Five EU capitals demand tougher trade tools against Chinese overcapacity

A coalition of five EU governments has told the European Commission that the bloc's existing trade defence toolkit is no longer fit for purpose against what they describe as systemic and structural industrial overcapacity originating in China. The joint non-paper, signed by Spain, Italy, France, the Netherlands and Lithuania, landed on desks in Brussels days before a scheduled orientation debate on Friday that is meant to set a new strategic direction for EU-China economic relations.

The document, first reported by the Financial Times and subsequently seen by the South China Morning Post, does not name China explicitly. It does not need to. In Brussels trade circles the phrase "systemic and structural industrial overcapacity" has become established shorthand for the surge of subsidised Chinese output in sectors from steel and aluminium to electric vehicles, batteries and solar panels. The five capitals argue that the current reliance on anti-dumping and anti-subsidy investigations, each tied to a specific product from a specific producer, is too slow, too narrow and too easily circumvented.

From product cases to sector safeguards

The core of the proposal is a shift toward safeguard measures under Article 19 of the Treaty on the Functioning of the European Union. Unlike anti-dumping duties, which require proof of unfair pricing by individual exporters, safeguards can be imposed when a surge of imports causes or threatens serious injury to a whole EU industry, regardless of whether the trade is fair. They are faster to activate, provisional measures can apply within weeks, and they cover all sources, not just the investigated companies.

The EU has used this instrument sparingly. The most prominent recent case was the 2018 safeguard on steel products, extended in 2021 and again in 2023, which was driven largely by Chinese overcapacity redirected into Europe after the United States closed its market with Section 232 tariffs. A separate safeguard on ferroalloys followed in 2023. Both were calibrated as tariff-rate quotas rather than outright bans, and both expired after three years. The five signatories want the Commission to treat safeguards as a standard, not exceptional, response.

They also want the safeguard framework widened. Current rules require a demonstrated import surge. The paper argues that the Commission should be able to act pre-emptively when capacity data shows a looming glut, rather than waiting for the ships to arrive at Rotterdam or Antwerp. That would mark a significant legal shift, moving EU trade defence closer to the US Section 232 model of national security tariffs, a comparison that makes several member states uncomfortable.

A new resilience instrument

The most novel element is the proposed "resilience tool". According to the text, this would be activated "when European supply sources are concentrated beyond a specified threshold". In practice, that means the Commission would monitor import dependency ratios for strategic inputs, rare earths, active pharmaceutical ingredients, certain semiconductor grades, and could impose diversification requirements, stockpiling obligations or tariff preferences for alternative suppliers once a concentration limit is breached.

The concept echoes the European Economic Security Strategy published in June 2023, which identified supply chain concentration as a strategic vulnerability. But the strategy stopped short of proposing a binding legal instrument. The five capitals are now asking for exactly that: a regulation that would give the Commission teeth to force diversification, not just encourage it. The threshold itself is left undefined in the non-paper, a deliberate ambiguity that will become a focal point of negotiation if the proposal advances.

Anti-circumvention and the transshipment problem

The third pillar is stronger anti-circumvention powers. The EU already has rules allowing duties to be extended to products slightly modified to avoid classification, or assembled in third countries from Chinese inputs. But the process is cumbersome. The paper calls for automatic extension of measures when a pattern of circumvention is detected, and for new powers to target transshipment, where Chinese goods are rerouted through Southeast Asia, Turkey or North Africa with minimal processing before entering the single market.

This is not theoretical. The Commission's 2023 report on trade defence noted a sharp rise in circumvention investigations, with China the origin in the majority of cases. Solar panels, e-bikes and certain steel products have all seen duties evaded through assembly operations in Malaysia, Vietnam and Morocco. The signatories want the burden of proof shifted: once a pattern is established, the importer should demonstrate genuine transformation, not the Commission prove its absence.

The political arithmetic

The choice of signatories is revealing. France and Italy have large domestic steel, chemical and automotive sectors exposed to Chinese competition. Spain has been vocal on solar and ceramics. The Netherlands, home to Europe's largest port and a traditionally free-trade orientation, signals that the debate has shifted even in liberal economies. Lithuania, a Baltic state with a hawkish stance on China since the 2021 diplomatic row over Taiwan representation, adds an eastern flank.

Germany is absent. Berlin's export machine, machinery, vehicles, chemicals, still depends heavily on the Chinese market, and the chancellery has consistently resisted measures that could trigger retaliation. Chancellor Olaf Scholz's visit to Beijing in April 2024, accompanied by a business delegation, underscored that priority. Poland, Hungary and the Czech Republic, all significant recipients of Chinese investment in EVs and batteries, are also missing. The divide is not new, but the non-paper forces it into the open ahead of Friday's debate.

Commission calculus

The European Commission walks a tightrope. Executive Vice-President Valdis Dombrovskis, responsible for trade, has acknowledged the overcapacity problem in speeches to the European Parliament's trade committee. But the Commission's instinct is to manage tensions through dialogue, the EU-China High-Level Economic and Trade Dialogue restarted in 2023 after a three-year hiatus, and to use existing tools rigorously rather than invent new ones that could be challenged at the World Trade Organization.

There is also the question of WTO compatibility. Safeguards are explicitly permitted under Article XIX of GATT 1994 and the Agreement on Safeguards, but they require compensation to affected trading partners after three years, and they must be non-discriminatory. A resilience tool that targets concentration, which in practice means China, could face legal challenge as a disguised safeguard or a violation of most-favoured-nation treatment. The Commission's legal service will be asked for an opinion before any legislative proposal.

Industry pressure and the EV investigation

The timing is driven partly by the ongoing anti-subsidy investigation into Chinese battery electric vehicles, the largest such case the EU has ever launched. Provisional duties ranging from 17.4% to 38.1% entered force in July 2024; definitive measures are due by November. European automakers are split: some want protection, others fear retaliation against their Chinese joint ventures. The Chinese government has already opened counter-investigations into EU pork, dairy and brandy, sectors concentrated in France, Spain and the Netherlands.

That retaliation explains why the three countries most exposed to Chinese counter-measures are among the signatories. They calculate that the cost of inaction, losing domestic production capacity in strategic sectors, outweighs the risk of further Chinese sanctions. The non-paper is, in effect, a demand that the Commission stop treating each sector in isolation and acknowledge a structural pattern.

For now, the non-paper sits on the table as a marker. It forces every capital to declare a position. The countries that did not sign will have to explain why the current toolkit is sufficient. The Commission will have to decide whether to lead the parade or risk being pushed by a qualified majority in Council. The debate on Friday is not a decision point, but it is the moment the direction becomes visible.