A consensus is emerging in Europe that Chinese overcapacity and resulting import surges threaten the continent’s industrial base. Yet the EU remains divided on how to respond. Anti-dumping and anti-subsidy measures are overburdened to respond to a systemic shock, while new instruments would take years to design, legislate and operationalise. Nor would they remove the political difficulty of agreeing action in Council or the risk of Chinese retaliation. This brief argues that the EU must therefore make better use of the safeguard mechanism already available under existing rules. With defensible baselines, country-specific tariff-rate quotas, sectoral focus and systematic import surveillance, safeguards can provide immediate protection while limiting collateral damage to partners.
A consensus is emerging in Europe that Chinese industrial overcapacity, and the resulting import surges, pose a systemic challenge to the continent’s industrial base. Far less settled is what the EU should do about it. Following internal discussions in late May, the Commission is expected to seek the European Council’s backing for tougher measures against mounting Chinese import pressure, supported by at the 18-19 June summit. France, Italy, the Netherlands and Lithuania have circulated a joint non-paper calling for stronger action, centred on broader use of safeguards, WTO litigation and anti-circumvention reforms. Yet the support for concrete measures remains tentative. Spain initially co-signed but subsequently withdrew, and Germany, while declining to sign, signalled on the day of the Commission meeting that it was open to discussing more robust trade-defence measures.
In the face of a systemic shock, the EU’s traditional trade defence tools – anti-subsidy and anti-dumping investigations – have reached their institutional limits. The debate has therefore turned to whether the EU needs new instruments. Chancellor Friedrich Merz epitomised this shift when he argued that the European Council would discuss how to “expand our toolkit within the European Union”. One option is a dedicated overcapacity instrument, likely modelled loosely on the logic of US Section 301, which allows the imposition of tariffs in response to ‘unfair trade practices’. Another is a diversification tool, which would require EU firms to source from at least three different suppliers. The debate over new instruments, however, risks becoming a way of postponing decisions that can already be taken under existing rules today.
Instead, the EU should focus on making better use of the existing safeguard mechanism. Safeguards, which allow for temporary trade barriers where import surges threaten EU industry, are available now and can be designed to address the short-term threat posed by Chinese overcapacity. A new overcapacity instrument tailored to the specific challenges of China’s growth model may be useful in the long run. But it would take years to design, negotiate and bring into force, leaving the EU without an adequate response in the meantime. It would also face political hurdles at least as high as those attached to safeguards and would not, by itself, avert the risk of Chinese retaliation.
Safeguards are not a perfect tool. Their non-discriminatory nature creates genuine legal and political challenges, especially for trade partners not responsible for the underlying distortion. But if used carefully, they can offer a much-needed immediate defence. The Commission should therefore construct a defensible pre-surge baseline, rely on country-specific tariff-rate quotas to preserve traditional trade flows from non-Chinese partners, focus on sectors where Europe still has productive capacity worth defending, and trigger investigations more systematically using import surveillance data and clear injury indicators. This would allow the EU to act now with a tool that already exists, while limiting collateral damage and helping shape a broader international response to a challenge other major economies are already addressing through their own protective measures.
Chinese overcapacity as a structural shock to Europe
Much of the political debate in Europe has revolved around the size of the EU’s trade deficit with China, which reached €360 billion in 2025, up almost a fifth on the previous year. In the first quarter of 2026, it widened further, approaching €95 billion compared to €88.4 billion in 2025. Chinese export volumes have risen more than 40 per cent since the pandemic while imports have stagnated, with exports from all major European economies except the Netherlands falling since 2022 (Figure 1).
Figure 1: Monthly EU-China balance of trade. Source: Eurostat
This narrative is understandable but does not tell the whole story. Trade deficits are not inherently a problem. Under normal conditions, a bilateral deficit reflects comparative advantage, exchange rates and consumption patterns, and does not on its own justify trade defence action. The EU’s case rests instead on the fact that a significant and growing share of the competitive pressure on European manufacturing is the direct product of deliberate state-led distortion.
