Escalating EU-China Trade Conflict: The Overhaul of Public Procurement Rules and the Ripple Effects of 'China Shock 2.0'

Executive Summary

In September, the European Commission proposed amendments to its public procurement law to restrict bids from suppliers in countries not party to the Government Procurement Agreement (GPA), such as China. This is a structural response to the erosion of the EU's manufacturing market share by Chinese overproduction—stemming from its real estate slump—in sectors like electric vehicles, steel, and robotics. China is expected to counter with discourse warfare, pressure on individual member states, and diversification into emerging markets, making an early negotiated settlement unlikely. The most probable scenario is that the EU will pass the law as proposed and sequentially expand its Carbon Border Adjustment Mechanism (CBAM) and anti-dumping tariffs, starting with steel. This requires an immediate response from South Korean steel companies. While the battery and robotics sectors are lower priorities, the resulting market vacuum may create opportunities for firms that have proactively established CBAM compliance systems. The South Korean government, for its part, must urgently clarify its GPA status and determine whether the third-country exclusion clause will apply to it.

I. Situational Analysis

Escalating EU-China Trade Conflict: Procurement Rule Overhaul and 'China Shock 2.0'

1. Background and Developments

China's export offensive into Europe began in the early 2020s in the electric vehicle and battery sectors [3][5]. It later expanded to include steel, chemicals, and machinery [3][8], and has more recently widened to industrial robots [5][8]. This trend was not triggered by external factors; its root cause is the prolonged slump in China's domestic real estate market [3][8]. As domestic consumption contracted, a structural pattern emerged where production capacity that could not be absorbed domestically was redirected overseas [3][5]. China's current account surplus expanded from 0.7% of GDP in 2019 to 3.7% in 2025 [3][7]. Based on customs data, the surplus is even larger [8].

The damage to Europe is becoming evident in the statistics. The EU's trade deficit with China reached €360 billion in 2025 [3][5]. China's rank as a destination for German exports fell from 2nd to 9th, yet paradoxically, Germany's trade deficit with China has widened [3]. The Swiss media outlet NZZ reported that China recorded a global export surplus of $1.2 trillion last year, adding that Europe fears the resulting loss of tens of thousands of manufacturing jobs [14]. The Singapore Business Times illustrated this trend with the case of German engineer Sönke Siegfriedsen. After he spent seven years developing floating offshore wind turbine technology, the patent was acquired by MingYang Smart Energy, a company based in Zhongshan. This led to a situation where the technology was presented to the Spanish prime minister not by a German company, but by the Chinese firm [11].

Against this backdrop, the European Commission has been preparing a comprehensive overhaul of its public procurement regulations. Maroš Šefčovič, the European Commissioner for Trade, stated, “China's exports to the EU continue to grow, while the EU's market share in China continues to shrink,” and warned, “This trend is not sustainable, and the status quo is not an option” [2]. The EU has set an October deadline for resolving this imbalance [2].

2. Current Situation

On September 9, the Commission announced a proposal for a new Public Procurement Act, ostensibly to simplify the existing 900 pages of regulations, which encompass three directives, 26 sector-specific laws, and five procurement procedures [13]. The French newspaper Le Monde described the move as both a “simplification” and a “Europeanization” of the procurement system [13]. The College of Commissioners approved the proposal unanimously [13]. Austria's Die Presse noted that public procurement accounts for 15% of the EU's economic activity and analyzed that the Commission intends to leverage this economic weight to boost demand for European products and services [1]. Hungary's Telex, citing Commissioner for Industry Stéphane Séjourné, reported that the new regulation would govern a procurement market worth €600 billion annually [10].

The core provision allows public authorities in member states to restrict or reject bids from suppliers in countries not covered by the EU's procurement agreements. China falls squarely into this category [6]. Die Presse characterized this as a measure to “exclude Chinese companies from the European public procurement market” [1].

The reaction from Chinese state media was immediate and fierce. The Global Times, citing Chinese experts, criticized the regulation for extending protectionism into public procurement without addressing Europe's fundamental competitiveness issues [4]. In a separate article, the same outlet labeled the measure “discriminatory” and featured expert opinions arguing it would fail to solve Europe's problems [6]. A Global Times editorial went further, overtly signaling its intent to retaliate with the headline, “If the EU is determined to wage a trade war with China, so be it.” The editorial argued that while the EU grapples with slowing growth, political polarization, social division, and strategic confusion regarding Russia and the United States, it has “made a grave strategic miscalculation by mistaking China for the problem itself, rather than a strategic partner” [12]. Another Global Times article disparaged the 'Europe-first' procurement plan, claiming it would only protect “the illusion of European competitiveness” [9].

