EU-China, the Limits of a New Trade Balance

*Articolo di Silverio Allocca originariamente pubblicato dal Nuovo Giornale Nazionale e ripubblicato da Trieste News

19 agosto 2026 – ore 12:00 – China can negotiate the imbalance, but not its own model of power. Ahead of the next EU – China Trade and Investment Compact meeting scheduled for October, this editorial offers a focused assessment of the strategic constraints that may shape the negotiating space between Brussels and Beijing. It draws on a broader study, forthcoming shortly, which examines in greater depth China’s negotiating position, its economic-security red lines, and the possible areas of compatibility between the two sides. The central question is whether the TIC can deliver meaningful trade rebalancing without requiring either side to compromise the core instruments of its economic-security and development strategy. The Trade and Investment Compact between the European Union and China formally emerges as an instrument for rebalancing trade, but its real scope is considerably broader. Behind the issue of the deficit, market access, rare-earth exports, and regulatory reciprocity, two different conceptions of economic security are in fact confronting each other and, above all, two different ways of understanding the relationship between trade, industry, and sovereignty.

The decisive question, therefore, is not to establish how much Beijing is willing to concede, but to understand what Beijing can concede without compromising the instruments through which it pursues its economic security, technological self-reliance, and industrial modernization.

This is the real key to understanding the negotiation.

China has a far from irrelevant negotiating margin. It can selectively increase imports from Europe, further open certain sectors, improve European companies’ access to the Chinese market, strengthen intellectual-property protection, make certain administrative procedures more predictable, and introduce greater transparency into licensing systems.

It can even accept consultation and monitoring mechanisms capable of reducing the uncertainty characterizing certain areas of the economic relationship.

But all these concessions have one common characteristic: they can modify the conditions under which China trades with Europe without modifying the conditions under which China builds its own industrial and technological capacity.

And it is precisely here that the first and most important dividing line lies.

The point is not trade. It is sovereignty over productive capacity

For Brussels, the problem of the trade imbalance cannot simply be attributed to the fact that China imports too little from Europe.

The problem is that a growing share of Chinese competitiveness derives from industrial capacities built through investment, public support, economies of scale, integration of production chains, and technological-development policies that produce an exportable supply far greater than domestic demand in certain sectors.

This is where the issue of so-called overcapacity arises.

But what Europe interprets as a trade distortion, Beijing may interpret as strategic industrial capacity.

It is only apparently a semantic difference. In reality, it is a difference of a strategic nature.

If Brussels were to ask China to increase European imports, the request could be compatible with Chinese interests. If, instead, it were to ask China to reduce its productive capacity in strategic sectors because that capacity contributes to the European trade surplus, the negotiation would immediately enter another dimension.

It would no longer be a matter of discussing Chinese trade.

It would be a matter of discussing what the structure of the Chinese economy should be.

And it is difficult to imagine Beijing granting the Union such a negotiating right.

The point is particularly evident in light of the new cycle of Chinese planning. Innovation, advanced manufacturing, scientific and technological self-reliance, and the development of new quality productive forces are not treated as mere instruments of economic policy. They are an integral part of China’s national development strategy and economic security.

For this reason, the real red line is not necessarily a specific sector – electric vehicles, batteries, photovoltaics, semiconductors, robotics, or artificial intelligence – but rather the principle that China’s strategic productive capacity could be determined by the requirements of trade rebalancing with Europe.

That is a much deeper limit.

The Fundamental Distinction: The Right to the Leverage and the Conditions for Its Exercise

The same logic appears in export controls.

Rare earths constitute the paradigmatic case. Europe has an obvious interest in obtaining stable, predictable supplies not exposed to arbitrary disruptions. China, by contrast, regards the ability to control certain exports as a component of its economic and national security.

The negotiable point, therefore, is not necessarily China’s right to control exports, but the manner in which that right is exercised.

It is a fundamental distinction.

Beijing may be incentivized to accept greater transparency, clearer licensing criteria, predictable administrative timelines, prior consultations, and emergency-management mechanisms.

It would be much more difficult to obtain a permanent renunciation of the Chinese state’s ability to subject certain resources or technologies to controls when these are considered relevant to national security.

In other words:

Europe can negotiate the conditions of the leverage; it can hardly negotiate the existence of the leverage.

The same distinction applies to the entire set of Chinese economic-security instruments: the Export Control Law, the Anti-Foreign Sanctions Law, the Unreliable Entity List, and other instruments for responding to foreign measures.

