Key Takeaways
China’s dominance in the world’s “clean” or “green” energy manufacturing is beginning to cause problems in Europe, one of its largest consumers and a strong supporter of strict climate policy.
China’s economy is sluggish at home, so it is looking to the EU for more exports, just as the EU grows increasingly alarmed by its dependence on China and its growing trade imbalance.
The EU has taken actions against Chinese EV imports and is considering further actions this month.
China has overbuilt capacity through manufacturing incentives and low-price exports to other nations.
If the EU levies further tariffs on Chinese goods, China may need to turn to developing markets and Southeast Asia to market its overcapacity.
Europe’s climate goals and its drive to reach net zero carbon, independent of progress elsewhere, have created a market for China’s dominance in so-called clean technologies, from solar panels to electric vehicles. As a result, European manufacturers are losing ground to China in global markets in these technologies and in China’s industrial transformation, making Europe a vital outlet for Chinese overcapacity. Despite adding wind and solar capacity, China is not pursuing net-zero goals and is using its massive coal-fired fleet to power manufacturing and export cheap goods. European Commission President Ursula von der Leyen said that the EU’s trade deficit with China was now at 1 billion euros ($1.14 billion) per day–a “tipping point.” The EU will use “all the tools” to rebalance the trade relationship with China, she said.
European leaders are due to review the China deficit and possible new measures in October. China has exported huge volumes of solar cells to Europe, forcing companies there to shut down. China accounted for 98% of the EU’s solar panel imports in 2024, according to an October 2025 Eurostat article, the bloc’s statistics agency. The EU accounts for about 25% of China’s electric vehicle exports, making it the bloc’s main destination. The EU levied tariffs of up to 45.3% on Chinese-built electric vehicles at the end of October 2024. These measures vary by automaker—ranging from roughly 7.8% for Tesla to 35.3% for uncooperative brands like SAIC —on top of the standard 10% import duty. China responded with duties on European cognac, pork, and dairy products. EU has repeatedly signaled plans to limit Chinese electric vehicles, leaving China concerned about possible trade issues with the bloc.
German companies, once leaders in solar panel production and automobile manufacturing, have been hit hard. China accounts for about 40.9% of Germany’s imported electric vehicles and remains Germany’s largest importer of electric cars, as China’s price competition erodes European manufacturers’ profit margins. Volkswagen has announced plans to cut 100,000 jobs by the end of the decade. If EU regulators do not maintain pressure, China’s electric vehicles could further erode Germany’s auto industry, as well as others in the bloc.
China’s industrial overcapacity and surging exports could accelerate deindustrialization across the bloc, which is already underway due to high energy prices from its climate policies. Under deindustrialization, factories close or move offshore. In a recent phone call with his German counterpart, Johann Wadephul, Chinese Foreign Minister Wang Yi said China and the EU are comprehensive strategic partners and that “a trade war should not be waged between them.” Wang Yi does not want the EU to raise tariffs, especially since China is already negotiating with the United States on tariffs and does not need a separate round of talks at this time.
If a trade war with the EU breaks out, China would lose a high-value market. Europe is the largest market that can absorb China’s overcapacity, as the United States is protecting its EV market from Chinese vehicles. China’s trade surplus with the EU reached 1.67 trillion yuan ($248.8 billion) in the first eight months of 2026, about 30% of its total trade surplus, according to China’s General Administration of Customs.
China’s domestic market is sluggish because household spending is weak. China’s late-August decision to extend mortgage terms to 40 years as home prices fell shows the economy is struggling. China’s retail sales grew by just 0.4% in August from a year earlier, missing the 0.8% economists had forecast based on data released by the National Bureau of Statistics. Decreasing domestic demand leaves China under persistent overcapacity pressure, and if exports also stall, Chinese manufacturers will be squeezed from all sides.
If the EU takes action against China’s imports, China will try to sell more products to developing markets, build factories abroad, and exert pressure on supply chains. It will most likely turn to Southeast Asia—the country’s largest export market. However, if China is left with a mostly Southeast Asian market, its profits will likely shrink because prices there are generally lower than in Europe. Also, Chinese manufacturers have factories and goods in Southeast Asia, so Chinese exports would compete with other Chinese manufacturers. Chinese companies already illegally export goods made in China as made in Southeast Asia to the EU and the United States, where tariffs don’t apply. This technique of Chinese “origin washing” would likely spread further if the EU and the United States both impose broad levies on Chinese goods.
The regime’s biggest economic headache is that its cheap goods alarm nearly every trading partner, prompting governments to steadily impose restrictions. As tariffs rise, China will find it harder to use its low-price strategy to gain export markets. But with its sluggish domestic market, it needs export markets as factories are producing more than Chinese households will buy.
Conclusion
China’s sluggish domestic economy has its manufacturing sector looking to exports, particularly to Europe, where its solar panels and electric vehicles are doing well. The EU, however, is unhappy with its trade deficit with China and may take further action this month. The EU levied tariffs of up to 45% on Chinese-built electric vehicles in October 2024. China’s industrial overcapacity and surging exports could accelerate deindustrialization across the bloc, which is already underway due to high energy prices from the EU’s climate policies. If the EU levies further tariffs on Chinese goods, China will need to turn to developing markets and Southeast Asia to market its overcapacity.
