Another trade war? EU fires first shot in economic clash with China

The European Union (EU) is moving to redraw the rules of industrial competition within its borders, setting the stage for a sharper economic confrontation with China. Its proposed “Made in Europe” framework, embedded in the Industrial Accelerator Act, seeks to channel public money into domestic production while limiting reliance on foreign suppliers. The initiative reflects mounting anxiety over deindustrialisation, job losses and strategic dependence on external powers. China, seeing the move as discriminatory, has warned of retaliation. This could be another global trade disruption loading.

What exactly is the new EU law?

At the centre of the controversy is the Industrial Accelerator Act unveiled by the European Commission in March 2026. The legislation introduces “Made in Europe” requirements that tie access to public funding in strategic sectors to local production thresholds.

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These thresholds are both explicit and sector-specific. Electric vehicles must meet a 70 percent EU content requirement, though most battery components are exempted. Aluminium and cement producers face a 25 percent local content threshold. The rules go further than simple sourcing requirements. They impose structural conditions on foreign firms seeking to benefit from European subsidies or procurement.

Companies from countries controlling at least 40 per cent of global market share in a given sector must ensure that at least half of the associated economic activity benefits EU workers. Foreign ownership is capped below 49 percent. Firms are expected to form joint ventures with European partners, transfer technology, allocate 1 percent of global revenue to EU-based research and development, and carry out at least 30 percent of production within the bloc.

EU Industry Commissioner Stéphane Séjourné termed the law as a defensive but necessary intervention to rebuild industrial resilience. The Commission insists the framework complies with global trade norms and reflects a principle of reciprocity rather than protectionism.

An industrial strategy that targets China

The scope of the law is deliberately focused on sectors seen as critical to Europe’s economic future and strategic autonomy. These include automotive manufacturing, especially electric vehicles, green technologies such as renewables and batteries, and energy-intensive industries like steel and aluminium. All these have significant Chinese footprints.

These sectors represent both the backbone of Europe’s industrial base and the frontline of global competition with China. In recent years, Chinese firms have expanded aggressively in electric vehicles, solar panels, and industrial materials, often benefiting from state support and scale advantages.

The EU’s approach marks a shift from broad free-market openness toward a more conditional model of access. Public funds, subsidies and procurement opportunities will now function as policy tools to shape supply chains and industrial geography within Europe.

Why is the EU turning protectionist?

The immediate trigger for the policy is a wave of industrial decline across Europe. Since 2024, roughly 200,000 jobs have been lost in energy-intensive industries and the automotive sector. Projections suggest that up to 600,000 additional jobs could disappear in car manufacturing alone over the coming decade.

European policymakers increasingly attribute these losses to a combination of high domestic energy costs, slower innovation cycles, and intense competition from Chinese imports. Chinese manufacturers have flooded European markets with competitively priced goods, particularly in electric vehicles and green technologies, while establishing production facilities that generate limited local employment.

Beyond economics, there is a strategic dimension. The EU fears overdependence on external suppliers for critical technologies, especially in the context of geopolitical uncertainty. The law is therefore designed not only to protect jobs but also to secure supply chains and reduce vulnerabilities.

European officials also point to asymmetry in market access. While the EU remains one of the world’s most open markets, European companies often face barriers in China. The Commission has explicitly framed the new rules as a response to this imbalance, emphasising the need for mutual openness.

China threatens to retaliate

China has responded sharply. Its commerce ministry has accused the EU of violating rules under the World Trade Organization and engaging in discriminatory practices against Chinese firms. China’s warning of “countermeasures” suggests the possibility of retaliatory tariffs, restrictions on European companies operating in China, or challenges through international trade mechanisms.

For Chinese companies, the immediate impact could be significant. The new requirements make it harder to access EU subsidies without restructuring operations. Firms may be compelled to localise production, form partnerships with European companies, or transfer technology to remain competitive within the EU market.

At the same time, the policy could accelerate a broader shift already underway. Chinese manufacturers may increasingly invest directly in Europe to bypass trade barriers, though the law’s ownership and control limits complicate this strategy. Alternatively, they could redirect exports to other markets, intensifying competition elsewhere.

Is a new trade war brewing?

The EU’s move reflects a wider trend among major economies toward industrial policy and economic nationalism. The US has already adopted similar measures through legislation such as the Inflation Reduction Act, while China has long pursued state-led industrial strategies. This convergence raises questions about the future of the global trading system. If major players increasingly prioritise domestic production and impose local content requirements, the principles underpinning open trade could weaken. Disputes within the World Trade Organization are likely to intensify, especially if China formally challenges the EU’s measures.

For Europe, the success of the policy will depend on execution. While it may stimulate domestic production and protect jobs, it also risks higher costs, reduced competition and potential retaliation that could harm exporters. For China, the challenge lies in adapting to a more fragmented global market where access is increasingly conditional.

The Industrial Accelerator Act still requires approval from EU member states and the European Parliament, and its final form may evolve through negotiations. Yet the direction is clear. Europe is revising its economic model, placing greater emphasis on resilience, sovereignty and strategic autonomy.

The clash between “Made in Europe” and “Made in China” can trigger a deeper reordering of global economic relationships, where efficiency is no longer the sole guiding principle, and where geopolitics increasingly shapes trade. Whether this shift leads to a more balanced system or a more fragmented one will depend on how both sides manage the tensions now coming to the surface.