Beijing’s Made in China 2025 strategy, adopted in 2015, set out ambitions to establish Chinese leadership across ten strategic sectors, including next-generation information technology, robotics, aerospace and advanced rail equipment, clean power and vehicles, and biomedicine and high-end medical devices. These priorities were backed by a dense ecosystem of state-led policies, spanning local-content preferences to intellectual property transfer from foreign firms seeking access to the Chinese market.
At the core of this system are extensive industrial subsidies and other forms of financial support that lower firms’ costs, sustain investment and allow production to expand beyond commercially viable levels. The OECD’s recently published MAGIC (Manufacturing Groups and Industrial Corporations) database shows Chinese firms received between three and eight times more support relative to revenue than OECD countries between 2005 and 2024, and the IMF puts total industrial subsidies at 4.4 per cent of Chinese GDP – roughly $800 billion a year. The OECD estimates that around 60 per cent of Chinese firms’ global market-share gains since 2005 can be attributed to state support with state banks lending at below-market rates and local governments providing land and energy at preferential rates.
China’s investment-led industrial push has fuelled real technological progress. It has also generated excess capacity, as non-market state support allows companies to continue operating despite making losses amid fierce price wars and falling producer prices. Around 30 per cent of Chinese industrial firms now operate at a loss, up from 20 per cent before the pandemic. This extends to traditional industries including chemicals but is especially prevalent in sectors that have seen above-median asset growth in the wake of the property bubble burst 2021-22, which map directly to the industries targeted by the Made in China 2025 strategy (see Figure 2). Despite weak profitability, real value-added in the high-growth sectors has still been increasing by around 7.5 per cent per annum, more than twice the pace seen in lower-growth sectors.
Figure 2: Loss-making industrial firms according to asset growth 2021-22. Source: Federal Reserve Bank of Dallas
Persistently weak domestic demand turns this industrial overcapacity into an export problem. With household consumption at around 40% of GDP, compared to an OECD average of around 53% of GDP, China’s home market simply cannot absorb the scale of output generated by state-backed investment. Exports therefore become the valve, pushing surplus production into global markets at suppressed prices.
The export pressure on Europe is reinforced by two dynamics. The first is trade diversion. The US and Europe have long been China’s two most important high-income export markets. As US tariffs restrict access to one major outlet for Chinese exports, surplus production seeks demand elsewhere, increasing pressure on the EU market. Despite the temporary tariff relief following February’s Supreme Court decision, which reduced tariff pressure on China more than on other major exporters, Chinese exports to the US fell by 10.2 per cent, while exports to the EU rose by 19 per cent year-on-year between January and April 2026. As the US administration reinstates equivalent tariff levels through alternative legal routes, this redirection pressure is likely to intensify. At the same time, other economies including India, Brazil, Mexico and Türkiye have expanded trade barriers in sectors exposed to Chinese import pressure, which further narrowed the outlets for Chinese surplus production.
The second dynamic is China’s exchange-rate policy. A trade surplus of China’s size would normally push the renminbi upwards, as exporters convert foreign-currency earnings into domestic currency. That appreciation would weaken export competitiveness and make imports more attractive. But this adjustment has been actively contained. Chinese state banks have bought dollars to counter appreciation pressure, helping to keep the renminbi weak and exports competitive. Estimates of the resulting undervaluation vary widely from around 16 per cent to as much as 30 per cent.
What makes this particularly acute for the EU is where the import pressure is landing. Chinese imports are hitting the sectors that form the backbone of Europe’s manufacturing model (see Figure 3) and support tens of millions of jobs – machinery, chemicals, automotive supply chains, batteries and clean technologies. The car sector illustrates this most clearly, where Chinese vehicles have roughly doubled their share of the EU market in just three years. In the first three months of 2026, year-on-year imports of Chinese battery-powered electric vehicles (EVs) rose by 32 per cent in value, while non-plug-in hybrids were up 184 per cent and plug-in hybrids 145 per cent, pushing the overall increase in EU imports of Chinese EVs and hybrid vehicles to 77 per cent. The pressure is feeding through into employment. The Commission sees 600,000 automotive jobs at risk, while European automotive suppliers alone announced more than 100,000 job cuts over 2024 and 2025, with industry groups citing stronger Chinese competition as one of the drivers.
