ICAS Trade ‘n Tech Dispatch (online ISSN 2837-3863, print ISSN 2837-3855) is published about every two weeks throughout the year at 1919 M St NW, Suite 310, Washington, DC 20036.
The online version of ICAS Trade ‘n Tech Dispatch can be found at chinaus-icas.org/icas-trade-technology-program/tnt-dispatch/.
In One Sentence
Mark the Essentials
Keeping an Eye On…
Brussels has a China trade problem on its hands. The EU’s bilateral trade deficit with Beijing in 2025 was a monumentally large €359 billion. Brussels’ diagnosis of its causes, however, leaves something to be desired. Per the Europeans’ telling, China’s extensive use of industrial subsidies has created massive overcapacity in its domestic sectors which, along with an undervalued currency, has led to an unfair flooding of its markets — the former needing to be countervailed and the latter reversed.
There is more than a grain of truth in the EU’s assertion. Yet the assertion deflects more than it reveals.
There is no question that Chinese exports worldwide are supported by many WTO-compliant and probably WTO-non-compliant subsidies, and that excess capacity reductions — or supply-side reform, as the Chinese leadership terms it — is a pressing matter. These subsidies range from preferential financing and direct cash grants, to state-financed equity investments, to inputs and land use rights provided at below-adequate remuneration, to debt and liability guarantees, to a long list of tax exemptions. Yet for reasons best known to the Europeans themselves, they have never litigated a major Chinese industrial policy subsidies case at the WTO. Perhaps the WTO’s ASCM (Agreement on Subsidies and Countervailing Measures) disciplines are too weak to hold China to account. Alternatively, China may have gamed the system to perfection such that rules are observed in breach of their spirit — though it should equally be noted that China was a rule-taker, not a rule-maker, at the time of its WTO accession. Be that as it may, it is Beijing that is now challenging the EU’s countervailing tariffs on Chinese battery electric vehicles at the WTO, when it should have been the EU challenging China’s industrial subsidies in the first place.
There is no question either that the Chinese yuan is undervalued (the IMF attests to this) and that the competitive effects have been compounded by prevailing producer price deflation — until recently — within the Chinese macroeconomy. Yet the undervaluation has been a function of the property market implosion and the weak state of the Chinese macroeconomy, which markets have punished by running down the value of the yuan — again, until recently. For most of the past two years, Chinese intervention has actually been aimed at propping up the currency, not depressing it. If blame is to be assigned, it should be directed at the Chinese leadership’s timidity in clearing its housing market through bankruptcy tools, loss recognition, and compelled developer exits — measures that would restore the macroeconomy to a more balanced and durable growth track. Holding down the currency is not among the culpable policies.
Most pertinently, it is worth reflecting on the fact that the run-up in the EU’s deficit with China is almost entirely concentrated in two product groups: new energy products (silicon wafers and PV cells, lithium-ion batteries, and electric vehicles) and chemicals. The former reflects China’s world-beating competitiveness in these sectors (aided, no doubt, by subsidies); the latter arises from soaring natural gas prices following Russia’s invasion of Ukraine, which has battered the cost structure of Europe’s chemicals industry — the fourth-largest manufacturing sector in the EU. The vast majority of other Chinese exports to the EU, including machinery and electrical equipment (the largest export category by value), have more or less tracked their unremarkable pre-COVID trend. These realities cast doubt on the argument that across-the-board industrial subsidies, a manipulated exchange rate, or a redirection of Chinese exports away from the U.S. market due to Trump’s tariffs are responsible for the run-up in the EU’s deficit with China. Had that been the case, Chinese exports outside the new energy and chemicals sectors should have seen major upward spikes as well. They have not.
So what, then, is to be done going forward?