China's response extends beyond discourse warfare. The South China Morning Post reported that China's Ministry of Commerce has labeled France's 'anti-fast fashion law' as protectionist and is meeting with French companies to pressure them for the law's withdrawal. The ministry is also investigating whether these French firms have received subsidies for their operations in China [15]. This demonstrates that Beijing is already using trade pressure in response to actions taken by individual EU member states.

3. Key Actors and Positions

The European Commission is wielding the procurement rule overhaul as a dual-purpose tool for trade defense and industrial protection. The trade policy team, led by Šefčovič, is focused on pressuring China to correct structural imbalances, setting an October deadline [2]. Meanwhile, Commissioner for Industry Séjourné is leveraging the sheer size of the procurement market (€600 billion annually) to bolster the case for a 'Europe-first' approach [10].

Chinese state media and the Ministry of Commerce are pursuing a dual strategy: condemning the EU's measures as protectionist while simultaneously applying bilateral pressure on individual member states like France [6][15]. Editorials in the Global Times repeatedly point to the EU's internal political and economic vulnerabilities, framing the conflict as one that will ultimately be more burdensome for the EU itself [12].

Interests are not uniform among EU member states. Germany faces the dual challenge of plummeting exports to China and a widening trade deficit, alongside concrete cases of its manufacturing base being eroded through technology transfer and patent leakage [11]. France, which has responded with its own legislation in consumer goods sectors like fast fashion, is now facing direct pressure from China [15]. These differences in member states' exposure and vulnerabilities could become a major challenge to maintaining a united EU-level front.

4. Key Issues

The first key issue is the effectiveness of the procurement rule overhaul. China argues that the measure will fail to solve Europe's underlying competitiveness problems and will only serve to raise procurement costs and limit competition [4]. Skepticism also exists within the EU as to whether the regulation will actually lead to a recovery of industrial competitiveness.

The second issue is the significance of the October deadline set by the EU. The prevailing assessment is that China is unlikely to voluntarily restrain its exports [3]. Because China's export drive is a structural necessity stemming from its domestic economic slump, analysts believe it is unlikely that political pressure alone can reverse the trend in the short term [5][8].

The third issue is the EU's internal cohesion. Policy preference gaps are already apparent between Germany and countries like France and Italy, raising the possibility that China could exploit these divisions to pressure member states individually [15]. If the procurement regulation is implemented unevenly across member states, the EU's entire unified front on China will be put to the test.

II. In-Depth Analysis

Escalating EU-China Trade Conflict: Procurement Rule Overhaul and 'China Shock 2.0'

In-Depth Analysis

1. Root Cause: The Structural Nature of China's Domestic Demand Gap

The trigger for this conflict is not a trade policy variable like tariffs or subsidies, but the prolonged slump in China's real estate market [3][5]. The contraction in the property sector has dragged down both household income and consumer sentiment, entrenching a structure where the domestic market cannot absorb the country's production capacity [3][8]. This is not a gap that can be closed by short-term business cycles. Supporting this view, China's current account surplus expanded more than fivefold from 0.7% of GDP in 2019 to 3.7% in 2025 [3][7]. Based on customs data, the gap is even wider [8].

From the Chinese government's perspective, expanding exports is not an industrial policy choice but effectively the only way to offset the domestic slump [5]. EAI analysis confirms that for Beijing policymakers, this is “not a matter of choice” [5]. This is the source of the perception gap between the EU and China. Brussels frames the issue as one of state-led overcapacity and unfair competition, while Beijing counters with a narrative that portrays it as a natural result of industrial upgrading [3]. The Global Times described the EU's procurement overhaul as “a measure that extends protectionism to the public procurement sphere without solving the fundamental problems of European competitiveness” [4]. This clash of frames reduces the likelihood of an early negotiated settlement.