Figure 3: Sectoral EU imports from China. Source: Eurostat
The broader threat for European industry is becoming quantifiable. A February 2026 analysis by the French government’s planning office estimates that up to 55 per cent of European manufacturing output could be threatened over the medium term, rising to 70 per cent in Germany and 60 per cent in Italy. The photovoltaic sector offers a cautionary example. Where Europe once had robust technological capabilities, by the time anti-dumping measures against Chinese solar panels were established in 2013, much of its industrial base had already been eroded.
There is little reason to expect change to this dynamic, as China’s 15th Five-Year Plan for 2026–30 doubles down on technological self-reliance, national security and manufacturing expansion. The EU thus faces a singularly distortive trading partner, deliberately pushing subsidised overcapacity into precisely those sectors that form the backbone of European manufacturing. The bloc is well within its rights to respond – not to be bluntly protectionist, but to level a playing field that has been systematically tilted.
Why the EU’s traditional trade defence measures are falling short
To deal with this threat, the EU has so far relied on the two tools that WTO offers to respond to distorting trade practices, namely anti-subsidy and anti-dumping investigations. However, it has become increasingly clear that these are not up to the task.
Anti-subsidy investigations are the EU’s most targeted instrument for responding to foreign state support. They allow the Commission to impose country-specific and product-specific countervailing duties where it can demonstrate that foreign producers benefit from state support, that these subsidies cause injury to EU industry, and that imposing measures is in the broader EU interest. Duties are calibrated to each investigated firm’s level of subsidisation, with less favourable rates for firms that decline to cooperate; non-sampled exporters receive a weighted average rate and may later request an individual review. Although most cases are triggered by industry complaints, the Commission can launch investigations ex officio, of its own accord, where it considers that sufficient evidence exists.
The 2023-24 EV anti-subsidy investigationhas shown both the strategic value and the limits of the instrument. Politically, it demonstrated that the Commission could act even in the face of German resistance and fears of Chinese retaliation. But the case also exposed the instrument’s constraints. The Commission had to build its case painstakingly, establishing subsidisation, injury and causality firm by firm. This makes anti-subsidy investigations evidence-heavy, resource-intensive and procedurally slow, with most cases running close to the legal maximum of 13 months. Even when the evidence threshold is met, the resulting duties in the case of Chinese companies often fall short of levelling the playing field. In the EV case, the tariffs remained modest enough for some Chinese producers to absorb them while continuing to export profitably. This is because countervailing duties can target discrete forms of subsidisation, such as direct transfers, tax exemptions or below-market price provision of goods. But they are less effective when the underlying problem is a broader system of distortion that operates across sectors and through the interaction of state finance, local-government support, protected demand, and legacy subsidies. At the same time, the measure, which applies to individual products, left gaps. Chinese hybrid vehicles imports, which fell outside the investigation, surged.
Anti-dumping investigations are the EU’s most frequently wielded trade defence instrument. These allow the Commission to impose duties where foreign exporters sell goods in the EU below their “normal value”, defined as the domestic price or production costs plus a reasonable profit. Following a reform of the regulation in 2018, the Commission can construct this value using costs in comparable third countries where no market distortions exist.
But anti-dumping measures are poorly suited to a situation in which overcapacities produce pressure across many products at once or where they occur in complex value chains. Investigations usually start with an industry complaint and require detailed data from exporters, importers and EU producers concerning price, cost and injury. Each case must establish dumping, injury and causality product by product, often over a legal timetable of up to 14 months. The chemicals sector exemplifies the problem. European producers are increasingly seeking anti-dumping cases against Chinese imports, but the pressure is spread across a wide range of chemical inputs used in pharmaceuticals, plastics, paints and industrial production, with investigations being conducted one product at a time. Furthermore, measures are constrained by the need for granular price and product comparisons, which makes them difficult to apply in complex sectors with fragmented value chains and differentiated products.
