Written by Li Shuo and Kate Logan, Directors of the China Climate Hub
New energy vehicles (NEVs) have been at the heart of EU-China trade tensions. The EU is attempting to thread the needle between three competing objectives: electrifying transport, strengthening domestic supply chains, and ensuring vehicle affordability. Meanwhile, Chinese NEV exports have continued to swell, especially amid weakening domestic demand and skyrocketing fuel prices from the Hormuz energy crisis. When the EU imposed tariffs on Chinese battery electric vehicles (BEVs) in 2024, hybrid vehicles were excluded, allowing Chinese automakers to expand their hybrid exports into the European market and creating a new challenge for the EU’s attempts to revitalize its incumbent auto sector amid growing competition from Chinese brands. This was one factor contributing to the relationship’s temperature rising from simmering to boiling in June of this year.
On October 9, the EU and China surprised observers when they reached an initial agreement on managing their trade and economic relationship. The deal marks a significant step in the two sides’ efforts to contain trade tensions through negotiation rather than unilateral escalation. The breakthrough came just ahead of the European Council meeting on October 15-16 and in line with a previously agreed October deadline to achieve “tangible results.”
The agreement’s headline deliverable is a framework for managing the surge in Chinese hybrid vehicle exports to the European market. Under the emerging framework, the EU could pursue trade safeguards by imposing import quotas. These quotas on Chinese hybrid vehicle imports would be set above 2025 import levels, with room for annual growth—a result Beijing could present as a victory. At the same time, the quotas would remain well below projected 2026 levels, allowing Brussels to defend the deal domestically. China had pushed back against a previous European proposal for China to adopt voluntary export restraints on the grounds that such an arrangement would violate WTO rules; since the deal, the EU has notified the WTO that it has initiated a safeguard investigation into certain hybrid vehicles. Battery electric vehicles (BEVs) will continue to be subject to EU tariffs, with exporters having the option to propose price floors as an alternative to tariffs, per a January 2026 EU-China agreement.
Now that an interim deal has been reached, what will happen next?
The operational details of the deal will need to be worked out over the coming weeks and months. Key questions include the scope of the deal and whether it covers conventional hybrids, plug-in hybrids and extended-range vehicles; how quotas will be allocated among countries, companies and importers; how existing rules of origin will apply to vehicles assembled in third countries; and how imports exceeding the quotas would be handled. Any one of these technical issues could reignite political controversy.
The potential divergence in the two sides’ interests over the coming months is also not difficult to see. Brussels will be watching to determine whether Beijing’s other commitments in the deal translate into tangible commercial benefits. Will tariffs on products such as auto parts, olive oil and footwear be reduced? Will licensing for rare earths and permanent magnets be expedited? Will progress on market access for medical devices and agri-food products generate actual orders? If the European side sees only the management of Chinese auto exports without new market opportunities for European companies, calls for further pressure may grow louder. Conversely, if the EU makes no substantive improvements in its approach to dual-use items, makes no progress on BEV price undertakings, or fails to advance discussions on the Foreign Subsidies Regulation, China may be less willing to maintain restraint over the longer term.
Will the deal help stabilize EU-China relations?
In either case, the October agreement is unlikely to halt the EU’s tightening of its trade and industrial policies toward China, particularly the further development of what is often referred to as its trade and investment toolbox. The European Commission plans to present a new package in December, which is expected to include an instrument to diversify away from high-risk single suppliers. It has also announced plans for a “solidarity mechanism” to help member states or industries facing coercion or retaliation. The EU’s proposed Industrial Accelerator Act, which would impose strict conditions on certain foreign investments in strategic sectors, including Chinese clean tech investment, also remains under negotiation, though divisions over the bill may delay its progress and provide space for more Chinese investment deals to move ahead in the near term.
It therefore remains far from clear how much stability the October agreement will bring to EU-China trade and economic relations. The most plausible near-term trajectory is one of managed friction: periodic compromises that reduce the risk of a full-scale confrontation, alongside continued restrictions and recurring disputes. Domestic political dynamics in Brussels and the capitals of key member states, together with China’s evolving domestic political and economic outlook, will further shape the relationship as the two sides move into 2027.
What factors will shape the potential for progress in 2027?
Ultimately, the two sides’ ability to continue managing their differences will depend on how much leverage each believes it holds over the other. China’s strategic perceptions of Europe, Germany’s approach to China, and Berlin’s influence in Brussels are among the key factors to watch. Franco-German alignment on a proposed rapid-response trade tool bolstered European unity ahead of the deal, but divergences between the two countries’ approaches to China persist, especially among businesses.
For both the EU and China, January and March 2027 will be two important milestones. The two sides have agreed to hold a ministerial-level video conference in January 2027, followed by the third EU-China Trade and Investment Consultations (TIC) meeting in March. The January meeting could provide an opportunity to review implementation, with both sides assessing which commitments have been delivered and which individual cases remain stalled. The March meeting, meanwhile, could help shape discussions on whether the import quota model can be extended beyond automobiles to chemicals, machinery and other sensitive sectors.
Driven by domestic political considerations on both sides, the longstanding gap between public rhetoric and actual action in EU-China relations is also likely to persist, if not widen. Nevertheless, harsh rhetoric does not necessarily signal imminent confrontation. Domestic politics — including key elections in 2027, particularly in France — will continue to drive tough rhetoric on both sides, while economic realities in both Europe and China will create pressure to avoid unnecessary friction.
The extent to which both sides can manage frictions will also impact energy transition and climate outcomes. For Europe, the availability of affordable NEVs may impact the rate of vehicle electrification, including the region’s contribution to a proposed global target for electricity to account for 35% of final energy consumption by 2035 that the EU is championing politically. For China, preserving access to EU markets — whether through trade or investment — may be increasingly essential for the future viability of NEV companies as they struggle to maintain profitability amid intense competition. With clean tech sectors accounting for 11.4% of China’s GDP and over a third of GDP growth in 2025, whether NEV champions can preserve their profits may influence their political standing and China’s continued prioritization of the industry.