EU Trade Commissioner Valdis Dombrovskis is for several days of talks in China. The routine meeting, scheduled for the regular exchange of high-level trade representatives following China's post-pandemic reopening, takes on a contentious character due to new points of friction between Brussels and Beijing. About two weeks ago, the European Commission surprisingly announced an investigation into imports of electric vehicles from China. This investigation could likely result in tariffs, as it focuses not on individual manufacturers' dumping practices but on national and regional subsidies benefiting both state-owned and private electric vehicle manufacturers, putting China's industrial policy in the spotlight.

Opinions in Europe about the Commission's actions are divided, with more leaning toward caution. This is not just because the electric vehicle industry benefits from subsidies and support for industry and environmental reasons almost everywhere, making the evidence complex. Critics accuse the EU Commission of playing with matches or throwing stones while living in a glass house, depending on the metaphor. After all, Beijing could retaliate not only with tariff countermeasures but also with malicious actions against European companies, especially the German automotive industry, operating in China.

Of course, the Chinese government and state media responded with strong rhetoric to the Commission's move. They spoke of blatant self-destructive protectionism, irresponsible trade-war provocation, and a hostile attitude toward China's legitimate economic and technological ascent. However, what China has not been doing at the moment is immediately vowing retaliation and issuing explicit warnings of countermeasures, as is common in exchanges with the US. The tone is more plaintive and accusatory than threatening. China calls on Brussels to come to its senses and not be incited by the US into descending into treacherous trade conflict territory.

Delicate Balancing Act

In this year, Beijing has as little interest in igniting a high-profile trade conflict with escalation potential against Europe as it does in making explicit threats to European companies. Instead, it finds itself in a delicate balancing act amid an unusually fragile economic situation, aiming to keep foreign direct investors and financial speculators engaged. This has nothing to do with a political change of course but rather pragmatic necessities.

China is facing cyclical and structural challenges domestically that have not magically disappeared after the briefly celebrated "reopening" in the markets. Instead they have intensified. External economic pressures, such as a severe drop in exports, a clear decline in foreign direct investments, and significant depreciation pressure on the yuan, have added to these challenges. The currency weakness, coupled with poor economic performance, has led to a broader withdrawal of foreign capital from China's financial markets in recent weeks, which has alarmed Beijing.

Considering the heavily clouded domestic investor sentiment, China knows from the trade dispute with the US how sensitive its markets are to such conflicts. This does not mean that Dombrovskis and the EU Commission will be handled with kid gloves. Beijing will continue to exert pressure but handle public threats or actual sanctions very cautiously. Otherwise, the bumpy "charm offensive" towards foreign investors could completely derail.