The Commission’s Directorate-General for Trade is now running anti-dumping and anti-subsidy cases at record volumes,and the strain is showing. In 2024, the Commission launched 33 new trade-defence investigations, almost three times the annual average. In the field of chemicals alone, 24 new anti-dumping investigations were initiated in 2024 and 2025, compared with only one a year between 2018 and 2020, while at least 26 complaints are reportedly yet to be opened. This shows how product-specific instruments are increasingly being stretched to manage a broader systemic shock for which they were not designed.
Safeguards are imperfect – but better suited to the problem than the alternatives
The EU thus needs to find measures that remain in the spirit of WTO rules but allow it to deal with the challenge at hand. Any effective response therefore has to meet three conditions. It must: be China-specific and target sectors where active distortions directly threaten the EU’s industrial base; be fast enough; and avoid collateral damage to others.
Safeguards are WTO rules that are not designed to deal with active distortions but general import surges. However, they can be applied in ways that pragmatically deal with the Chinese challenge and fulfil the three criteria laid out. The Commission can impose safeguards where unforeseen developments lead to a substantial surge in imports that causes, or threatens to cause, serious injury to EU producers of similar or directly competitive products. Where these criteria are met, it can impose temporary import restraints to slow the surge and give domestic industries time to adjust.
The first step is the injury phase. The Commission must conduct a public investigation, consult trading partners and publish a report showing that increased imports are threatening to, or causing serious harm to EU enterprises. This still requires objective evidence, but it is less burdensome than anti-dumping or anti-subsidy investigations, as there is no need to prove unfair pricing or to trace specific subsidies. The investigation also allows for a broader product scope. The injury analysis can encompass a defined product group rather than requiring a separate case for narrowly defined products. It could also create new friction with the US, which would remain formally subject to the measure amid highly fragile transatlantic relations and heightened sensitivity in Washington to trade imbalances and market-access barriers.
The second step is the remedy phase. Here, the Commission has significant flexibility. A safeguard can be designed through flat tariffs, quotas or tariff-rate quotas, and the remedy can differentiate between product categories within the broader injury finding. Country-specific quota levels are normally based on the average of the last three representative years, but the Commission can depart from that baseline where necessary to prevent or remedy serious harm. They can also be adjusted if a particular country’s imports have increased disproportionately in a short period of time. Where no sufficient EU production exists, interested parties can seek exclusions.
Safeguards are temporary by design. Provisional safeguards can be applied for up to 200 days based on a preliminary determination alone, allowing for swifter use than anti-dumping or anti-subsidy procedures. Measures can run for up to four years and be extended to a maximum of eight, subject to progressive liberalisation and periodic review, allowing industry space to adjust, invest and upgrade, without turning the mechanism into permanent protectionism.
The EU’s steel safeguard measures show how this can work in practice. Introduced in 2018 after the US imposed unilateral tariffs on steel and aluminium, the measure was designed to prevent excess global steel capacity from being diverted onto the EU market. The Commission set tariff-rate quotas based on historical import volumes and applied an additional 25 per cent duty once those quotas were exhausted.
However, the case of steel also illustrates the central weakness of safeguards, which is that they apply to all trading partners, including those not responsible for the underlying distortion. The only explicit carve-out is for developing countries where their share of EU imports remains below three per cent, provided all exempted countries collectively remain below nine per cent. Additionally, there is some precedent for excluding close trading partners. In the steel case, the EU excluded the three European Economic Area (EEA) countries – Norway, Iceland and Liechtenstein – on the grounds that they were deeply integrated into the single market. However, excluding all free-trade agreement partners, from Mexico to South Korea, would be harder to reconcile with the non-discriminatory logic of safeguards.
