European businesses in China may have reached an inflection point, with business confidence showing signs of improvement for the first time in five years. The last investigation published by the European Union Chamber of Commerce in China (European Chamber) found that 68 percent of respondents felt “doing business in China had become more difficult” – a high number, but with a notable drop of 5 percentage points year-on-year. Likewise, the proportion of companies reporting increased politicization fell 5 percentage points, to 47 percent.
Other indicators also developed positively: optimism about the two-year profitability outlook rose to 17 percent, while the share of companies missing opportunities due to regulatory or market access obstacles fell by 9 percentage points to 54 percent.
However, Chinese companies operating in the EU are increasingly being targeted by new EU regulatory proposals in 2026, including the proposed review of the Cybersecurity Law (CSA2), the Industrial Acceleration Act (AAI), and the May 29 debate on a political document apparently led by France supported by Lithuania, Italy and the Netherlands. THE controversial The initiative calls 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 warned of retaliation. The Global Times, a state-linked media outlet known for its harsh rhetoric, declared that “China’s goodwill is not unlimited,” warning that “any unilateral measures that harm the legitimate interests of Chinese companies will inevitably be met with strong countermeasures from China.”
Yuyuan Tantian, an unofficial account affiliated with the public channel CCTV, echoes These warnings and challenged the EU’s “overcapacity” narrative, arguing that EU measures are protectionist and reflect industrial decline and lobbying by special interests. He also noted that European products hold significant market shares in China, citing French cosmetics, which accounted for 29.6% of Chinese cosmetics imports in 2025.
The three new EU proposals and China’s retaliatory signals
The debate on China-EU relations held at the European Commission on May 29 was closely followed. THE read aloud said that “the current state of trade and investment relations is not sustainable”, but communication continues.
As of this writing, no written proposals have been released to address these perceived issues. Discussions are expected to continue at the G7 meeting and European Council summit in June, as Politico reported. reported.
Before the debate, Yuyuan Tantian warned possible Chinese retaliation targeting EU cosmetics, wine, meat and luxury goods. He also pointed to possible anti-discrimination investigations under Article 7 of Chinese law. Foreign trade lawas well as recent investigations by China issued supply chain security regulations.
The CSA2, propose by the European Commission in January 2026, is a clear example of the EU’s broader approach to economic security. The proposal aims to establish a reliable ICT supply chain security framework to address concerns regarding “suppliers from high-risk third countries. These risks include not only technical vulnerabilities, but also third-country legal risks, foreign control or influence, strategic dependencies, and supply chain controllability.
A municipality report by the Chinese 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 among the hardest hit economies. Germany’s losses alone were estimated at 117.8 billion euros.
On the Chinese side, CSA2 is increasingly seen as part of a broader regulatory shift that could directly affect Chinese companies’ access to the European market. A Substack account related to Xinhua, China’s state news agency, listed potential European companies that could be affected by Chinese retaliation in this area, including Nokia, Ericsson and SAP.
The IAA, propose by the European Commission on March 4, 2026, also received Its main content received wide support from European countries such as Germany, France, Italy, the Netherlands and Poland during a debate held on May 28. The IAA aims to increase the EU’s industrial capacity, accelerate decarbonization and strengthen supply chains in strategic sectors. Its broader goal is to increase the manufacturing sector’s share of EU GDP to 20% by 2035.
From the Chinese perspective, the most controversial issue element The section on EU origin requirements is one element of the future legislation. Under the current plan, companies from countries without reciprocal public procurement agreements with the EU would be excluded public markets concerned, and Chinese companies are largely seen as among the most affected.
The AAI also offers an EU-coordinated economic security review for third-country investors from economies representing more than 40 percent of global value chain capacity. The review would be triggered if an investor acquires control of more than 30 percent of a target company, or if the investment reaches at least 100 million euros. Companies would also have to meet at least four out of six conditions, including a possible foreign ownership cap of 49 percent.
In response to IAA, the same account linked to Xinhua identified several possible counter-tools available for China in a Substack post, including the Unreliable entity listwhich may impose broad trade, investment, entry and financial restrictions; THE Export Control Act And Dual-use Items Export Control Regulationswho targets access to supply chain choke points and Chinese dual-use goods; and the Data Security Actwhich may restrict or complicate cross-border data transfers for data-intensive businesses. 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 message.
Competing narratives on the relationship to regulations in action
Two of the central arguments in China-EU economic relations are the trade deficit and overcapacity. According to a report According to SOAPBOX, a weekly Chinese trade data program produced in collaboration with the Mercator Institute of China Studies, the deficit between the two sides has widened since 2017, except in 2023. In 2026, EU exports to China fell by 7.5% year-on-year, while imports from China rose by 2% in the first quarter, pushing the quarterly deficit to almost 95 billion euros. At the national level, a Short of the Center for European Reform argued that Germany faces a “China Shock 2.0” as Chinese mass production and import substitution puts pressure on German companies in China, Europe and third markets. It cites Chinese export volumes having increased by more than 40% since the pandemic, a manufacturing surplus of around $2 trillion and potential risks to more than 400,000 German jobs linked to exports to China.
A new analysis speak China Finance Forum 40a Chinese think tank composed of 40 leading Chinese economists, offered a different view. It argues that Chinese export growth to Europe has been concentrated in energy-intensive sectors, namely electric vehicles, batteries, photovoltaics and chemicals, where Europe’s green transition and energy shock have generated substantial demand. At the same time, the decline in European exports to China appears to reflect less a contraction in Chinese demand than China’s industrial modernization and its growing capacity for import substitution.
The biggest concern in Europe is the speed of Chinese manufacturing expansion and its implications for European industrial competitiveness, as evidenced by French President Emmanuel Macron’s call for the EU to create an Article 301-style trading system. tool. The aim is to enable the EU to respond more quickly to “unfair” practices and protect strategic sectors from what EU leaders see as China-linked overcapacity through broader action at the sectoral level, rather than relying solely on product-by-product trade defense investigations. The Financial Times also reported that the EU develops plans that could force European companies to buy critical components from at least 3 different suppliers.
China has also started using its own tools. In May, Beijing ordered Chinese entities will not participate in a European Union anti-subsidy investigation into Chinese security company Nuctech. This was the first application of China’s recently issued regulations on countermeasures against “illegal extraterritorial jurisdiction.”
Escalation Management
The current escalation of rhetoric and regulation is unlikely to produce positive results for either party. For China, the challenge is not simply managing European risk reduction tools, tariffs or regulatory barriers. The key is to reduce Europe’s political fears about the speed of Chinese manufacturing expansion. If Chinese products continue to rapidly gain market share, Europe will increasingly view China as a systemic industrial challenge rather than just a trading partner.
For China, the answer is to move towards a “Made with Europe” model, with local production, localized research and development, and compliance with European labor laws and standards, rather than simply transplanting the high-pressure and often unsustainable involution seen in the country.
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 that regulatory escalation replaces dialogues and negotiations on technical issues. Think tanks should not only analyze the current or planned direction of economic security frameworks, but also explore ways to forge a better, more technically oriented mechanism in order to find a viable middle ground.
The key question is no longer whether both sides will defend their interests, but whether they will do so without turning economic security into a cycle of retaliation, or even a trade war.