China’s Escalation Dominance: Neutralizing the EU’s Economic Security Agenda

In an already tense EU-China relationship, tensions escalated over the summer, with a series of sanctions and counter-sanctions, as well as an unprecedented legal battle over distortions of competition linked to Chinese state aid.

The launch, at the end of June, of a new trade and investment consultation mechanism between the European Commission and China’s Ministry of Commerce has created a further incentive for escalation. It is not surprising that both sides are seeking to demonstrate their determination and strengthen their bargaining leverage-or even create new leverage.

According to the European Commission, the negotiations should produce results by the end of October. The European objective remains unchanged: to address the significant trade imbalances that are putting pressure on the automotive, chemical, mature semiconductor and wind turbine component industries. But the sense of urgency is unprecedented, as illustrated by the figure of "one billion euros in trade deficit per day", used by the President of the European Commission in late August to convey the extraordinary scale of the imbalance in Europe’s trade relationship with China. Those who have followed the relationship for longer will remember that, fifteen years ago, another figure was frequently cited: "one billion euros in trade per day". At the time, it was used in a positive sense, to illustrate the strategic importance attached to the relationship.

Since then, virtually every aspect of the bilateral relationship has deteriorated, leaving Europe with a difficult strategic dilemma. China’s simultaneous use of export controls and lawfare appears designed to neutralize the EU’s economic security agenda. As European measures multiply, from steel safeguard measures to the construction of a genuine policy of "European preference", China is determined to defend its surpluses against Brussels’ assertive awakening.

The logic is straightforward: convince Europeans that any measure they take will trigger a more costly response from China. The credibility of Beijing’s willingness to escalate is taken for granted by many stakeholders. Yet the restraint it has so far induced in European policies has been achieved largely through threats, and therefore at relatively little cost. Whether the practice of escalation threats reflects a systematic effort in the cognitive domain to shape European perceptions, and what Europe can still do to alter Beijing’s strategic calculations, remain open questions.

The Front of Export Control

On July 23, the Council of the EU adopted its 21st sanctions package against Russia. It specifically targets 14 entities based in mainland China and Hong Kong that are accused of helping Moscow circumvent European sanctions on defense electronics. Most are relatively small commercial companies that serve as intermediaries in the procurement of microelectronic components and equipment.

The next day, the Chinese Ministry of Commerce retaliated by placing 14 European companies on its export control list. The MOFCOM spokesperson justified this decision as a "response" to the "particularly serious actions" (恶劣行径) of the European Union.

The Chinese countermeasure targets the broader field of defense electronics. It relies on asymmetry and is clearly designed to signal to European decision-makers that further escalation could come at serious cost, by targeting two areas of European industrial strength.

The first is the European defense industry. Its dependence on Chinese inputs is real, although public data do not allow it to be measured precisely. Major European defense companies such as Rheinmetall have been working for several years to reduce their reliance on Chinese suppliers. Their lack of exposure to the Chinese market, due to the European export control regime, also reduces their vulnerability to Chinese restrictive measures, although it does not eliminate it. For smaller companies, the situation is more concerning.

The second is the military-industrial sector built around optical technologies, and more specifically photonics, an area in which several European countries have strong capabilities and in which China is seeking to establish a stronger global position. Beijing’s decision to target indium in its countermeasures reflects both its assessment of European vulnerabilities and its own industrial ambitions. Indium phosphide is a substrate used primarily in optical communications, radio-frequency applications and space technology. The French company InPACT, one of the fourteen entities targeted, is currently Europe’s leading producer of the material. China controls around 70% of global indium production, a byproduct of zinc production, in which it also holds a dominant position. Beijing placed indium on its export control list in February 2025, but this is the first time it has used the measure against European interests. The move will certainly be welcomed by Chinese companies such as San’an Optoelectronics and Yunnan Germanium are expanding their activities in this sector.

As in previous escalations, China has not closed the door to negotiations. Rather, it seeks to strengthen its bargaining position before and during the talks. Indeed, Europeans are not facing a systematic embargo: Chinese and foreign suppliers can still apply for export licenses. According to the Ministry of Commerce, applications may be approved in "exceptional cases".

The Front of Legal Action

The denial of export permits for critical materials is not unique to EU-China relations. China is using the same tactic against Japan, but in a more punitive manner, steadily tightening restrictions, including most recently on exports affecting Japan’s chemical industry. It also deployed the tactic against the Trump administration in late 2025, with considerable effect. Beijing now appears to believe, not without some triumphalism, that the threat of further escalation played a decisive role in stopping new US export control measures that were then under consideration.

At the same time, the Chinese government has opened a new front specific to its relationship with the European Union: the use of Chinese law to neutralize one of the most powerful tools in the European economic security arsenal, the 2022 Foreign Subsidies Regulation (FSR). In force since 2023, the FSR allows the European Commission to investigate companies benefiting from subsidies granted by third countries and to intervene when those subsidies distort competition in the European market. It fills a gap in European law by extending scrutiny of foreign subsidies beyond mergers and acquisitions to public procurement and, under the regulation’s broad wording, to "any market situation." It applies across all sectors, complementing existing European rules on competition, state aid and trade defense.

