European companies in China may have reached an inflection point, with business confidence showing signs of improvement for the first time in five years. The latest survey published by the European Union Chamber of Commerce in China (European Chamber) revealed that 68 percent of the respondents found that “doing business in China had become more difficult” – a high figure, yet notably a 5 percentage point decline year-on-year. Similarly, the proportion of firms reporting increased politicization fell by 5 percentage points to 47 percent.
Other indicators also trended positively: optimism regarding the two-year profitability outlook rose to 17 percent, while the share of companies missing opportunities due to regulatory or market access barriers dropped by 9 percentage points to 54 percent.
Chinese companies operating in the EU, however, have been increasingly targeted by new EU regulatory proposals in 2026, notably the proposal for a revised Cybersecurity Act (CSA2), the Industrial Accelerator Act (IAA), and the debate on May 29 on a reportedly French-led policy paper supported by Lithuania, Italy, and the Netherlands. The controversial initiative called for a more comprehensive instrument to address what some European leaders see as China’s overcapacity and the EU’s external dependencies in strategic sectors.
Chinese media have been warning of retaliation. The Global Times, a state-linked outlet known for its tough rhetoric, stated that China’s “goodwill is not limitless,” warning that “any unilateral measures that harm the legitimate interests of Chinese enterprises will inevitably face strong countermeasures from China.”
Yuyuan Tantian, an unofficial account affiliated with state broadcaster CCTV, echoed these warnings and challenged the EU’s “overcapacity” narrative, arguing that the EU’s measures are protectionist and reflect industrial decline and lobbying by vested interests. It also noted that European products enjoy significant market shares in China, citing French cosmetics, which accounted for 29.6 percent of China’s cosmetics imports in 2025.
The EU’s Three New Toolkit Proposals and China’s Retaliation Signals
The debate on China-EU relations held at the European Commission on May 29 was closely watched. The readout stated that “the current state of the trade and investment relationship is not sustainable,” but communication continues.
At the time of this writing, no written proposal has been released to address these perceived issues. The discussion is expected to continue at the G-7 meeting and the European Council summit in June, in line with what Politico has reported.
Ahead of the debate, Yuyuan Tantian warned of possible Chinese retaliation targeting EU cosmetics, wine, meat, and luxury goods. It also pointed to possible anti-discrimination investigations under Article 7 of China’s Foreign Trade Law, as well as probes under China’s recently issued regulations on supply chain security.
The CSA2, proposed by the European Commission in January 2026, is a clear example of the EU’s expanding economic security approach. The proposal seeks to establish a trusted ICT supply-chain security framework to address concerns over “high-risk third-country suppliers.” These risks include not only technical vulnerabilities, but also third-country legal risks, foreign control or influence, strategic dependencies, and supply chain controllability.
A joint report by the China Chamber of Commerce to the EU and KPMG estimated that the cost of CSA2 could reach 367.8 billion euros between 2026 and 2030, with Germany, France, and Italy to be among the hardest-hit economies. Germany’s losses alone were gauged to reach 117.8 billion euros.
From the Chinese side, CSA2 is increasingly seen as part of a broader regulatory turn that could directly affect Chinese firms’ access to the European market. A Substack account linked to Xinhua, China’s state news agency, has listed potential European companies that could be affected by Chinese retaliation in this area, including Nokia, Ericsson, and SAP.
The IAA, proposed by the European Commission on March 4, 2026, also received broad support for its main content from European countries such as Germany, France, Italy, the Netherlands, and Poland at a debate held on May 28. The IAA aims to expand EU industrial capacity, accelerate decarbonization, and strengthen supply chains in strategic sectors. Its broader target is to raise manufacturing’s share of EU GDP to 20 percent by 2035.
From the Chinese perspective, the most controversial element of the prospective legislation is the section on EU origin requirements. Under the current draft, companies from countries without reciprocal public procurement agreements with the EU would be excluded from relevant public procurement, and Chinese firms are widely seen as among the most affected.
