (FT) reported that the Commission was pursuing a plan to cap annual imports of Chinese hybrid and plug-in hybrid vehicles at 350,000. This follows an agreement reached during trade talks held in Beijing, China, on the 8th–9th involving EU Trade Commissioner Maroš Šefčovič and Chinese Commerce Minister Wang Wentao, among others. The import restrictions are scheduled to take effect in December this year, setting an annual import ceiling of 350,000 vehicles in 2027 and increasing it by 6% each year from 2028 through 2030.

The restrictions cover hybrids manufactured in China and exported to the EU, including vehicles made by European automakers at their Chinese factories. However, Chinese-brand vehicles produced within the EU will not be subject to the import cap. The EU estimates that China's hybrid vehicle exports to the bloc will reach about 800,000 this year. It calculates that the agreement could reduce imports of Chinese hybrids by more than half and lower their share of the European market from about 6% currently to around 3%.

China Confident Agreement Will "Actually Expand Exports"

China, by contrast, argues that the agreement has created opportunities for its companies to expand exports. In an official explanatory statement released on the 12th, China's Ministry of Commerce said, "According to Eurostat, EU imports of Chinese hybrid vehicles totaled 107,000 in 2024 and rose to 302,000 in 2025," adding, "The two sides agreed to expand imports from the 2025 level, ensuring export capacity and stable growth for Chinese companies." While the EU emphasized the reduction in imports relative to this year's projected volume, China highlighted the potential to expand future exports compared with last year's actual imports of 302,000 vehicles.

China's Ministry of Commerce also explained that the hybrid vehicle trade agreement follows three principles: respect for facts, non-discrimination and compliance with World Trade Organization (WTO) rules. On non-discrimination in particular, it stated, "No measure should target only Chinese products or discriminate against Chinese companies," and noted that "the import quota allocated to China will be no smaller than the volume allocated to any other country from which the EU imports." Regarding compliance with WTO rules, it said, "China retains all rights within the WTO framework, including initiating dispute settlement proceedings and seeking trade compensation."

Table 1. Plan to Restrict Imports of Chinese Hybrids and the Two Sides' Positions

Difficulties Finding Alternative Markets

Market doubts about China's optimism nevertheless persist. Observers warn that China is likely to struggle to redirect vehicles previously exported to Europe to other markets. For a start, demand in China's domestic auto market remains sluggish amid weak consumer sentiment and reduced purchase subsidies. According to the China Passenger Car Association (CPCA), domestic passenger car sales in September totaled about 1.63 million vehicles, down 28.1% year on year and marking the 12th consecutive monthly decline. Barriers to alternative export markets are also rising. After imposing an additional 100% tariff on Chinese EVs, the United States has tightened regulations on Chinese connected-car software and hardware, effectively blocking market access. Mexico also approved legislation last December imposing tariffs of up to 50% on some 1,400 product categories, including automobiles, imported from countries without free trade agreements (FTAs), such as China. Brazil raised tariffs on imported EVs and hybrids to 35% in July.

Existing major export markets also have limited capacity to absorb more vehicles. According to an automotive market report released in March by global accounting firm PwC, China's exports of passenger cars and light commercial vehicles (LVs) to Russia totaled about 556,000 last year, plunging 46% from a year earlier. This reflected a combination of adverse factors, including increases in Russia's import-related taxes and slowing local vehicle demand. Southeast Asia, which China is targeting as a new export hub, is also a relatively small market. According to PwC, vehicle sales across six major ASEAN countries—Indonesia, Thailand, Malaysia, the Philippines, Vietnam and Singapore—totaled only about 3.5 million last year, while Chinese automakers held a market share of just 11%.

Effectiveness of Local Production Strategy Remains Uncertain

Against this backdrop, Chinese companies are stepping up efforts to establish local production and supply chains in Europe to find a way forward. In an interview with French business broadcaster BFM Business on the 12th, BYD Executive Vice President Stella Li said the company planned to secure two additional production sites in Europe and was considering France as a leading candidate. BYD has already built its first European vehicle assembly plant in Hungary and plans to begin full-scale operations in the fourth quarter of this year. Meanwhile, XPeng continues contract manufacturing at Magna International's Austrian plant and is examining options to partner with local manufacturers to build new factories or use existing facilities. Changan Automobile has also announced a target of expanding its European production capacity to 180,000 vehicles annually by 2028 and 350,000 by 2030.

The problem is that expanding local production in Europe may not necessarily strengthen Chinese companies' competitiveness. They must shoulder higher labor and energy costs than in China, while establishing new local parts supply chains also entails additional spending. Another uncertainty is that the EU's industrial regulatory direction has yet to be finalized. The Commission is currently pursuing stronger local production and parts sourcing requirements for products such as EVs through the Industrial Accelerator Act (IAA), while member states and industry debate what should qualify as European-made. Controversy continues over whether vehicles and components produced in non-EU countries such as Türkiye, the United Kingdom and Morocco should be recognized as European-made. Chinese automakers therefore risk having to make further adjustments to their parts sourcing networks and production systems depending on the rules ultimately adopted.