Europe Fights Back Against China on Trade. These Auto Makers May Benefit.

Volkswagen has plans to cut jobs and close German factories. (Focke Strangmann/Getty Images)

Key Points

• Chinese officials agreed to limit hybrid vehicle exports to the European Union following a visit by EU Trade Commissioner Maros Sefkovic.
• The EU’s goods trade deficit with China has more than doubled since prepandemic days and could reach 400 billion euros this year.
• French President Emmanuel Macron and German Chancellor Friedrich Merz called for a credible instrument to exclude trade distorters from the market.

A funny thing happened when European Union Trade Commissioner Maroš Šefčovič went to Beijing a week ago. He came back with a concession.

Chinese counterparts agreed to limit hybrid vehicle exports, which have quadrupled over the past 18 months as an end-run around EU tariffs on all-electric cars. That won’t automatically rescue Europe’s floundering auto makers, much less close the yawning bilateral trade gap. Shares in Volkswagen , BMW , and Mercedes-Benz Group , all down by a third or more this year, barely reacted.

Nevertheless, “the fact that they got anything is a success after years of the Chinese being totally dismissive,” says Andrew Small, director of the Asia program at the European Council on Foreign Relations.

The EU’s goods trade deficit with China has more than doubled since prepandemic days and could hit a record 400 billion euros ($445 billion) this year. European leaders are increasingly fed up with China’s penchant for keeping unprofitable companies alive, then selling their excess production at minimal margins abroad.

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French President Emmanuel Macron and German Chancellor Friedrich Merz posted a joint letter to the European Commission on Oct. 5, calling for a “credible instrument up to and including exclusion from the single market” for unnamed trade distorters. The imprimatur of Germany, Europe’s top economy and leading China trade dove in recent years, marks a milestone, says Dimitar Lilkov, senior research officer at the Wilfried Martens Centre for European Studies.

Next steps remain unclear. Car imports are a symbolically resonant and easily defined target. In euro terms, though, Europe buys 10 times as much Chinese electrical equipment and seven times as much machinery as vehicles. “An approach to these more amorphous and bigger areas has to be invented,” Small observes.

The good news for auto makers is they are using the tariff reprieve to fight back, says industry analyst Matthias Schmidt. Chinese EV sales are “plateauing” at about 15% of that category as VW and French competitor Peugeot roll out hot-selling new models. EVs will exceed 25% of new EU car sales this year, with a boost from Iran war–fueled petrol prices, he estimates.

The bad news is that European car manufacturers won’t make much money. Chinese rivals at the gate plus the economics of EVs, where batteries account for much of the cost, are slashing margins from high-single digits to 3% to 4%, Schmidt reckons.

That leaves axing costs the key to survival. Investors were unimpressed this summer by VW CEO Oliver Blume’s taboo-smashing plan to cut up to 100,000 jobs and close four German factories, notes Michael Field, European equity strategist at Morningstar. “VW is getting huge pushback from their unions and local governments,” he says. “It’s hard to square that circle.”

VW shares are trading 80% below a theoretical fair value after crashing by three-quarters over the past five years, Morningstar estimates. Mercedes’ upside is 50%. Field sees “no single short-term catalyst” to reverse dismal market sentiment, however.

Brussels’ would-be tougher stance on China is constrained by at least two factors. One is the U.S., where Trump administration tariffs reduced EU exports by 16% in the first eight months of 2026. The second is Europe’s commitment to slashing its carbon output, which depends largely on Chinese equipment.

“The European Green Deal has caused a huge wealth transfer to China,” Lilkov comments.

Doing nothing is increasingly not an option, though.

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