The EU’s response is a five-pronged one. First, compel European companies in key sectors to diversify supply chains — a dedicated instrument is being readied for unveiling, likely this September. Second, deploy powerful safeguard tools that can be triggered quickly by imposing steep above-quota tariffs, providing breathing room to industries hardest hit by Chinese competition. Third, build out Europe’s industrial re-expansion through legislative acts such as the Industrial Accelerator Act (IIA) and sectoral action plans that account for both horizontal and vertical convergence of sectoral value chains. Fourth, initiate new rulemaking at the WTO that would create policy space to combat negative trade spillovers arising from distortive state interventions, including subsidization. And fifth, press China to develop its anemic consumption engine and thereby run a less imbalanced economy capable of drawing in EU-origin imports.
The list is worthy but incomplete. Two more items should be added. First, the EU must bring — and win — a major industrial subsidies case against China at the WTO. Asserting that China engages in unfair industrial policy practices does not automatically make it so; the case must be proven. At a time when China has brought and won subsidies-related cases of its own (against the United States and, down the line, against India), there is no excuse for failing to pursue such cases at multilateral fora. Second, and more importantly, the EU must welcome Chinese inward foreign direct investment — particularly greenfield investment from private actors in the new energy sectors (solar, batteries, EVs). The potential for such investment remains vast and untapped and, under the right conditions, could be transformative. The impact on trade rebalancing — to say nothing of job creation and the development of innovation clusters — could be correspondingly significant.
Expanded Reading
In One Sentence
Mark the Essentials
Keeping an Eye On…
On July 1, 2026, as per Article 34.7 of USMCA, the U.S., Canada, and Mexico will meet virtually on the sixth anniversary of the agreement’s entry into force for a first joint review. The joint review is a novel mechanism with no precedent in prior U.S. FTAs, although it should be acknowledged in fairness that certain earlier agreements have been reopened and renegotiated — the KORUS FTA being the most notable example. If all three parties agree in writing, the USMCA will be automatically extended for sixteen years, with another joint review six years hence. If the parties fail to agree, a grinding annual negotiating process will follow, with disruptive implications for industries and businesses including those headquartered outside North America. In the run-up to the review, President Trump has hinted that he might not renew the agreement, and the U.S. Trade Representative has signaled that rubber-stamping the agreement in its current form would not serve the national interest. A number of larger, non-trade-related political clouds are hovering over the review process as well.
The joint review is an opportune moment to reflect on how far the vision of a continent-wide North American trading bloc has fallen. In the eyes of its architects, NAFTA/USMCA was to be no mere free trade agreement. It was to be a springboard for broader regional cooperation — encompassing the pooling of the region’s abundant energy resources, the streamlining of North American regulatory frameworks, and a platform for expanding law enforcement coordination and joint defense. Secure in its continent-wide depth, the United States could leverage this integrated home base as a source of geopolitical and economic strength globally.
Today, by contrast, the Trump administration’s vision for USMCA is one of leveraging Mexican and Canadian access to the U.S. domestic market in order to shut out the rest of the world. Its key objectives going into the review are worth enumerating. First, strengthen the agreement’s rules of origin for industrial goods to minimize the use of third-country content in U.S. supply chains. Second, align Mexico and Canada more closely with U.S. economic security policy on tariffs, export controls, and foreign investment screening. Third, develop mechanisms to penalize the offshoring of U.S. production to Mexico and Canada driven by regulatory and other arbitrages. Fourth, improve implementation of Mexico’s and Canada’s forced labor import bans. And fifth, develop a North American critical minerals marketplace to minimize the risk of weaponized supply dependencies.
Two crosscutting themes bear highlighting. First, China’s exports to and investments within the bloc are a common thread running through nearly all of the enumerated objectives — China Derangement Syndrome is being deliberately mainstreamed into the bloc’s mechanisms and functioning. Second, the vision of a North American bloc embodying the promise of wider regional cooperation is dying a hard death. The trading bloc is no longer about the possibilities of continent-wide integration and its leveraging for broader geopolitical gain; it is about a shrinking of horizons and the limiting of exposure to forces deemed adversarial on home or proximate turf. In time, the USMCA itself — not just its underlying vision — may die that same hard death. Or perhaps, more likely, it will simply muddle through. On that cheerless note, may the joint review begin.
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Legislative Developments
Hearings and Statements
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