One way to limit collateral damage is to use country-specific tariff-rate quotas. The Commission would first identify a representative pre-surge period, which forms the baseline for tariff-free access. If EU demand or import dependence has increased since then, the overall quota could be set above past import volumes. The additional quota space could then be allocated so that established suppliers whose exports have remained broadly stable retain access consistent with traditional trade flows and current market demand, while countries responsible for a disproportionate share of the increase are held closer to their pre-surge volumes. Imports above the quota would face the safeguard duty.
The second weakness is political. Unlike anti-dumping and anti-subsidy measures, where the Commission has the power to act unless member states form a blocking coalition via qualified majority, safeguards require a qualified majority in favour of the measures in the Council. That is a high bar to pass because the costs of action would fall unevenly across the Union and lead capitals to weigh the risks differently. Some member states would worry about downstream costs for manufacturers reliant on Chinese inputs; others about retaliation against exporters, restrictions on critical supplies, or the impact on investment relationships with Beijing. In many cases, these concerns will overlap.
Any serious move against Chinese imports is likely to provoke some level of retaliation. Beijing has built a broad toolkit for targeted economic pressure and has already shown that it can respond quickly and asymmetrically, above all through export controls on critical inputs such as rare earths, with the potential to disrupt European production within weeks. Beijing is also adept at exploiting national differences directly. Before the Commission’s May 2026 deliberations, a Chinese state-affiliated broadcaster cited cosmetics, alcohol, meat and luxury goods as potential targets for retaliatory tariffs – goods directly relevant for France, Spain and Italy.
The uneven exposures make collective action fragile. Spain illustrates the problem. Madrid has sought closer bilateral ties with Beijing and has recently benefited from a sharp increase in Chinese investment. Its decision to withdraw from the non-paper shows how easily support for tougher measures can fray once trade defence intersects with wider diplomatic and economic priorities.
The weaknesses of safeguards would not be fixed by a new instrument
However, a China-specific instrument would not resolve the issues the EU faces right now. While there is a sound argument for developing a tool that directly addresses the distortions produced by China’s growth model in the medium term. But such a tool would not make the politics easier. The difficulty of building the necessary member-state coalition would remain. If anything, they would become more pronounced. A new overcapacity tool modelled on the logic of US Section 301 would ask member states to give the Commission broader discretion to act. What’s more, as a result of the tool’s potential to be directly applied against a specific country, the legal obstacles that would need to be overcome to make it compatible with the non-discrimination clause of the WTO could pose an additional political hurdle.
A new instrument would not escape Chinese retaliation either. Beijing is unlikely to distinguish between a safeguard, an overcapacity instrument or any other EU measure if the practical effect were to restrict Chinese exports. If anything, a more openly China-specific instrument could make the confrontation clearer and raise the likelihood of a sharper response. Any serious response to Chinese import pressure will require a parallel strategy to absorb and share the costs of retaliation across member states.
Finally, and most importantly, a new instrument would take years to negotiate, legislate and operationalise. The Anti-Coercion Instrument, a more focused and legally less contentious tool, was proposed in December 2021 and came into force only in December 2023.
Use What You Have: How to move forward with safeguards
Safeguards, albeit an imperfect tool, should form the immediate defence against Chinese import surges. But deploying them means getting a few issues right.
First, the Commission should use the flexibility in the Safeguards Regulation to build a defensible case around both “unforeseen developments” and the appropriate pre-surge baseline. The two most obvious triggers – the bursting of China’s property bubble that led to a redirecting of investment into industrial production, and US tariff-driven trade diversion – point to a baseline anchored somewhere after 2021. That period, however, is distorted. The post-Covid rebound drove materially higher imports in 2022 and 2023, inflating an average drawn from those years. Go further back and pre-pandemic figures are equally distorted, this time in the opposite direction, as a result of Covid lockdowns suppressing trade flows. There is, in short, no ‘clean’ recent baseline. The Commission should acknowledge this and use the flexibility in the regulation to depart from the standard representative period. This would allow it to build a longer reference window that smooths out successive distortions.
