The economic relationship between Western countries – primarily the United States and the European Union – and China has undergone a profound transformation over the past decade. Once characterized by deep interdependence, with China serving as the “world’s factory” and a key market for Western exports, ties have shifted toward strategic competition, selective decoupling, and “de-risking.”
This evolution began accelerating during the U.S.-China trade war initiated in 2018 and has intensified through geopolitical tensions, supply chain disruptions from Russia’s invasion of Ukraine, and concerns over technology transfer and national security.
By late 2025, bilateral trade remains substantial but increasingly politicized. Western policies emphasize resilience through reshoring, friendshoring, and diversification, while China pursues self-reliance via “dual circulation” and expands influence through the Belt and Road Initiative (BRI). Despite rhetoric of decoupling, full separation is improbable due to mutual economic dependencies, resulting instead in a fragmented, selective engagement.
In the early 2000s, China’s WTO accession in 2001 fueled rapid integration. EU-China trade grew from modest levels in the 1980s to €705 billion by 2019, with China becoming the EU’s largest trading partner in 2020 amid global slowdowns. U.S.-China trade similarly boomed, peaking at over $660 billion in 2018.
The shift began with U.S. Section 301 tariffs in 2018 targeting intellectual property theft and forced technology transfer. By 2020, the EU labeled China a “partner, competitor and systemic rival.” It was exposed vulnerabilities in supply chains, prompting Western calls for resilience. China’s support for Russia post-2022 invasion further strained ties, solidifying views of Beijing as a geopolitical adversary. Trade volumes have proven resilient despite tensions.
The U.S.-China bilateral goods trade declined from pre-2018 peaks but stabilized. In 2023, total trade was around $575 billion; by mid-2025, monthly deficits hovered at $20-30 billion, with year-to-date surpluses for China near $200 billion in some periods. China’s overall trade surplus reached record highs, partly redirected from the U.S. to other markets.
The EU-China trade’s more robust growth persisted. Bilateral goods trade hit €732 billion in 2024, with a €305-391 billion EU deficit attributed to Chinese overcapacity in sectors like EVs and renewables. In early 2025, deficits remained wide (e.g., €26-31 billion monthly).
Tariffs escalated in 2025 under the second Trump administration, briefly reaching extremes (U.S. up to 145% on some goods, China retaliating at 125%) before a late-October truce in South Korea. This reduced U.S. fentanyl-related tariffs from 20% to 10% and suspended further hikes until 2026, while China lifted agricultural retaliatory duties. Effective U.S. rates on Chinese goods averaged over 30% in mid-2025, with extensions on exclusions for 178 products.
These measures redirected trade flows: U.S. imports shifted to Mexico/Vietnam (often via Chinese intermediates), while EU faced increased Chinese exports dumped due to U.S. barriers.
Foreign Direct Investment (FDI) reflects caution.
Western FDI into China slowed amid regulatory hurdles and geopolitical risks. Cumulative utilized FDI since 2021 hit $708 billion by mid-2025, but inflows fluctuated downward in real terms.
Chinese outbound FDI to the West declined sharply due to screening mechanisms (e.g., EU FDI screening, U.S. CFIUS). Chinese stock in EU was €65 billion in 2023; flows rose slightly to €9.4 billion in 2024 but focused on greenfield in autos and tech.
China redirected investments southward, bolstering self-reliance in semiconductors and critical minerals.
Western strategies emphasize reducing vulnerabilities:
U.S.: CHIPS Act and IRA subsidized domestic/onshoring production. Friendshoring prioritized allies (e.g., Taiwan for chips, Mexico for autos).
EU: “De-risking” under von der Leyen focused on critical dependencies (rare earths, EVs). Anti-coercion instruments and overcapacity probes targeted Chinese dumping.
Reshoring remained limited – China retained dominance in manufacturing scale. Diversification to ASEAN/India grew, but dependencies persisted (e.g., 50%+ of German intermediates from China). No full decoupling occurred; instead, selective redundancy emerged.
Beijing accelerated “Made in China 2025” goals, achieving tech self-sufficiency milestones despite export controls. Dual circulation prioritized domestic demand while exporting overcapacity.
The BRI expanded to record levels: $123 billion in H1 2025 engagements across 146-150 countries, focused on Africa/Middle East/Central Asia (green energy rhetoric, but fossils dominant). Withdrawals (Italy 2023, Panama 2025) were offset by deeper Global South ties.
China courted Europe amid U.S. tensions, exploiting transatlantic rifts, while building anti-sanction frameworks.
A fragile truce stabilized ties post-October 2025 summit: lowered tariffs, resumed agricultural purchases, and suspended escalations. Yet underlying rivalry persists – U.S. chip tariffs delayed to 2027, EU probes ongoing.
Economic interdependence endures: China anchors global chains; West relies on affordable inputs. Growth slowdowns (China ~4-5% projected) and Western industrial policies suggest continued friction, but mutual costs deter full rupture.
This transformation reflects a new equilibrium: managed competition over outright decoupling, with fragmented globalization favoring regional blocs and alliances.
By Sven Sandström