On 8 and 9 October, the European Commissioner for Trade and Security, Maroš Šefcovic, will visit Beijing. The European Union’s trade deficit with China on manufactured goods stands at EUR 400 billion over a twelve-month period, driven by a surge in imports. That said, as a proportion of GDP, it is below its 2022 peak (2.1% compared with 2.5%). Furthermore, the aggregate figure masks contrasting realities: 1) with the exception of the automotive sector and Germany, exports are holding up, including service exports; 2) the loss of the Chinese market has been largely offset by third markets; and 3) the real challenge lies in the move upmarket of products imported from China. More than simply rebalancing the bilateral trade balance, the challenge for Europe is to defend its market more firmly and invest more at home to strengthen its competitiveness.
Exports to China: a targeted, not widespread, decline
The decline in exports to China is not across the board. Since 2022, the year when European exports to China peaked, the automotive sector (vehicles and equipment) has accounted for two-thirds of the fall in European sales in China (EUR 23bn out of 34bn), due to the surge in electric vehicles and local brands on the Chinese market. Competition has also intensified in the electronic-component sector, with a 40% fall in European exports since 2022 – a sign of Beijing’s progress in in its substitution strategy and in bolstering its autonomy in key sectors such as AI. In total, these two sectors (automotive and electronics) account for more than 80% of the decline in European exports to China since 2022 (EUR 28bn out of 34bn).
The rest of the exports have held up significantly better, as they have fallen by only 3% since 2022 (EUR -6bn) and have remained stable over the past year. A number of sectors have even seen an increase, including specialised machinery, aircraft engines and equipment, and pharmaceuticals. The same has happened with high value-added services, where the EU has seen its surplus with China increase in recent years, despite stalling in 2025[1].
Germany – by far Europe’s leading exporter of cars to China – is bearing the brunt of the impact. Its exports to China have fallen by EUR 32bn (-30%) since 2022, accounting for the bulk of the European decline (EUR 34bn). As a result, excluding Germany, exports by value have remained stable since 2022 and have even started to rise again this year (+5% y/y in the first half, compared with -12% for Germany; see Chart 1). France and Italy recorded growth of over 15% in the first half of the year, driven by chemicals (France and Italy) and aeronautics (France). The decline seen in Germany is also having a heavy impact through its value chains, as it is leading to a fall in exports from Central European countries (including Slovakia, Slovenia and Bulgaria).
Outside Germany, manufacturing exports are rebounding
A shift well under way but fragile
The contraction in the Chinese market has been largely offset elsewhere. Excluding China, the EU’s manufacturing surplus is still EUR 60bn higher than its 2022 level (see Chart 2), although it declined in 2026 due to the fall in exports to the United States. European companies have increased their exports to other destinations, particularly within the continent. Exports of chemicals and pharmaceutical products to Switzerland, for example, have risen by a third since 2022. As a result, the share of the EFTA[2] in extra-EU manufacturing exports reached 11% in July[3], an all-time high, while China’s share fell below 8%, its lowest level since 2010. The United States’ share, by contrast, fell back to 21%, 3 pp below its 2025 peak.
The manufacturing surplus excluding China is higher than its 2022 level
This reorientation is all the more valuable given that exports are also losing momentum elsewhere, and not just in the United States. Indeed, the deterioration in Asian markets is not limited to China. The manufacturing trade deficit with the ASEAN and Taiwan has also widened significantly since 2022, with some countries acting in part as re-export hubs for Chinese goods. In particular, the EU’s bilateral deficit with Vietnam has risen from EUR 36bn in 2022 to 57bn today, while the deficit with Taiwan – a major exporter of electronic equipment, particularly AI-related products – has increased from EUR 15bn to 26bn.
That said, recent indicators are encouraging. The volume of EU goods exports surprised on the upside in Q2 2026 (+4.3% q/q), driven – though not exclusively – by Ireland (+2.1% q/q excluding Ireland). September business climate surveys also point to a marked improvement in industrial export order books in the euro area, reaching their highest levels since February 2022 according to the PMI and since October 2023 according to the European Commission survey.
EU imports from China are the crux of the matter
China is becoming an increasingly indispensable supplier for Europe and therein lies the Achilles' heel of the EU-27. Imports from China rose by a further 7% y/y in the first half of 2026, bringing the country’s share of imports from outside the EU to 23% – a new record (31% for manufactured goods alone).
These imports also reflect China’s move up the value chain– particularly in the automotive, electrical equipment, machinery, and pharmaceutical sectors, where imports have almost doubled in value since 2022. Although the amounts remain modest at this stage (EUR 11bn), their rapid growth is a ground for vigilance. The automotive sector has demonstrated how quickly Chinese exports can break into the European market, given the significant competitiveness gaps – both in terms of cost and, increasingly, non-cost factors. Furthermore, the EU relies on China for certain strategic products (notably critical metals); China could impose retaliatory measures regarding these goods in response to potential European trade barriers, as illustrated by the 2025 restrictions on rare earth elements.
Rebalancing will not come from trade alone
Europe’s response to China’s rising competitiveness cannot be limited to the issue of the bilateral trade balance; doing so would risk repeating the errors of the US administration, which made bilateral deficits the be-all and end-all of its tariff policy. The imbalance is primarily on Chinese’s side: its structurally high trade surplus (nearly 6% of GDP) is driven by sluggish domestic demand, making exports an essential outlet for its overproduction. China’s industrial strategy targets sectors where Europe holds a dominant position, and there is no guarantee that the European sectors currently holding their ground will continue to do so in the future. Europe is right to take a tougher stance in order to rebalance competition between the two blocs. In recent months, the Commission has stepped up safeguard measures—covering chemicals, automobiles, and steel, including the introduction of quotas and price floors for electrical steel in September—while Paris and Berlin are preparing a joint position to strengthen trade defence instruments, to be unveiled at the October European Council. However, this firm approach has its limits, as imports of Chinese intermediate goods remain essential to the competitiveness of European industry.
For Europe, another issue is its investment gap. The Draghi report estimated the additional annual investment needed to restore European competitiveness at EUR 750–800bn. Two of the identified levers are crucial. The first is R&D, an area where the gap with China has widened significantly in recent years[4]. The second is the deepening of the Single Market, which is key to the economies of scale enjoyed by Chinese corporate champions. Yet Europe does not lack resources, not least its current account surplus (2.5% of GDP), which reflects a continued abundance of savings. Several initiatives currently under negotiation, including the Industrial Accelerator Act, are expected to result in concrete measures (see table), even though their final scope and implementation will take time.
The EU’s toolbox against China
The European Union should not aim to rebalance its bilateral trade balance with China, as it does reflect both competitive distortions and greater R&D expenditures. The EU’s surplus with the rest of the world demonstrates its continued competitiveness. Nevertheless, in the short term, it must defend its market more firmly and in a targeted manner. The meeting on October 8-9, as part of the Trade and Investment Consultation platform launched in late June, could yield welcome progress regarding rare-earth exports or access to the Chinese market. However, the real challenge for Europe lies elsewhere. It must transform itself from within by significantly increasing investment and economies of scale, while diversifying its markets. These three levers are essential for the EU to strengthen its sovereignty and enhance its resilience to economic shocks.
