How can the EU Balance between the US and China?
The European Union’s economy finds itself in a delicate balancing act between its deep economic ties with the United States and its growing dependence on China. This dual reliance creates both opportunities and vulnerabilities that require careful navigation. Recent trade data reveals the scale of these relationships – in 2023, EU-U.S. trade in goods and services surpassed €1.2 trillion, maintaining America’s position as the EU’s largest trading partner. Meanwhile, trade with China reached €856 billion, with a concerning trade deficit of nearly €400 billion favoring Beijing. These figures underscore the fundamentally different nature of the EU’s economic relationships with these two global powers.
The transatlantic economic partnership remains the bedrock of EU external trade, characterized by relative symmetry and shared values. Germany’s automotive exports to the U.S., totaling €48 billion in 2023, and France’s aerospace industry sales demonstrate the depth of this integration. American companies account for 45% of all foreign direct investment in the EU, with U.S. tech giants like Microsoft and Google playing dominant roles in Europe’s digital economy. However, recent U.S. policies like the Inflation Reduction Act, which allocates $369 billion in green subsidies, have created new tensions by potentially diverting European clean tech investments across the Atlantic. The Biden administration’s CHIPS Act similarly threatens to undermine EU semiconductor ambitions with its $52 billion in manufacturing incentives.
China’s economic relationship with Europe has grown more problematic in recent years. While Chinese exports to the EU have surged by 72% since 2018, reaching €626 billion in 2023, European companies face increasing barriers in the Chinese market. A 2023 European Chamber of Commerce report found that 43% of EU firms in China feel compelled to transfer technology as a condition for market access. China’s dominance in critical sectors is particularly alarming – it controls 80% of global rare earth element production essential for EU green technologies, 60% of solar panel manufacturing, and nearly 90% of certain battery components. The 2021 Chinese economic coercion against Lithuania, which saw bilateral trade drop by 80% after Vilnius allowed a Taiwanese representative office, demonstrated Beijing’s willingness to weaponize economic ties.
The risks of these dependencies became starkly apparent during recent global crises. The COVID-19 pandemic revealed Europe’s overreliance on Chinese medical supplies, with 70% of antibiotics and 50% of paracetamol imports originating from China. Russia’s invasion of Ukraine further exposed energy security flaws, prompting the EU to accelerate its decoupling from authoritarian economies. The European Commission’s 2023 Economic Security Strategy identified 137 critical technologies where over-dependence creates vulnerabilities, with China dominating supply chains in 34 of these categories.
To address these challenges, the EU has begun implementing defensive economic measures. The newly enacted Anti-Coercion Instrument provides a legal framework to respond to economic blackmail, while the Critical Raw Materials Act aims to reduce reliance on Chinese minerals by sourcing at least 30% from alternative suppliers by 2030. The EU’s Foreign Subsidies Regulation, which came into force in 2023, has already blocked several Chinese acquisitions of European tech firms. However, these measures remain reactive rather than proactive.
A more sustainable approach requires rebuilding European industrial competitiveness. The EU’s innovation deficit is stark – while American and Chinese firms dominate global R&D spending, only two European companies (SAP and Volkswagen) rank among the world’s top 20 innovators. The EU’s per capita investment in artificial intelligence lags behind both the U.S. and China by a factor of three. Closing this gap demands increased funding for strategic technologies, with the proposed €100 billion European Sovereignty Fund representing a step in the right direction.
Trade diversification offers another pathway to reduced dependency. The EU-Mercosur agreement, if finalized, could create a market of 780 million consumers, while the EU-India trade negotiations aim to counterbalance Chinese influence in Asia. Strengthening partnerships with democratic allies through initiatives like the Trade and Technology Council helps align standards and reduce unilateral vulnerabilities.
The coming decade will test Europe’s ability to maintain economic sovereignty amid great power competition. While complete decoupling from China remains unrealistic, smart de-risking through supply chain diversification, investment screening, and industrial policy can help the EU navigate an increasingly fragmented global economy. The stakes are high – failure to address these dependencies could leave Europe economically and technologically subordinate to foreign powers, while success would reinforce its position as an independent center of economic gravity.