Trade has been the foundation of a European peace project after Germany led Europe twice during the last century to largest losses of lives the humanity has ever known.

A fledgling customs union of six nations, founded by the Treaty of Rome on March 25, 1957, followed a successful European Steel and Coal Community – a desperate attempt in 1951 to make another war in Europe impossible by putting the instruments of war in common property.

Those modest beginnings have led to the world’s largest trading bloc, a unified market, and an expanding regional currency area. That is now also an ambitious quest for economic and political union of 27 states, with a population of 449 million, and a third largest world economy of $20 trillion accounting for 14% of global demand and output.

Still, the “European project” is very much a slow work in progress. Politically exhausted sovereignty transfers to European legislative and executive authorities make the E.U. a collection of nation states, with common trade rules by virtue of customs union regulations.

And like anything else in the E.U., that common trade policy, heavily influenced by Germany, is a contested ground of European unity. Trade with China is the latest example of how a “strategic and systemic rivalry” derailed into a divisive trade dispute.

Excessive trade deficits with China

China is the E.U.’s second largest trade partner, with $588 billion of total trade during the first nine months of this year. That is slightly below the same period of 2023, mainly because the E.U.’s stagnating economic growth has cut imports from China by 4%.

That shortfall can probably be narrowed should the household spending in the E.U. revive during the yearend retailing season. The problem is much deeper, though, because the E.U.-China relations are now part of growing tensions along the geopolitical fault lines.

Some E.U. commissioners are publicly stating that a trade war with China is inevitable. And, apparently, it is not just a question of Chinese low-cost battery-operated vehicles that present a serious competitive threat to E.U. automobile industries.

A more fundamental issue, according to E.U. officials, is the fact that the bilateral trade with China is structurally imbalanced with Beijing’s large and systematic trade surpluses. As a result of that, it is feared that the trade gap favoring China would widen excessively if Chinese electric vehicles (EV) were allowed free access to E.U. markets.

The E.U. has a point here. Last year, the E.U. had a €291 billion ($317 billion at current exchange rates) merchandise trade deficit with China. This year, however, the deficit is much smaller. According to Chinese data, during the first nine months of this year the E.U trade gap with China narrowed to $181 billion (€166 billion) – which gives a deficit at an estimated annual rate of $241 billion (€221 billion).

In spite of such a considerable decline of China’s trade surpluses, the E.U. wants to levy a countervailing duty of up to 45% on electric vehicles built in China to offset allegedly illegal Chinese state subsidies – firmly denied by Beijing.

U.S. has to calm things down

China is getting ready to retaliate with its own punitive import duties on E.U. brandy, pork and dairy products, and large engine E.U. made cars.

Negotiations are still going on, and the E.U. mandate to come to terms with China does not look very strong. Germany, for example, is opposed to import duties, while Italian car manufacturers would like to work with Chinese by sharing the production process.

Local production is obviously a way around import duties. That would also level the playing field for European manufacturers according to an old axiom of trade theory: if you impede trade, factors of production (capital and labor) will jump over the trade barriers.

For the E.U., local production of Chinese EVs would be an optimal solution because increasing competition would speed up the technological adjustment of E.U. manufacturers, EV prices would be held down, and faster progress would be made toward lower carbon emissions.

More importantly, the stagnant E.U. economy would benefit from growing industrial production, with increasing jobs and incomes generated in an environment of stable prices. That would allow declining interest rates at a time when E.U.’s excessive debt and budget deficits require sustained public spending cuts and higher taxes.

Germany would like that and will try to prevent the imposition of import tariffs. It cannot do otherwise. Berlin has staked the future of its automobile and chemical industries on Chinese markets.

But Germany, and the rest of the E.U., will have to wait to coordinate broad China policies with the new U.S. administration.

Washington needs a trade deal with China and the rest of the world. Capricious sanctions and expansive 301 Trade Act investigations, export and investment controls, judicial overreach – all that must be thoroughly reviewed.

The world needs an America that will lead to a peaceful modus vivendi.