The progressive institutionalization of these instruments demonstrates that Beijing no longer considers trade a sphere separate from national security. Trade has become part of the architecture of economic security.

Asking China to make the exercise of these instruments more predictable is therefore negotiable.

Asking China to renounce the right to use them, by contrast, means intervening in the economic sovereignty of the state.

The Paradox of Economic Deterrence

Here the second central element of the negotiation emerges: interdependence between Europe and China is neither symmetrical nor one-directional.

China possesses fundamental chokepoints in critical raw materials and industrial chains linked to rare earths. Europe, in turn, possesses technologies, machinery, advanced industrial goods, intellectual property, financial capabilities, and, above all, a market of such a size as to constitute a significant lever.

Neither side, however, is completely autonomous.

And it is precisely this reciprocal vulnerability that creates a particular form of economic deterrence.

China can use rare earths to exert pressure on Europe, but systematic use of this leverage would accelerate European diversification, recycling, technological substitution, and the construction of alternative supply chains.

Europe can use access to its market or certain technologies as instruments of pressure, but systematic use of these levers would in turn accelerate Chinese technological substitution and the industrial self-reliance pursued by Beijing.

The leverage, if used aggressively, therefore tends over time to destroy the conditions that make it effective.

This is the paradox of deterrence based on interdependence: the ability to strike the other side exists precisely because dependence persists; but repeated use of that ability incentivizes the counterpart to eliminate the dependence.

Stability therefore does not arise from the absence of vulnerabilities.

It arises from the awareness that exploiting the other side’s vulnerability may accelerate the construction of a lesser vulnerability of one’s own.

But Europe Has a Problem That China Does Not Have to the Same Extent

It is at this point that the transatlantic relationship introduces the decisive variable.

European leverage does not perfectly coincide with an autonomous European lever.

In several strategic technological sectors, European industry operates within an ecosystem in which the United States possesses its own control capabilities, standards, intellectual property, components, and export-control instruments.

This gives rise to an issue that goes beyond the simple EU-China relationship: the intertemporal credibility of the European commitment.

Beijing must not assess only what Brussels promises today. It must assess whether Brussels will actually be able to maintain that position tomorrow.

A possible European agreement on technology, exports, or economic security could in fact subsequently be conditioned by U.S. strategic requirements.

This does not mean that Washington and Beijing pursue convergent interests toward Europe. It means something more limited and analytically relevant: European dependence on the transatlantic architecture may reduce the credibility of European autonomy as a negotiating variable.

The Nord Stream affair, beyond its specific characteristics and without establishing any equivalence with trade policy toward China, may be invoked precisely from this perspective: as a politically relevant precedent regarding the possibility that European decisions concerning infrastructure and economic security may be conditioned by strategic considerations external to the relationship directly concerned.

For Beijing, therefore, the issue is not simply to understand whether Europe possesses a given technology.

It is to understand who politically controls the European decision to export it.

And this is a substantive difference.

The TIC Is Therefore a Three-Way Negotiation

Formally, the negotiation is between Brussels and Beijing.

Strategically, however, it is at least a triangle.

China must consider its relationship with Europe also in light of its competition with the United States. Europe must consider its relationship with China while taking into account the constraints and opportunities arising from the transatlantic alliance. Washington, finally, possesses instruments capable of influencing the perimeter within which Europe can exercise its technological leverage.

This produces a paradoxical situation.

Europe may be strategically stronger vis-à-vis China thanks to its relationship with the United States, but it may simultaneously be less autonomous as a bilateral negotiator.

And it is precisely this possible contradiction that Beijing may exploit.

If China believes that an agreement with Brussels could subsequently be modified by American strategic requirements, the value of the concessions it would receive in exchange decreases.

Why concede something to Europe today if tomorrow Washington could ask Europe to adopt a policy incompatible with the agreement?

The problem therefore becomes one of the intertemporal credibility of agreements.

An agreement is strategically effective only if both parties consider the other’s ability to comply with it over time to be credible.

The Real Zone of Compatibility

From this perspective, a possible zone of compatibility emerges that is much more precise than what the simple concept of “rebalancing” might suggest.

China can accept:

• greater access to its market;
• a selective increase in European imports;
• greater regulatory predictability;
• improvements in intellectual-property protection;
• greater transparency regarding certain policies;
• more predictable procedures for export controls;
• prior consultations;
• monitoring mechanisms;
• cooperation on the WTO and standards.

