The EU's Expanding Trade Restrictions on China and Europe's Strategic Dilemma: Implications for South Korea of Regulations on Steel, EVs, and Hybrids

Executive Summary

With the EU's trade deficit with China reaching one billion euros per day, a figure European Commission President von der Leyen has defined as a tipping point, the EU is sequentially expanding its trade restrictions from electric vehicles to hybrid cars and downstream steel products. China has officially rejected the EU's demand for voluntary export restraints, labeling it a WTO violation, and has countered that the root cause lies in the structural weaknesses of European manufacturing, making a negotiated settlement by the October deadline unlikely. The most probable scenario, with the highest current likelihood of realization, involves the EU continuing to expand its Carbon Border Adjustment Mechanism (CBAM) and anti-dumping duties in sequence, from steel to electric vehicles, batteries, and then robots. This trend, coupled with Germany's push for its own economic security package, presents both regulatory risks and opportunities to fill market gaps for South Korea's steel, automotive, and battery industries. South Korean companies must act preemptively before these regulations are finalized by establishing data systems for CBAM carbon intensity, increasing their production share within the EU, and strengthening supply chain partnerships with German automakers.

I. Analysis of the Current Situation

EU Expands Trade Restrictions Beyond Chinese EVs to Hybrids and Steel: An Analysis of the Current Situation

1. Background and Developments

The EU-China trade imbalance has already passed a numerical tipping point. In a speech to the European Parliament, European Commission President Ursula von der Leyen stated that the trade deficit with China has reached one billion euros per day [9]. She described this situation as a "tipping point" [9]. The German media outlet Der Standard reported that China's external export surplus from January to August of this year amounted to approximately 690 billion euros [14]. This figure starkly reveals the sheer volume of goods that Chinese manufacturing is pushing onto the global market.

The root of this imbalance lies not in an inadequate European response, but in the structure of China's domestic market. The prolonged slump in China's real estate sector has dampened domestic consumption [3][8], entrenching a system where production capacity that cannot be absorbed at home is offloaded abroad [3][8]. This trend, which began in the early 2020s in the electric vehicle and battery sectors, has since expanded to steel, chemicals, and machinery, and has most recently spread to industrial robots [3][6][8]. China's current account surplus has expanded from 0.7% of GDP in 2019 to a projected 3.7% in 2025 [3][6][8].

In response to this trend, the European Commission has pursued a path of sequentially expanding its Carbon Border Adjustment Mechanism (CBAM) and anti-dumping duties, starting with steel [3][8]. The choice of steel as the initial target is rooted in Germany's experience. An asymmetric structure, where Germany's exports to China are decreasing while its trade deficit with China is paradoxically growing, has served as a driving force sustaining protectionist sentiment within the EU [3]. This dynamic led to the introduction of countervailing duties on electric vehicles, and since the beginning of this year, the scope of regulations has broadened to include hybrid cars and downstream steel products.

2. Current Situation

China's state-run Global Times assesses that the EU's recent measures have surpassed the level of traditional trade remedies targeting individual items. A Chinese expert noted, "The EU's recent moves are no longer limited to traditional trade remedies targeting individual products, but are gradually expanding to entire industrial supply chains" [1]. The same article warns that with European industry already facing competitive pressure, attempting to solve structural problems by strengthening trade barriers will not only do little to bolster European manufacturing but could also prove counterproductive [1].

The regulation of hybrid cars is the most recent point of contention. The U.S. automotive trade publication Automotive News reported that the EU is requesting China to limit its hybrid car exports to avoid a trade dispute [4]. In response, China's Ministry of Commerce immediately pushed back. A ministry spokesperson stated, "So-called 'voluntary export restraints' seriously violate WTO rules and directly contradict the principles of a market economy and fair competition," adding unequivocally, "China is resolutely opposed to this" [7]. The Ministry of Commerce took issue with the EU's very method of applying pressure—threatening to impose high tariffs if China does not voluntarily restrict its hybrid car exports [7].

