How China’s Silent Coercion Has Europe Sanctioning Itself – Analysis

By Tobias Gehrke 

China is ramping up its threats of economic coercion against Europe. In April alone, China’s State Council enacted the Provisions on Industrial and Supply Chain Security (which instructs its companies not to comply with EU investigations or sanctions), cut off dual-use supplies to seven European defence contractors over Taiwan, and made explicit threats over the EU’s proposals on its Industrial Accelerator Act and its Cybersecurity Act.

The conventional reading of past Chinese economic coercion is that it has not worked. When Beijing hit Australian barley, wine and beef with tariffs and unofficial bans in 2020 after Canberra called for a covid-19 origin inquiry, the trade damage was sharp but short-lived. Many exporters found new buyers and trade was rerouted. Lithuania’s 2021 confrontation with China over Taiwan’s representative office in Vilnius followed a similar arc. The global market, this telling goes, is the best antidote to coercion.

The trade data, though, misses the political mechanism at play. Even if China never actively uses these coercive laws, they contribute to Europe’s ongoing self-sanctioning of the very policies which can address the China problem. If European policymakers pre-emptively drop them for fear of retaliation, Beijing achieves its objectives without having to use its tools at all. Coercion works just as well by chilling the policy space.

Weaponising compliance

Beijing’s cooling options are growing fast. China’s export control reforms over the last year have built the legal scaffolding for global licensing of rare earths and their derivatives. In practice, a South Korean battery plant in Poland could soon need a Chinese licence, or risk sanctions, if a single Chinese rare-earth input enters its production chain. This could allow Beijing to reward firms that deepen Chinese integration and deny licences to those trying to build alternatives—effectively an anti-derisking mechanism. Indeed, one survey of European companies active in China found 15% of respondents considered offshoring even more production to China, including higher value-added components, in order to deal with these new controls.

China’s latest supply chain security regulations go even further by explicitly weaponising compliance with foreign (and European) laws: Beijing has already ordered its companies not to comply with an anti-subsidy investigation into the Chinese security scanner ‌firm, Nuctech.

Looking ahead, the EU is considering new rules that could force European companies in key sectors to buy critical components from at least three different suppliers, in a bid to reduce the bloc’s reliance on China. But under the April regulations, Beijing could now sanction those same companies (which have Chinese business ties) for the act of compliance with European law. Ironically, European policymakers seeking to reduce their companies’ exposure to coercion may end up placing those same companies directly in Beijing’s crosshairs.

The price war

The result is a chilling effect on Europe’s economic agenda on China. Europeans face a price war, a massive export surge and deindustrialisation, but they are not taking the necessary actions against these threats because of fears of retaliation and coercion from Beijing. China’s threat is most consequential when European policymakers do not dare to consider systemic options (such as sector-wide trade defences) to offset China’s systemic distortions (such as massive cost gaps) that affect the entire industrial base and deepen dependencies, for fear of sanctions.

This chilling effect is driving inaction, the costs of which are compounding fast. By 2030, Chinese price competitiveness across major European manufacturing sectors could put millions of European industrial jobs at risk. The exposure runs well beyond cars and chemicals into machine tools, semiconductors, pharmaceuticals, medical devices, industrial robotics, batteries and wind. Supplier networks will follow, since Chinese producers favour Chinese inputs. Every month that Europe delays addressing the pressure that China is exerting on its industrial base deepens Europe’s dependence—and strengthens Beijing’s leverage over existing European policy.

Chinese innovation and competitiveness are, of course, real in pockets, but the systemic price advantage is largely a product of state capitalism. For example, the renminbi being undervalued by somewhere between 15-30% acts as a de facto export subsidy on everything China sells abroad. Chinese industrial subsidies run at around 4% of GDP, roughly double the EU average, while a record number of its companies are loss-making. The result is a fierce domestic price war that many Chinese manufacturers can only survive by exporting their way out, while Chinese banks depend on that export growth to keep rolling over the credit they have already extended.

Decades of debt-fuelled investment in real estate and infrastructure have resulted in an unprecedented credit boom and bust, damaging China’s financial system and preventing it from meaningfully boosting domestic demand. The result is a growth model that depends upon expanding global export market share and forcing disinvestment among its trading partners.

Europe’s two-pronged problem

Europe is among the most exposed to this China shock. But a comprehensive policy package to offset this imbalance—including import tariffs, public procurement restrictions, FDI conditionality or mandatory supply chain diversification standards—continues to be derailed by Berlin and other EU capitals.

Instead, the European competitiveness debate is largely dominated by fights over marginal solutions, not least because Chinese coercive threats are having a chilling effect on EU policymaking. For example, German chancellor Friedrich Merz and Italian prime minister Giorgia Meloni have made deregulation and slashing red tape the core of their response, with many European multinationals consistently warning of trade conflicts and retaliation should Europe adopt legitimate trade defences.

This lacklustre response is partly down to genuine disagreement among European capitals, each with different industrial champions and different exposures to the Chinese market. But the chilling effect plays an even bigger role. Beijing’s coercive leverage works when it quietly constrains Europe’s policy space; when policymakers and businesses quibble loudly over marginal options but fall silent on a systemic response, for fear that the mere conversation will trigger escalation.

A previous ECFR report lays out which cards the EU can use to push back and deter China’s coercive threats. So far, Europeans have been pricing in the visible cost of confronting China and discounting the compounding cost of inaction. But Chinese coercion and Chinese systemic imbalances are two sides of the same coin. Trying to address the latter will inevitably invite the former. Europeans can only successfully deal with the China problem when industrial protection and economic deterrence are combined into a comprehensive agenda. Either Europe finds a response that addresses both, or it will address neither.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.

• About the author: Tobias Gehrke is a senior policy fellow at the European Council on Foreign Relations. He covers geoeconomics, focusing on economic security, European economic strategy, and great power competition in the global economy.
• Source: This article was published by ECFR