BERLIN
German coalition parties—the Social Democrats, Greens, and Free Democrats—are advocating for a more assertive European Union policy toward China. An internal document obtained by the parties outlines proposals for enhanced investment screening and reduced reliance on Chinese supply chains, signaling a potential shift in the EU's trade and economic strategy.
The document specifically calls for mandatory EU-wide screening of foreign direct investment, particularly in critical infrastructure, advanced technology, and raw materials sectors. Such measures would increase regulatory hurdles and transaction costs for European firms with substantial China exposure. This could widen credit spreads for companies heavily dependent on Chinese operations or sourcing.
The paper also suggests active diversification of supply chains away from China, a strategy that could elevate input costs for European manufacturers and complicate near-term inflation dynamics that fixed-income markets are pricing into the forward curve.
Increased EU-China trade friction would likely trigger a flight to quality into core sovereigns like German Bunds and U.S. Treasuries. Disruptions to established supply networks could steepen yield curves as investors price in higher long-term inflation from reshoring costs. The euro could weaken against the dollar if European growth forecasts weaken from prolonged trade disputes.
The proposals align with the European Commission's stated objective of "de-risking" economic ties with Beijing without complete decoupling. However, achieving unanimity among all 27 EU member states for stringent measures faces structural obstacles. Member states exhibit varying economic dependencies on China, creating divergent national interests.
The German government plans to unveil an updated China strategy in coming months to guide its EU-level negotiating position. EU trade ministers are scheduled to convene in November to discuss economic security and supply chain resilience. The outcome will determine the pace and scope of any new EU-China policy framework.