The problem first arose in summer 2024. Under investigation by the FSR, the Chinese company Nuctech, which supplies body scanners and baggage inspection systems to airports and seaports in more than 170 countries, cited Chinese law to deny European investigators access to the information necessary for the proceedings: Articles 31 and 36 of the Data Security Law, Article 41 of the Personal Information Protection Law, and Article 28 of the State Secrets Protection Law. It accuses the EU of forcing it to "illegally disclose" data stored in China.

A subsequent escalation occurred in three stages.

• In January 2025, China’s Ministry of Commerce and Ministry of Justice classified European investigations targeting Nuctech and other Chinese companies as barriers to trade and investment, and called on the EU to rectify its practices. The classification was a political declaration, which did not prevent the European Commission from continuing and expanding its investigations.
• On April 7, 2026, Premier Li Qiang promulgated, by Decree No. 835, the Regulations on Combating the Improper Exercise of Foreign Extraterritorial Jurisdiction (中华人民共和国反外国不当域外管辖条例), which took effect on the day of their publication: twenty articles, grounded in the National Security Law, the Foreign Relations Law, and the Anti-Sanctions Law, which, according to an expert analysis published on the website of the Chinese Ministry of Justice, "clearly affirm, through legal channels, China’s principled position that it does not accept the abusive exercise of extraterritorial jurisdiction by foreign states."
• Five weeks later, on May 15, the regulation was applied for the first time, in connection with the European Commission’s FSR investigation into Nuctech. Beijing characterized the investigation as an improper exercise of extraterritorial jurisdiction and prohibited any organization or individual in China from providing assistance to the Commission in connection with it. Chinese authorities accused the Commission of seeking cooperation from Chinese banks and requesting large amounts of information on Chinese territory that they consider unrelated to the proceedings.

The system is based on a blocking architecture. Once a foreign measure has been deemed unlawful, no one may enforce it, unless authorization is granted in "special cases." The Ministry of Justice may also issue injunctions against specific individuals. Such penalties for violations can be severe: exclusion from public procurement and bidding processes; restrictions on imports and exports; a ban on receiving data from abroad or transferring it out of China; restrictions on entry, exit, and residence; and fines. They apply to both organizations and individuals. In practice, a Chinese employee of a European company who cooperates with the European Commission as part of an investigation is now subject to personal liability, as is the supervisor who authorizes such cooperation.

That same month, April 2026, saw the publication of a complementary regulation on the security of industrial and supply chains (国务院关于产业链供应链安全的规定), which governs the collection of information and investigative activities conducted by foreign entities into Chinese value chains. The two texts complement each other: one restricts access to information, while the other prohibits any action based on information that may have been obtained.

On May 28, 2026, the Commission launched an in-depth investigation into the acquisition of the German retailer Ceconomy (parent company of MediaMarkt and Saturn) by the Chinese e-commerce giant JD.com, a deal worth 2.2 billion euros. Brussels suspects that preferential financing, subsidies, and tax advantages granted by the Chinese government enabled JD.com to make an offer that distorted the negotiating process. This is the first in-depth investigation launched under the FSR into an acquisitive transaction involving a Chinese buyer. On August 20, the Chinese Ministry of Justice described the proceedings as an "illegal exercise of extraterritorial jurisdiction," and prohibited any Chinese entity from cooperating with the investigation. The JD.com case confirms that a standard operating procedure is now in place. The Commission must rule by October 2 on a case in which it has been denied access to the evidence.

Analysis of China's Strategy

These two summer disputes follow the same logic. The approach is not new. China adopted a similar strategy in response to the EU’s 2024 anti-subsidy investigation into Chinese electric vehicles. At the time, Chinese officials repeatedly raised the prospect of a slide into a full-scale trade war, while Beijing responded with anti-dumping measures, including against luxury goods such as cognac.

What has changed is the breadth, intensity and credibility of the threat of escalation. China has built up several instruments of economic leverage and is now in a position to deploy them. Indium was placed on the Chinese export control list in February 2025; InPACT was added fifteen months later. The regulation on extraterritorial jurisdiction was promulgated on April 7, 2026; five weeks later, it was invoked against the FSR investigation. China’s toolkit is being built methodically and continuously refined. Its purpose is to give the Party leadership a range of options for applying pressure when needed.

China’s strategy toward Europe resembles the concept of "escalation dominance" developed in deterrence theory. Where there is no guarantee of mutually assured destruction, the side capable of inflicting the greatest damage acquires greater leverage over the terms of crisis resolution. The deliberate asymmetry of the measures targeting European companies serves precisely this purpose: to convince decision-makers in Brussels and European capitals that Europe has more to lose from further escalation than China does.

