Bruegel says EU-China trade deal fails to resolve subsidies in 2026

Think tank Bruegel said Oct. 17 that the European Union’s latest trade framework with China leaves state industrial subsidies and Europe’s €360 billion bilateral deficit intact despite newly negotiated auto quotas.

The assessment follows consultations held Oct. 8 and Oct. 9 in Beijing between European Union Trade Commissioner Maroš Šefčovič and Chinese officials. Both sides agreed on three shared understandings to stabilize trade frictions.

Brussels secured a Chinese commitment to cut exports of hybrid and plug-in hybrid electric vehicles to the bloc by about 50% over four years. The restriction aims to shield European automakers from expanding low-cost shipments.

Chinese automotive shipments to the bloc represent about €15 billion ($16.3 billion) annually. That volume accounts for roughly 4% of Europe’s €360 billion bilateral merchandise trade deficit with China, the study noted.

The modest import curb leaves the core drivers of Europe’s trade imbalance untouched, wrote Alicia García-Herrero, senior fellow at Bruegel. Most of the deficit stems from heavy industrial categories rather than finished passenger cars.

Chinese exports of machinery, chemicals, basic metals, solar modules, lithium-ion batteries and information technology hardware continue to expand into the single market. These sectors receive direct capital injections and state energy subsidies in China.

China also agreed to lower import tariffs on European automotive components, olive oil and footwear. The duty reductions will save European exporters an estimated €225 million ($244 million) each year.

Those tariff savings represent less than 0.1% of the overall bilateral shortfall, García-Herrero said. European manufacturers gain minimal commercial relief while Chinese factory overcapacity persists across critical heavy industries.

Beijing also offered a green channel to accelerate export licenses for rare earths and permanent magnets. European automakers and wind turbine manufacturers depend on Chinese processing facilities for more than 90% of their refined permanent magnets.

Relying on administrative discretion does not guarantee mineral access, the think tank warned. Beijing retains full statutory authority over licensing volumes and can suspend critical mineral shipments during future political disputes.

European automakers face persistent cost disadvantages under the framework. Subsidized Chinese upstream cell suppliers continue to supply domestic carmakers at battery cell pack costs roughly 30% below European production averages.

The agreed framework simultaneously weakens European Union regulatory leverage, the report said. Beijing used the consultations to demand technical discussions regarding the European Union Foreign Subsidies Regulation, known as Regulation EU 2022/2560.

Chinese negotiators also pressured European officials to ease dual-use export controls affecting ASML advanced lithography tools. ASML builds critical semiconductor lithography equipment in the Netherlands and complies with multilateral export licensing controls.

Beijing also demanded that European regulators halt planned cybersecurity compliance reviews on Chinese-manufactured solar inverters. Those systems manage electricity grid integration across several European power transmission networks.

The bilateral understandings defer hard structural choices, García-Herrero wrote. Brussels avoided immediate Chinese retaliation against European brandy, pork and high-displacement vehicles but traded away long-term enforcement momentum.

European Union member state delegates and Chinese commerce officials plan to convene technical working sessions before Dec. 15 to establish monitoring benchmarks for hybrid car export shipments.

The European Commission has not published the complete legal text of the agreement or the operational rules governing hybrid quota allocations and the rare earth green channel.