Separately from EU-level discussions, Germany is preparing its own economic security package. According to the Global Times, citing a Bloomberg report, Germany is considering a wide range of measures to protect its strategic industries, including new tariffs on hybrid cars [11]. A Chinese expert criticized these potential measures, arguing that they "carry the risk of externalizing Germany's own competitiveness problems and are far from a solution to the structural challenges facing German industry" [11].

A similar conflict is unfolding in the telecommunications equipment sector. Seventeen executives from European telecom companies published an open letter stating that the industry could face up to 40 billion euros in additional expenditures if the amended EU Cybersecurity Act is implemented [16]. Citing this letter, Chinese Foreign Ministry spokesperson Guo Jiakun urged the EU to "heed the rational voices within Europe and refrain from introducing discriminatory regulations" [16]. This indicates that the EU's regulations targeting China are expanding beyond automobiles and steel into the realm of telecommunications infrastructure.

Despite this trend of strengthening regulations, channels for dialogue remain open. Chinese Minister of Commerce Wang Wentao held a video call with Maroš Šefčovič, the EU's Executive Vice-President for Trade and Economic Security, at Šefčovič's request [13]. The Global Times described the EU's move to request dialogue while simultaneously pursuing regulations as "particularly noteworthy," and conveyed the Chinese perspective questioning the sincerity of the gesture [13][1]. The European Commission has set October as a deadline for producing results in recalibrating its trade relationship with China [2]. Executive Vice-President Šefčovič stated, "China's exports to the EU continue to grow, while our market share in China continues to shrink. This trend is not sustainable, and the status quo is not an option" [2].

3. Key Actors and Positions

The European Commissiondefines the widening trade deficit as a political tipping point that can no longer be ignored. President von der Leyen has declared, "We will use all the tools at our disposal to recalibrate the relationship" [9]. Executive Vice-President Šefčovič is pursuing a two-track strategy of combining dialogue with pressure, intensifying this pressure by explicitly setting an October deadline for negotiations with China [2].

The German Government and Industryoccupy a dual position. While automakers such as Volkswagen and Mercedes-Benz, which are highly dependent on the Chinese market, have maintained a cautious stance on strengthening EU-level regulations, the government is considering its own measures, including tariffs on hybrid cars, through a separate economic security package [11]. This illustrates the varying approaches to China policy that exist even among EU member states.

China's Ministry of Commerce and Ministry of Foreign Affairsare maintaining a hardline stance, defining the EU's measures as a violation of WTO rules and a form of discriminatory protectionism. The Ministry of Commerce has explicitly rejected the demand for voluntary export restraints [7], while the Ministry of Foreign Affairs is employing a discourse strategy of citing internal European opposition to pressure the EU [16]. Simultaneously, they are keeping negotiation channels open, as demonstrated by Minister Wang Wentao's participation in the video call with Šefčovič [13].

European Telecommunications and Automotive IndustriesAs the parties that will bear the direct costs of increased regulation, these industries are voicing their own distinct concerns. The open letter from telecommunications executives [16] reflects apprehension that EU policy is being advanced without sufficient coordination with the industry. The automotive and steel sectors face the dual burden of supply chain restructuring costs and diminished access to the Chinese market.

4. Key Issues

The first issue is the changing nature of the EU's measures. China's assessment is that the actions are expanding from anti-dumping and countervailing duties on individual products to structural regulations targeting entire industrial supply chains [1]. This suggests the EU is shifting from simple trade remedies to a response on the level of industrial policy.

The second issue concerns the sincerity of the EU's negotiating stance. Its approach of strengthening regulations while simultaneously requesting dialogue is perceived by China as a two-faced attitude [1][13]. This could act as an obstacle to building trust in future negotiations.

