China economic policy faces trade tests with EU, U.S. soon

China economic policy is staying industry-first as Beijing prepares for trade talks with Europe and President Trump this year.

Top Communist Party officials signaled continuity on Thursday, favoring selective support for industry instead of the household-led stimulus many foreign governments and economists have urged. The message matters because Beijing is entering negotiations while defending a model that has fed disputes over exports, subsidies and weak domestic demand.

President Xi Jinping and President Trump are expected to hold more in-person meetings this year, according to the source material. Brussels has also set an October deadline for China to resolve trade frictions, with European concerns focused on a Chinese trade surplus described as exceeding $1 trillion.

Beijing hardens its trade case

China’s commerce ministry recently rejected Western claims about “so-called industrial overcapacity,” describing them as flawed and politically motivated. The ministry’s paper argued that foreign restrictions on Chinese companies and products are discriminatory rather than legitimate responses to market distortions.

The party’s theoretical journal Qiushi also defended China’s low consumption levels in July as a historically grounded feature of a catch-up development strategy. At the same time, the article acknowledged that a shift in the model was “necessary,” a sign Beijing recognizes the imbalance but wants to control the pace of adjustment.

Xu Tianchen, a senior economist at the Economist Intelligence Unit, said the messaging serves two purposes. “The first is about hoping others understand where it comes from. A better mutual understanding helps in negotiations,” Xu said. “The second is about drawing a red line.”

Exports meet Western resistance

Western governments argue that China’s production-heavy model channels cheap goods into global markets and pressures domestic manufacturers elsewhere. Beijing counters that its products are competitive on quality as well as price, and that its investment in science and technology can support global growth.

Premier Li Qiang has tried to recast warnings about a “China shock 2.0” as a “China opportunity 2.0” for the world economy. Eswar Prasad, a Cornell University professor of trade policy and a former China director at the International Monetary Fund, said that argument is unlikely to persuade countries absorbing the export surge.

“China’s heavy dependence on exports to power its own growth in light of weak domestic demand is going to make it difficult to argue that Chinese exports are a gift to consumers worldwide,” Prasad said. His point captures the core tension: China sees competitiveness, while its trading partners see a demand gap being exported through factories.

The United States tried to raise pressure through tariffs of more than 100% last year, according to the source material. Beijing then used its leverage in rare earth production, a critical input for many global industries, to regain strategic room in the dispute.

Europe weighs its industrial defense

The European Union is pursuing industrial and procurement policies intended to protect its market. Its trade deficit with China averaged $1 billion a day last year, according to the source material, while German Chancellor Friedrich Merz has criticized Beijing for keeping its currency undervalued.

Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, said Beijing appears to be applying lessons from the U.S. tariff fight to Europe. “The U.S. tariff episode appears to have supplied a template of managed engagement that Beijing is also applying to Europe —essentially buying time,” she said.

China has slowed investment this year by tightening scrutiny of local government spending, a channel economists associate with excess capacity in manufacturing and infrastructure. Officials also acknowledge a supply-demand “contradiction” and have pledged to curb deflationary price wars among producers competing for market share at the cost of profits.

International research points to deeper risks. The Organisation for Economic Co-operation and Development said in a recent report that subsidies explain market-share gains for nearly 60% of Chinese firms, while a Bank of Italy paper estimated that weak consumption and overcapacity explain about 75% of China’s export growth.

If Beijing’s current stance holds, the global effect would be continued pressure on traded-goods prices and more friction with economies trying to rebuild manufacturing. For China, the benefit would be policy stability for favored industries, but the cost could be a larger trade-defense response from Europe and the United States.

If Beijing instead shifts more income toward households and slows investment further, global export pressure could ease through stronger Chinese import demand and less factory surplus. The risk for China is slower industrial momentum; the risk for the wider sector is a more uncertain adjustment for companies built around scale, subsidies and overseas sales.