Second, safeguards must be designed to limit collateral damage to trade partners. This is the central design dilemma. A safeguard triggered by China-driven overcapacity cannot legally be made China-specific. The EU therefore faces two options.
The first option is the legally more aggressive route and would exempt free-trade partners from the measure. Such an approach would be politically attractive because it would avoid turning a China-driven measure into a source of friction with allies. Legally, however, it would be difficult to reconcile with the non-discrimination principle underpinning safeguards.
The second option is more laborious but more defensible: country-specific tariff-rate quotas calibrated around the constructed pre-surge baseline. Rather than formally exempting partners, the Commission should use the quota allocation to protect trade flows from non-Chinese suppliers while disciplining the incremental surge that is causing injury. Departing from historical supplier shares would require consultation in the WTO Committee on Safeguards, creating a formal channel for negotiating quota allocation with China and other affected suppliers. This would make the measure formally origin-neutral while ensuring that the burden falls primarily on the incremental import surge.
Third, safeguards should be reserved for cases where overcapacity threatens serious injury to EU productive capacity worth defending. Safeguards should be used selectively, both to preserve their credibility and to reduce the risk of an all-out trade war that the EU is neither politically equipped for nor willing to fight. Machinery, industrial components, chemicals and wind turbine components are stronger candidates than solar panels because they still combine strategic relevance with a feasible European production base. These are sectors where import surges could erode capabilities that remain embedded in European value chains, support downstream manufacturing and which may be costly to rebuild once lost. In sectors such as solar, where structural cost disadvantages are too great and EU production cannot meet demand, safeguards risk disrupting supply without preserving a viable European industrial base.
Fourth, the EU should launch investigations systematically rather than on a case-by-case basis. The Commission’s Import Surveillance Task Force already provides the analytical infrastructure to do so. As Figure 4 illustrates, the Task Force is already tracking which product categories are seeing the sharpest import increases and where significant price deterioration signals below-cost competition. The Commission should devise predefined thresholds tied to the Safeguards Regulation’s Article 9 injury indicators – import volumes, price undercutting, capacity utilisation, profitability, employment – so that preliminary investigations open systematically when those thresholds are crossed. This reduces the risk of delay and bolsters the process from political pressure to defer action in sectors where member state sensitivities are highest.
Figure 4: Goods (exceeding €500M plus chemical sector) tracked by Import Surveillance Task Force in May 2026. Source: CIRCABC
Fifth, the Commission should negotiate an immediate first package of safeguards across several sectors. Because member states differ in their exposure to Chinese imports, downstream costs and risk of retaliation, bundling action across several sectors would allow the Commission to balance national interests, distribute the costs and benefits more evenly, and improve the prospects of assembling the qualified majority needed in Council.
Safeguards as a test of strategic seriousness
The EU must avoid treating new instruments as a way of postponing difficult choices in the present. Safeguards already exist. They have a basis in WTO rules, are designed for import surges, and can be deployed before the industrial capacity they are meant to protect has disappeared. Used selectively and temporarily, calibrated around a defensible pre-surge baseline and designed through tariff-rate quotas to preserve historical trade flows from non-Chinese partners, they can provide the breathing space European industry needs without turning into blanket protectionism.
Agreeing on a common European approach also matters internationally. Other major economies are already responding to Chinese overcapacity through their own trade-defence measures. The result is not yet a coordinated strategy, but it points towards an emerging global pattern. Governments are increasingly unwilling to let Chinese surplus capacity determine the shape of their industrial bases. The EU should join that response in a way that is rules-based, evidence-driven, and alert to collateral damage. A safeguard regime grounded in Import Surveillance Task Force data, tied to clear injury indicators and designed to remain defensible under WTO rules could establish the analytical framework, set sectoral precedents and foster political coalitions that a wider treatment of overcapacity will require.
Photo: Kalle Saarinen on Unsplash