The IAA also proposes an EU-coordinated economic security review for third-country investors from economies accounting for more than 40 percent of global value-chain capacity. The review would be triggered if an investor acquires more than 30 percent control of a target company, or if the investment reaches at least 100 million euros. Companies would also need to meet at least four out of six conditions, including a possible foreign ownership cap of 49 percent.
In response to the IAA, the same Xinhua-linked account identified several possible counter-tools available to China in a Substack post, including the Unreliable Entity List, which can impose broad trade, investment, entry, and financial restrictions; the Export Control Law and Regulations on Export Control of Dual-Use Items, which target access to supply-chain chokepoints and Chinese dual-use goods; and the Data Security Law, which can restrict or complicate cross-border data transfers for data-intensive firms. Companies like Vestas, Siemens Gamesa, and Nordex in the wind energy sector; Siemens, Philips, and GE HealthCare in the medical industry; and Volkswagen, BMW, and Mercedes-Benz in the automotive sector were listed as potential targets in the same post.
From Competing Narratives on Reports to Regulations in Actions
Two of the central arguments in China-EU economic relations are the trade deficit and overcapacity. According to a report by SOAPBOX, a weekly China trade data program produced in collaboration with the Mercator Institute for China Studies, the deficit between the two sides has been widening since 2017, except in 2023. In 2026, EU exports to China fell 7.5 percent year-on-year, while imports from China rose 2 percent in the first quarter, pushing the quarterly deficit close to 95 billion euros. At the country level, a brief by the Center for European Reform argued that Germany faces a “China shock 2.0” as Chinese mass production and import substitution pressure German firms in China, Europe, and third markets. It cited China’s export volumes rising over 40 percent since the pandemic, a manufacturing surplus of about $2 trillion, and potential risks to 400,000-plus German jobs tied to exports to China.
A new analysis by the China Finance 40 Forum, a Chinese think tank consisting of 40 leading Chinese economists, offered a different view. It argues that the growth in Chinese exports to Europe has been concentrated in energy-intensive sectors, namely electric vehicles, batteries, photovoltaic products, and chemicals, where Europe’s green transition and energy shock have generated substantial demand. At the same time, the fall in European exports to China appears to reflect not so much a contraction in Chinese demand as China’s industrial upgrading and growing capacity for import substitution.
The deeper concern in Europe is the speed of China’s manufacturing expansion and its implications for European industrial competitiveness, as reflected by French President Emmanuel Macron’s call on the EU to create a Section 301-style trade tool. The aim is to allow the EU to respond faster to “unfair” practices and protect strategic sectors from what European leaders see as China-linked overcapacity through broader sector-level action, rather than relying only on product-by-product trade defence investigations. The Financial Times has also reported that the EU is drawing up plans that could force European companies to purchase critical components from at least 3 different suppliers.
China has also begun using its own tools. In May, Beijing ordered Chinese entities not to assist a European Union anti-subsidy investigation into the Chinese security firm Nuctech. This was the first application of China’s recently issued regulations on countermeasures against “unlawful extraterritorial jurisdiction.”
Managing Escalation
The current escalation in narratives and regulations is unlikely to produce any positive outcomes for either side. For China, the challenge is not simply managing European de-risking tools, tariffs, or regulatory barriers. Reducing Europe’s political fear over the speed of Chinese manufacturing expansion is the key. If Chinese goods continue to gain market share rapidly, Europe will increasingly treat China as a systemic industrial challenge rather than simply a trade partner.
For China, the answer is shifting direction toward a “Made with Europe” model, with local production, localized research and development, as well as compliance with European labor laws and standards, rather than simply transplanting the high-pressure and often unsustainable involution seen back home.
For the EU, a gesture of willingness to negotiate with China is equally important. It is in the EU’s undeniable interest to defend its own industry. However, this should not mean allowing regulatory escalation to replace dialogues and negotiations over technical issues. Think tanks should not only analyze the existing or planned direction of economic security frameworks, but also explore ways to forge a better, more technically oriented mechanism to find workable common ground.
The key question is no longer whether both sides will defend their interests, but whether they can do so without turning economic security into a cycle of retaliation or even a trade war.
