Destined for division? US and EU responses to the challenge of Chinese overcapacity

Salih Bora, Mary Lovely and Luis Simon
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Salih Bora: Centre for Security, Diplomacy and Strategy-VUB
Luis Simon: Centre for Security, Diplomacy and Strategy-VUB; Elcano Royal Institute

No PB25-2, Policy Briefs from Peterson Institute for International Economics

Abstract: Heightened concerns about China's exports have intensified competitive pressures on producers and compelled American and European policymakers, government officials, and political leaders to try to counteract those concerns. President Donald Trump's decision to raise tariffs on China by 145 percent is the most recent--and arguably most dramatic--example of broader concerns about Chinese overcapacity. The clash with China is particularly evident in sectors that US and European leaders have deemed essential for growth and security, charging that Chinese industrial subsidies, rather than comparative advantage, are the basis for the country's export success. However, the European Union and the United States have taken different approaches to resolve tensions with China. The European Union seeks, at least for now, to preserve and adhere to global trading rules. By contrast, the United States has acted unilaterally (even before the second Trump administration) to defend its domestic production by engaging in a trade confrontation with China that, together with China's retaliation, has rattled global financial markets. This Policy Brief explores these EU-US divisions, their reflection on trade and industrial policy, and prospects for coordinated action against Chinese overcapacity. The authors argue that the European Union can take the lead toward a resolution within the rules-based system while maintaining an open door to future US participation. This Policy Brief has been copublished with the Centre for Security, Diplomacy and Strategy-VUB.

Date: 2025-04
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