This calculation appears to rest on a view of Europe as a fragile and indecisive adversary, a perception reflected in the comments of China’s leading experts on Europe. Wang Yiwei attributes Europe’s renewed focus on economic security to three internal crises (declining industrial competitiveness, strategic anxiety and governance failures) as well as to divisions among the 27 member states. In his view, the EU is seeking to shift its "internal contradictions" onto China. Cui Hongjian similarly interprets Europe’s approach as a manifestation of "strategic anxiety".

The same message is reiterated with great emphasis by all Chinese stakeholders involved in relations with the EU. All accuse Europe of being solely responsible for its own lack of competitiveness. All pretend to ignore the disproportionate scale of state aid granted by Chinese public authorities to fuel the country’s export-oriented economic model. In a recent editorial, the Global Times argues that "China should have been a strategic partner capable of helping the EU resolve these issues, but it has been mistakenly considered as the problem itself. This is a serious strategic misjudgment on behalf of the EU, and it is regretful." From diplomatic attitudes to expert interpretations, Chinese law, and the mainstream media, every means is being employed to keep intact the narrative of industrial success based on ingenuity and hard work only, rather than on government intervention and the plan to concentrate 21st-century strategic industries within China.

This leaves one question that European policymakers are not addressing. Isn't Chinese dominance taken for granted from the start? In reality, no Chinese countermeasure has been carried through to completion, as it would have proved extremely costly. And Chinese officials appear increasingly concerned about the possibility of losing access to the European market, which is now an irreplaceable destination for a number of high-value Chinese products. China’s strategy may be playing on the cognitive level: seeking to convince Europe that Beijing owns escalation dominance in order to achieve a result at no cost.

What path should Europe pursue?

Beyond perceptions, the Sino-European dispute is substantive and structural. China is defending a status quo that serves its interests. It is protecting its second-largest export market, after ASEAN, while supporting Russia’s invasion of Ukraine at an increasingly high but still controlled level, allowing it to avoid direct confrontation with Europe. Europe is bearing real costs: the continued erosion of its industrial base and the persistence of Russian aggression, sustained by the resilience of Russia’s defense industry partly enabled by Sino-Russian technological and commercial exchanges.

How can Europe get out of this situation? Remaining trapped in a state of permanent confrontation without resolving the underlying issues holds little appeal. In practice, Europe has three options.

The first is a mutually agreed compromise. This would mean explicitly setting aside part of the economic security agenda in order to secure supplies and contain costs for European consumers. Three arguments support this approach: it would provide immediate relief on critical materials; it would preserve the viability of affected European manufacturers until diversification and industrial policies take effect; and no EU instrument has so far produced a measurable change in Chinese behavior. The price, however, would be high. The underlying problems facing threatened industrial sectors would remain unresolved, while Europe would further lock itself into a model centered on consumers rather than producers. Its credibility with strategic partners, notably the United States and Japan, would also suffer, as they bear the costs of confronting China’s drive for unchallenged industrial dominance.

The second is to buy time by gradually scaling up de-risking through industrial policy and trade diversification. Europe would continue to strengthen its economic security toolkit and address its existing vulnerabilities, while exercising great caution to avoid a large-scale trade or lawfare escalation. This is the default strategy. It has its coherence: it keeps conflicts manageable and bets that time will work in Europe’s favor as alternative supply chains develop. Its weakness is that it largely preserves the status quo. In the short term, the trade imbalance would continue to widen, while key industrial pillars (such as automotive, chemicals, mature semiconductors and wind energy equipment) would remain exposed. Brussels’ economic security agenda could also come to be seen as a largely theoretical exercise: sophisticated on paper, but lacking credible deterrence.

The third is to escalate to deescalate, while accepting the consequences of a partial breakdown in relations. This would involve using the instruments already available in a carefully sequenced manner, paying great attention to the timing and intensity of European actions. These could include the Anti-Coercion Instrument, trade defense measures deployed in packages rather than piecemeal, new FSR investigations while accepting the possibility of a clash with Chinese domestic law, and faster implementation of local-content requirements. The logic is that the only way to persuade Beijing to soften its position is to make the threat of restricting access to the European market credible.

This is the riskiest path, but probably the only one capable of changing China’s calculations. Indeed, it is precisely to avoid this scenario that Beijing relies so heavily on the threat of escalation. The immediate cost for Europe would be retaliation, particularly against sectors dependent on Chinese inputs. This option can therefore only be pursued if the Europeanization of industrial ecosystems accelerates, alongside greater international diversification in cooperation with trusted partners.

Experts of European affairs tend to see Europe as reluctant to choose among these three paths. It is quite possible that no clear decision will emerge by the end of October, even though the consultation process launched in late June is expected to produce its first results by then. From Beijing’s perspective, however, there is little uncertainty: European hesitation ultimately amounts to choosing the second path. So far, China’s strategy of neutralization is working.

Chinese Premier Li Qiang with President of the European Commission Ursula von der Leyen during the EU-China Business Leaders Symposium at the the Great Hall of the People of Beijing on July 24, 2025.
Andres MARTINEZ CASARES / POOL / AFP