Europe’s China anxiety: Will it raise tariffs, weaken the euro or go for structural reforms?

The proposal, suggesting tariffs of up to 30% or a 20–30% euro depreciation, reflects mounting anxiety over Europe’s widening trade imbalance with China and its erosion of industrial competitiveness. But the strong international responses underline how consequential such steps would be.

Within Europe, reactions have been mixed. Export-oriented economies such as Germany and the Netherlands have signalled caution amid worries about retaliation and supply chain disruptions. European Central Bank (ECB) officials, while not commenting directly on the proposal, have reiterated that exchange-rate targeting is not part of their mandate, thereby reinforcing institutional limits on currency engineering.

Meanwhile, southern European voices more exposed to industrial pressures have shown greater openness to robust defensive measures.

Beijing’s response has been firm too, warning against protectionism and signalling that sweeping tariffs would invite counter-measures. Given China’s demonstrated willingness to target politically sensitive sectors—from agriculture to luxury goods—the risk of escalation is real.

The attraction of tariffs lies in their clarity. They are visible, direct and politically communicable. A significant tariff wall could provide breathing space to European industries under pressure from what many policymakers describe as subsidized Chinese overcapacity.

It could also serve as leverage in negotiations on market access, industrial subsidies and regulatory reciprocity. For sectors such as electric vehicles, batteries and green technologies—where Europe sees strategic stakes—temporary protection may be framed as necessary to preserve critical industrial capabilities. However, the costs are substantial.

Tariffs are taxes and are rarely absorbed entirely by exporters. European consumers and firms reliant on Chinese intermediate goods would bear part of the burden. In an environment where inflation is politically sensitive, raising import costs could complicate macroeconomic management.

Retaliation is a serious concern. China has signalled that it would respond proportionately. A tariff spiral would disproportionately hurt export-driven European economies and deepen global trade fragmentation. Perhaps most consequentially, sweeping tariffs would challenge Europe’s commitment to the multilateral trading system at a time when it has sought to position itself as a defender of rules-based trade.

The alternative, engineering a weaker euro—is less overtly protectionist but potentially just as disruptive. Currency depreciation works as a broad-based competitiveness tool. A 20–30% depreciation would make Chinese imports more expensive while boosting the competitiveness of European exports, supporting manufacturing-linked employment and narrowing the trade deficit.

Unlike tariffs, currency adjustment would have an impact across sectors, avoiding the complexity of product-by-product trade remedies. But the trade-offs are equally stark. A weaker euro would increase the cost of all imports, particularly energy and raw materials. For a region structurally dependent on imported energy, this poses inflationary risks. Imported inflation would erode real incomes and test political tolerance.

Institutionally, deliberate depreciation would also raise profound questions. The eurozone’s monetary policy is set by the ECB with a price-stability mandate. Any perception of exchange-rate manipulation could undermine central bank credibility, unsettle financial markets and invite retaliatory responses from other major economies.

The intensity of global reactions underscores a deeper truth: this is not merely about tariffs or exchange rates. It is about structural competitiveness in an era of Chinese scale and state-backed industrial dynamism. China’s export strength reflects not only pricing advantages but ecosystem efficiencies—integrated supply chains, rapid scaling, coordinated industrial policy and sustained state support for strategic sectors.

Europe’s deeper challenges lie in productivity gaps, fragmented capital markets, regulatory complexity and high energy costs. Defensive macro tools may offer temporary relief, but they cannot substitute structural reform. A credible strategy would involve targeted, World Trade Organization-consistent trade defence instruments combined with accelerated innovation, investment in green and digital infrastructure, and deeper capital markets integration.

For India, this holds three lessons.

First, it reflects a shift in trade thinking. Even the EU—historically a champion of open markets—is contemplating tools once associated with economic nationalism. Globalization is not what it was.

Second, if Europe restricts Chinese imports, trade diversion could intensify competitive pressures in third markets, including India. Chinese exports may seek alternative destinations.

Third, exchange-rate adjustments in the eurozone, should they happen, would influence global capital flows and currency alignments. A much weaker euro could alter the rupee’s effective competitiveness against European and Chinese exporters.

The French advisory proposal should be seen less as imminent policy and more a signal of frustration. It reflects Europe’s struggle to reconcile industrial preservation with its commitment to open markets and monetary orthodoxy. The prudent path likely lies between the extremes: calibrated trade remedies within multilateral norms, reinforced domestic competitiveness and continued engagement with China, even if difficult.

Whether Europe opts for tariffs, currency adjustment or structural reform, its choice will reverberate across supply chains, capital markets and diplomatic alignments. For India and other emerging economies, the message is clear—prepare for a world where trade, currency and geopolitics are increasingly intertwined. One where strategic foresight is no longer optional.

The author is president, Chintan Research Foundation and former director, World Trade Organization.