The third issue is the internal policy coherence of the EU. The parallel pursuit of responses at the member state level (Germany) and the European Commission level increases the complexity of policy coordination [11]. As seen in the cost concerns of the telecommunications industry [16], reconciling the interests of industry and policymakers also remains a challenge.

The fourth issue is the legitimacy of the "voluntary export restraint" approach under international law. China is strongly protesting this method, defining it as a violation of WTO rules [7], which suggests that its actual implementation could escalate into a WTO dispute.

II. In-Depth Analysis

EU Expands Trade Restrictions Beyond Chinese EVs to Hybrids and Steel: An In-Depth Analysis

1. Analysis of Root Causes

The flashpoint for the current situation is not European industrial policy. The starting point is a structural vacuum in China's domestic market. The prolonged slump in China's real estate market has led to a contraction in household consumption [3][8], entrenching a pathway where manufacturing capacity that cannot be absorbed domestically is offloaded abroad [3][8]. This trend first appeared in the electric vehicle and battery sectors [3][6][8], later spreading to steel, chemicals, and machinery [3][8]. Recently, its scope has widened to include industrial robots [3][6][8].

The figures clearly illustrate this structure. China's current account surplus expanded from 0.7% of GDP in 2019 to a projected 3.7% in 2025 [3][6][8]. When calculated on a tariff basis, the surplus is even larger [3][8]. The German media outlet Der Standard reported that China's external export surplus from January to August of this year reached approximately 690 billion euros [14]. Commission President von der Leyen stated that the EU's trade deficit with China is at a level of one billion euros per day [9], a situation she defined as a "tipping point" [9]. Executive Vice-President for Trade Šefčovič noted, "China's exports to the EU continue to grow, while our market share in China continues to shrink" [2]. He added unequivocally, "This trend is not sustainable, and the status quo is not an option" [2].

The Chinese perspective differs. A Chinese expert cited by the Global Times points out that the EU's recent measures have gone beyond the level of traditional trade remedies targeting individual items [1]. The expert warned, "With European industry already facing competitive pressure, attempting to solve structural problems by strengthening trade barriers will not only do little to bolster European manufacturing but could also prove counterproductive" [1]. Similar criticism has been leveled at Germany's own economic security package. The Global Times relayed an expert's view that Germany's planned regulations on China "risk externalizing its own competitiveness problems" [11]. The point of collision between the two perspectives is clear. Brussels sees China's overproduction as the result of unfair competition. Beijing counters that the structural weakness of European manufacturing is the root cause, and that tariffs are a means to conceal this fact.

2. Structural Context

Economic Structure: The key aspect of this regulatory expansion is its shift in character from a product-specific response to one targeting entire industrial supply chains [1]. The background for selecting steel as the first target lies in Germany's unique position. Germany is experiencing an asymmetric structure where its exports to China are declining while its trade deficit with China is paradoxically growing [3]. This asymmetry acts as a driving force sustaining protectionist sentiment within the EU [3]. This is why the most likely path is considered to be the European Commission progressively expanding CBAM and anti-dumping duties in sequence from steel to electric vehicles, batteries, and then robots [3][8]. The probability of this path materializing is estimated at 50-55% [3].

Political Structure: The European Commission has set October as the deadline for achieving results in recalibrating its trade relationship with China [2]. Setting this deadline is itself a tool of political pressure. At the same time, the EU faces internal constraints due to differing interests among member states. Germany, which had long been in the camp of caution due to its auto industry's dependence on China, has recently pivoted toward preparing its own separate economic security package [11]. This creates a dual structure where a common response at the Commission level runs parallel to individual responses at the member state level. The Austrian media outlet Der Standard reported that the EU intends to exclude Chinese companies by strengthening "Made in Europe" requirements in public procurement [14]. This shows that regulatory tools are expanding beyond tariffs to include access to procurement markets [6].