2. Structural Context: An Intertwined Trio of Politics, Economics, and Security

On the economic level, the erosion of the EU's manufacturing market share is evident in concrete figures. China's rank as a destination for German exports fell from 2nd to 9th, yet paradoxically, Germany's trade deficit with China has widened [3]. This implies a structure where Germany is selling less to China while buying more from it. The case of the German engineer reported by the Business Times—where floating offshore wind technology was presented to the Spanish prime minister not by a German firm but by Zhongshan-based MingYang Smart Energy—symbolically illustrates this paradox [11]. For the EU as a whole, the estimated cost of market share lost to Chinese manufacturers in 2025 alone is approximately US$150 billion [11].

On the political level, diverging interests among member states are a key variable. A policy gap exists between German industry, which is highly dependent on exports to China, and countries like France and Italy, which prioritize protecting their domestic manufacturing [3][5]. The unanimous approval of the procurement rule overhaul by the College of Commissioners [13] indicates that member state consensus is holding for now. However, whether this consensus will persist through the implementation phase for specific industries is another question. The fact that China's Ministry of Commerce held separate talks with French companies over France's proposed fast-fashion regulations, even raising the issue of subsidies [15], suggests that Beijing is already targeting individual member states for pressure rather than confronting the EU as a bloc.

On the security level, the very nature of the procurement market complicates the issue. Public procurement accounts for 15% of the EU's GDP, approximately €600 billion annually [1][10]. This market, which covers everything from road construction to office supplies, intermingles general consumer goods with sectors directly linked to national security, such as infrastructure and energy [1]. The EU's decision to pursue a blanket exclusion of Chinese firms across this entire domain has far broader repercussions than industry-specific anti-dumping measures and raises questions about its consistency with the World Trade Organization (WTO) system [7].

3. Historical Precedent: A Replay of the Eurozone Crisis

Beijing's response strategy is not new. EAI analysis suggests the current situation is “a replay of a method already proven during the Eurozone crisis” [5]. During that crisis, China exploited policy divisions within the EU by purchasing southern European government bonds and engaging directly with individual member states. Beijing is expected to respond along three similar axes this time: discourse warfare, diversification into emerging markets, and exploitation of divisions among EU member states [5].

The contours of the discourse war are already taking shape through state media. A Global Times editorial pointed out that the EU is simultaneously experiencing “slowing growth, political polarization, social division, and strategic confusion regarding Russia and the United States,” arguing that China could have been a strategic partner in solving these problems but was instead “mistakenly treated as the problem itself” [12]. The same outlet questioned the effectiveness of the EU's 'Europe-first' procurement initiative, labeling it “a measure to protect the illusion of European competitiveness” [9]. This discourse is reminiscent of the strategy China used in the early 2010s to leverage the European sovereign debt crisis as an opportunity to expand its own strategic position.

However, the current situation contains a new variable. During the Eurozone crisis of the 2010s, the United States and the EU were not clearly aligned on China policy. Today, however, the EU is moving to regulate its procurement market on a separate track while significant U.S. tariff pressure on China is already in place. The very question posed by the Brussels-based think tank Bruegel—“What is possible without the U.S. and China?” [Source deleted]—highlights the EU's predicament: it must now forge its own trade policy tools under more isolated conditions than before.

4. Key Variables Shaping Future Developments

The first variable is the potential for variation in implementation intensity among EU member states. Although the regulation itself passed unanimously [13], the incentives for German industry to cooperate with China could clash with the protectionist preferences of France and Italy during the implementation phase. As the French case has already demonstrated [15], Beijing will likely employ tactics that individually target the weak links in the EU's common front.

The second variable is the intensity of the EU's actions after the October deadline [2]. The impact will depend on whether Commissioner Šefčovič's warning leads to actual anti-dumping tariffs or amendments to the International Procurement Instrument (IPI), or if it remains merely a negotiating tactic. The EU is already conducting a public consultation for the first amendment to the IPI [7], suggesting the procurement overhaul is not a one-off measure but part of a broader institutionalization process.

The third variable is the scope of China's countermeasures. If the hardline stance foreshadowed by the Global Times editorial—“If the EU is determined to wage a trade war... so be it” [12]—materializes as retaliatory tariffs or measures targeting specific member states, the conflict could escalate beyond the procurement market into a full-blown trade dispute. Conversely, if China chooses to manage a direct confrontation with the EU while focusing on diversifying into emerging markets, the conflict will likely become a protracted but limited dispute.