EU leaders prepare for trade showdown with China as deficit reaches 360 billion euros, Merz drops objections

A deficit of one billion euros a day

The EU's merchandise trade deficit with China reached 360 billion euros in 2025, up from 312 billion in 2024, and is drifting toward a possible 500 billion by 2027. On current trends, the gap widens by roughly one billion euros every day. EU imports from China have grown by an average of six percent annually since 2021, while European exports to the country have fallen by 2.5 percent a year. China now produces more than 30 percent of the world's goods but consumes less than 15 percent.

Opening the June summit, European Council President António Costa placed "macroeconomic imbalances" at the top of the agenda, a phrase officials said was chosen to avoid provoking Beijing while still allowing leaders to discuss the full range of trade frictions behind closed doors.

Merz drops Germany's brake

For years Berlin resisted calls for punitive trade steps, fearing Chinese retaliation against its export-heavy economy. That changed at this summit. After a G7 meeting in Évian, Chancellor Merz told reporters that currency undervaluation of 25 to 30 percent gives some economies "a massive competitive disadvantage" and said he had discussed this with US President Trump, "who sees it exactly the same way, because America is also affected." According to Handelsblatt, Merz has now told the European Commission he will not block preparations for sharper trade instruments.

The shift opens a path for the Commission, which had already readied an anti-subsidy investigation into Chinese plug-in hybrid cars. Registrations of BYD plug-in hybrids in the EU jumped 260 percent in the first five months of 2026, while Chery's deliveries rose 668 percent, far outpacing the 78 percent increase for pure battery-electric models.

"Speak softly and carry a hard stick"

Diplomats described the strategy as preparing for a showdown to make negotiations credible. One EU official told Handelsblatt: "We need a dialogue with instruments, with leverage: speak softly and carry a hard stick." Commission President Ursula von der Leyen wants backing from the largest member states so that Beijing believes the EU would politically withstand an escalation. If China retaliates with rare-earth export bans, the EU is expected to respond with counter-measures of equal weight.

China is an existential threat to our industry if we do not address the economic and trade imbalances.

French President Emmanuel Macron, long an advocate of a tougher line, has proposed a new trade-defence instrument modelled on the US Section 301 investigations. Italy, the Netherlands, Belgium, Austria and most central and eastern European states now support a firmer posture. Austrian Chancellor Christian Stocker called China a "systemic rival" and said a deficit of one billion euros a day "is something that demands action."

Budget clash looms

Beyond trade, leaders debated the EU's next seven-year budget (2028–2034), with the Commission and the Cypriot presidency proposing a spending framework of around two trillion euros. A group of net contributors including Germany, Austria, the Netherlands, Sweden, Finland and Denmark insisted on a ceiling of roughly one percent of GDP. Merz rejected any new common EU debt, saying "new European debt cannot happen; the budget must be balanced." No detailed counter-proposals have yet been tabled by the net-payer group.

Ukraine and Hormuz

Ukrainian President Volodymyr Zelenskyy addressed the summit Thursday evening, seeking continued support for EU accession talks and peace negotiations with Russia. Diplomats noted that Hungary's new prime minister, Magyar, has adopted a markedly more Ukraine-friendly stance than his predecessor Viktor Orbán. EU foreign policy chief Kaja Kallas welcomed the US-Iran framework agreement signed late Wednesday, calling it "a really good basis to end this war and open the Strait of Hormuz," though the precise role Europe might play in securing the waterway remains unclear.

It's a really good basis to end this war and open the Strait of Hormuz.