Europe, in turn, can offer:

• greater predictability for Chinese investments;
• greater clarity regarding its own economic-security instruments;
• consultation mechanisms concerning restrictions;
• greater regulatory transparency;
• technical cooperation;
• more predictable management of certain trade-defense instruments.

The common ground is evident: both sides can accept disciplining the exercise of their respective levers without relinquishing the levers themselves.

This is the possible architecture of the compromise.

The zone of incompatibility emerges instead when the negotiation seeks to intervene in the ownership of strategic levers or in the ability to use them.

Europe cannot realistically ask China to renounce its ability to pursue technological self-reliance.

China cannot realistically expect Europe to renounce the construction of its own economic security.

Beijing will not easily accept a European right to determine the size of its own industrial capacity.

Brussels cannot indefinitely accept that its dependence on certain supply chains may be transformed into coercion.

The compromise, therefore, is not between leverage and the absence of leverage.

It is between leverage and the discipline of leverage.

The Risk of a Merely Apparent Success

This is where the most important limitation of the TIC emerges.

The two sides may reach an agreement and both declare it a success while meaning two completely different things by success.

For Brussels, success might mean reducing distortions, greater reciprocity, and trade rebalancing.

For Beijing, it might mean improved access to the European market, stabilization of the relationship with Europe, and reduced tensions without any substantial modification of its industrial model.

Both interpretations would be consistent with an agreement.

But only one of them would be consistent with the idea of structural rebalancing.

This leads to the central conclusion.

The TIC can be effective without being transformative.

It can reduce certain tensions, increase trade, improve predictability, create consultation channels, and prevent economic vulnerabilities from being systematically transformed into instruments of coercion.

But it will hardly be able to modify the foundations of China’s development model if Beijing considers those foundations an integral part of its national security.

Managed Imbalance or Strategic Balance?

The real European dilemma is therefore much more difficult than it appears.

If Brussels insists on structural rebalancing to the point of demanding substantial changes to Chinese industrial capacity, it risks taking the negotiation directly against Beijing’s red lines.

If, instead, it accepts predominantly commercial and procedural rebalancing, it risks obtaining an improvement in the relationship without affecting the underlying causes of the imbalance.

The choice is, ultimately, between two conceptions of success.

The first consists of attempting to modify the structural determinants of the deficit, with a high risk of strategic collision.

The second consists of accepting a managed imbalance, provided that it is accompanied by mechanisms of predictability, reciprocity, and deterrence capable of preventing interdependence from turning into coercion.

It is probably this second path that offers the greatest negotiating space.

Not because it is more ambitious, but because it is compatible with the real constraints of both sides.

What Is Really at Stake

Ultimately, the TIC is therefore not a negotiation over whether China and Europe will abandon their economic-security strategies.

It is a negotiation over whether they can continue to pursue them without systematically using their respective vulnerabilities as weapons.

• China does not want to relinquish control over its strategic levers.

Europe does not want to relinquish the construction of its economic autonomy.

• China does not want to depend on foreign technologies.

Europe does not want to depend on Chinese raw materials.

• The United States, finally, introduces an additional level of complexity because it strengthens the West’s capacity to exert pressure on China while, at the same time, potentially conditioning the degree of autonomy with which Europe exercises its own.

The problem is therefore not merely who possesses the leverage.

It is who can use it, how much it can bear the cost of using it, and how much it can guarantee that the decision will effectively remain its own.

This is the true strategic significance of rare earths, technology, export controls, and industrial overcapacity.

And precisely for this reason, the TIC should not be judged exclusively by its ability to reduce the trade deficit.

Its most important result could be much more limited, but also more realistic: transforming a potentially coercive asymmetric interdependence into a strategically governed interdependence.

If it succeeds in doing so, the TIC will have achieved a significant result.

If, instead, Brussels attempts to use the trade negotiation to obtain profound changes from China to its industrial model, or Beijing expects Europe to indefinitely accept its vulnerabilities without disciplining the exercise of its own levers, the zone of compatibility will rapidly narrow.

The decisive question, then, is not whether China and Europe can reach an agreement.

It is whether they can reach an agreement sufficiently deep to make interdependence safer, but not so deep as to require either side to relinquish the instruments through which it defines its economic security and strategic autonomy.

This is probably the true test of the TIC.

And, above all, this is where the difference between a simple trade agreement and the construction of a genuine regime for managing strategic interdependence is measured.

China – EU: The real limit of the TIC