Security Structure: This issue is not confined to purely trade matters. The European Commission is handling trade policy within an 'economic security' framework. The very fact that Šefčovič's official title is 'Executive Vice-President for Trade and Economic Security' attests to this [13]. The case of 17 European telecom operators warning that the amended EU Cybersecurity Act could trigger up to 40 billion euros in equipment replacement costs shows that trade regulations are spreading into the domain of telecommunications infrastructure security [16]. In response, the Chinese Foreign Ministry urged the EU to "heed the rational voices within Europe and avoid discriminatory restrictive measures" [16]. The boundaries between trade, industrial, and security policy are progressively blurring within the EU.

3. Comparison with Historical Precedents and Similar Cases

Beijing does not view this as an unprecedented situation. Chinese analysis suggests that a response playbook already tested during the Eurozone crisis will be reprised [8]. At that time, Beijing's response rested on three pillars: discourse warfare, diversification into emerging markets, and exploitation of divisions among EU member states [8]. A similar pattern is detectable this time. The immediate and firm pushback from China's Ministry of Commerce, the discourse warfare waged through state media, and attempts to diversify export destinations to emerging markets are all proceeding simultaneously [7][1].

China's opposition to the 'voluntary export restraint' (VER) method also needs to be understood in a historical context. Automotive News reported that the EU is requesting China to voluntarily limit its hybrid car exports to avoid a trade dispute [4]. This method is formally similar to the VERs that Japan accepted during the U.S.-Japan automotive friction of the 1980s. China's Ministry of Commerce has rejected this approach outright. A spokesperson stated, "So-called 'voluntary export restraints' seriously violate WTO rules and directly contradict the principles of a market economy and fair competition" [7], adding unequivocally, "China is resolutely opposed to this" [7]. The fact that China is explicitly rejecting a precedent that Japan accepted is a crucial difference between the two cases. Beijing appears concerned that accepting such a measure would expose it to similar pressure on other products in the future.

The path of sequential tariff expansion using CBAM is not without precedent either. The EU's method of progressively expanding regulations from steel to electric vehicles, batteries, and robots [3][8] is consistent with its existing pattern of trade defense measures, which prioritize defending a specific industry and then extending regulations upstream in the supply chain. However, this instance is qualitatively different in that the breadth and speed of the targeted products are significantly greater than before.

4. Key Variables Shaping Future Developments

First is whether substantive agreement can be reached in China-EU negotiations by the October deadline. The video call between Minister of Commerce Wang Wentao and Executive Vice-President Šefčovič was held at Šefčovič's request [13]. The Global Times, while assessing this request for dialogue as a potential sign of a shift in the EU's attitude, also relayed an expert's view that "concrete actions must follow to meet China's demands" [13]. If the current dual pattern of pursuing dialogue and strengthening regulations simultaneously continues, China's doubts about the EU's sincerity are likely to grow [1].

Second is the alignment between Germany's independent actions and the EU's common response. The situation where Germany is pursuing its own economic security package, including tariffs on hybrid cars [11], while similar regulations are being discussed at the EU level, creates the potential for competition or overlap between member state actions and the Commission's response. In this process, there is also room for conflict between the business interests of the German auto industry in China and the German government's demands for industrial protection.

Third is the intensity and method of China's countermeasures. The Ministry of Commerce's declaration rejecting voluntary export restraints [7] and the Ministry of Foreign Affairs' call to refrain from discriminatory restrictive measures [16] can be seen as the initial stages of a discourse-based strategy. If, as during the Eurozone crisis, China begins to seriously apply pressure on individual member states and diversify into emerging markets, the unity of the EU's China policy could be put to the test [8].

Fourth is whether the proposed reforms to EU public procurement regulations will actually pass and what their scope of application will be. The European Commission is pushing to amend its public procurement law to restrict bids from suppliers in countries that have not signed procurement agreements with the EU [6][14]. Whether non-Chinese companies, including those from South Korea, will see collateral benefits could depend on whether this measure passes as originally proposed and the extent to which the provisions excluding third-country firms are applied [6].