EU officials are increasingly concerned about the EU’s widening trade deficit with China. The deficit is mainly linked to higher import volumes and weaker EU export volumes to China.
The car sector is often used as an example of this gap. EU vehicle imports from China have increased 10-fold since 2019, while EU vehicle exports to China have fallen sharply in recent years.
EU officials link part of the imbalance to overcapacity in China’s manufacturing sectors. In response, the European Commission has been working to broaden its trade policy tools and develop a wider industrial strategy.
A European Commission debate due at the end of May may be used to discuss new trade measures. Any measures could focus on addressing perceived Chinese overcapacity.
Standard Chartered economists Christopher Graham and Carol Liao expect China to keep a restrained, pragmatic approach towards the EU while tensions with the US continue. They say China may seek to avoid full escalation and maintain trade and investment ties, while still leaving scope for targeted actions against particular products or entities.
Concerns we saw growing throughout 2025 about the EU’s trade deficit with China have now fully materialized into active trade disputes. The imbalance has worsened, with Eurostat data from earlier this year showing the deficit in goods with China remained over €250 billion for the 2025 calendar year. This confirms the trend of weakening EU exports and rising import volumes that was flagged last year.
The automotive sector remains the primary battleground, just as we anticipated. Following the surge of Chinese vehicle imports to over 750,000 units in 2025, the European Commission implemented a 25% tariff on Chinese-made EVs in March 2026. This action was a direct result of the overcapacity debate that dominated discussions in Brussels late last year.
As predicted, China’s response has been pragmatic but firm, avoiding broad escalation while using targeted measures. Last month, Beijing initiated an anti-dumping investigation into specific EU luxury goods, with a focus on French brandy and German high-performance auto parts. This move has already put pressure on shares of exposed companies, mirroring the playbook we saw when China probed EU brandy imports back in early 2024.
For traders, this environment means implied volatility in the European auto sector and related industries will remain elevated. The VSTOXX index, a key measure of European market volatility, has spiked above 22 on dates of tariff announcements, a significant jump from the calmer periods of last year. We expect sharp, headline-driven price movements in the coming weeks as officials on both sides issue statements.
We see value in purchasing put options on an index of European automakers, such as the STOXX Europe 600 Automobiles & Parts Index. This offers a direct hedge against further retaliatory measures from China, which could significantly impact sales for German manufacturers who remain heavily reliant on the Chinese market. For instance, German auto exports to China fell nearly 15% in the first quarter of this year following the initial friction.
A pairs trade could also be effective, going long on Chinese EV manufacturers with a diversified global footprint and short on exposed European legacy automakers. While EU tariffs impact their European sales, leading Chinese brands like BYD have aggressively expanded into South American and Southeast Asian markets, offsetting some of the slowdown. This strategy isolates the diverging fortunes of the two manufacturing blocs.
The key focus in the coming weeks will be the preliminary findings from China’s anti-dumping probes and any new trade data from Eurostat. Any hint that China may expand its investigations into German luxury vehicles would create another significant downside catalyst. Traders should monitor statements from both the European Commission and China’s Ministry of Commerce for signals of de-escalation or further conflict.
