CASE STUDY
February 2026
Executive Summary
The China–European Union (EU) trade relationship has entered what analysts describe as a ‘do no harm’ phase — a period of cautious diplomatic engagement that nonetheless conceals deepening structural tensions. Europe’s trade deficit with China reached an estimated €359–400 billion in 2025, more than double its pre-pandemic level. The EU has simultaneously overtaken the United States as China’s top source of trade friction. High-profile diplomatic visits — including German Chancellor Friedrich Merz’s February 2026 trip to Beijing — reflect both sides’ interest in managing the relationship rather than resolving its underlying contradictions.
For Singapore, a city-state whose trade exceeds 300% of GDP, these dynamics carry significant implications. Positioned at the nexus of both relationships, Singapore faces risks from supply chain disruption, deflationary pressure from Chinese overcapacity, and sectoral uncertainty in electronics and financial services. Yet the same fragmentation creates opportunities: Singapore benefits from supply chain diversification, expanded EU–Singapore trade instruments, and its established role as a neutral hub for investment and intermediation in an increasingly polarised global order.
- Background: The Structural Architecture of EU–China Trade
The EU–China economic relationship is among the most consequential bilateral relationships in global trade. Together, the two economies account for nearly 30% of global trade flows. Their interdependence spans advanced manufacturing, technology, green energy, agriculture, and consumer goods. Yet the relationship has grown increasingly asymmetric and contested.
1.1 The Tripartite Characterisation
The EU’s defining policy framework — established in its 2019 Strategic Outlook and reaffirmed at the European Council in June 2023 — identifies China simultaneously as a cooperation partner, an economic competitor, and a systemic rival. This tripartite framing reflects genuine ambivalence within the bloc: member states vary substantially in their dependence on Chinese markets and their exposure to Chinese competition, making a unified stance difficult to sustain.
Beijing has consistently rejected this framing. It prefers a ‘pragmatic’ and commercially-oriented mode of engagement, objecting to what it characterises as the ideological contamination of an economic relationship. The Merz visit in February 2026, like the visits of French President Macron and other European leaders before it, was seized upon by Beijing as evidence of a European willingness to recalibrate toward this pragmatic approach. European analysts largely disagree with that reading.
Key Framing
Beijing sees European high-level visits as signals of recalibration. Brussels and analytical institutions characterise the same visits as ‘managed divergence’ — engagement that continues while de-risking accelerates.
1.2 Trade Volumes and the Deficit Problem
Bilateral trade between China and the EU reached approximately $749 billion (€642 billion) in the first eleven months of 2025, a year-on-year increase of around 5.4%. China remained the EU’s second-largest trading partner after ASEAN. However, aggregate volumes mask a critical structural imbalance: export growth from China drove the expansion, while European exports to China rose only marginally.
Indicator Value / Period Source
EU–China bilateral trade (Jan–Nov 2025) €642 billion China GAC, Jan 2026
Year-on-year trade growth (2025) +5.4% Brussels Signal, Jan 2026
EU trade deficit with China (2025 est.) €359–400 billion ST / Bruegel, 2025–26
Pre-pandemic EU deficit with China ~€175 billion Bruegel estimate
China’s global trade surplus (2025) >US$1 trillion China Briefing, Feb 2026
EU FDI into China, Q1 2025 €3.06 billion EU Trade Policy
The Bruegel think tank characterises this divergence as a ‘China shock’ driven by two compounding factors: pandemic-era supply chain disruptions that raised European producer prices, and China’s prolonged deflationary phase stemming from manufacturing overinvestment. The combination has given Chinese exporters a decisive price advantage across machinery, chemicals, electric vehicles, and green technologies.
- Key Fault Lines in the EU–China Trade Relationship
2.1 Industrial Policy and Market Distortions
The EU’s primary structural complaint is that China’s industrial policy — subsidies, state-directed credit, and preferential treatment of domestic firms — creates artificial comparative advantage and displaces European producers both in third markets and in the EU itself. China’s draft Five Year Plan signals no imminent shift away from investment-led growth or manufacturing overcapacity. The EU has responded with a suite of trade defence measures, including anti-subsidy and anti-dumping probes, that have become the dominant source of bilateral friction.
According to a monthly trade friction index published by the China Council for the Promotion of International Trade (CCPIT) in January 2026, the EU ranked as China’s top source of trade tensions among 20 major economies in November 2025 — surpassing the United States. Readings were elevated in semiconductor materials, rare earth magnets, and liquid-crystal display products.
2.2 Critical Materials and Export Controls
China’s imposition of export controls on rare earth elements — in April and October 2025, with a second package suspended until November 2026 — left a lasting impact on European policymakers. The controls highlighted Europe’s structural dependence on Chinese inputs for clean energy technologies, advanced semiconductors, and defence-related manufacturing. For Brussels, the controls were not merely a trade irritant but a demonstration of coercive capacity — confirming the systemic rival dimension of the relationship.
European policymakers have responded by accelerating work on the EU’s Industrial Accelerator Act, revising the Cybersecurity Act to allow EU-wide sectoral restrictions, and developing outbound investment screening mechanisms. The European Commission released a recommendation in January 2026 requiring member states to evaluate outbound investments in AI, quantum, and semiconductor sectors since 2021, with an ‘adequate control system’ required by July 2026.
2.3 The Russia Dimension
European suspicion that China has provided, or tolerated the provision of, dual-use goods and technologies to Russia has become a persistent irritant in bilateral relations. While Beijing disputes allegations of direct support, Brussels has linked progress on trade normalisation to China’s stance on the Russia–Ukraine conflict. This geopolitical overlay — absent from the pre-2022 trade relationship — has materially narrowed the space for transactional diplomacy.
2.4 Internal European Divisions
Beijing’s strategic reading of Europe, as assessed by analysts at the Mercator Institute for China Studies (MERICS), is that the EU is a politically divided and geopolitically challenged actor that can be leveraged. Beijing believes that pressure from Washington will push European capitals toward China to counterbalance transatlantic tensions. There is evidence for this interpretation: member states vary considerably in their China exposure, with Germany — Europe’s largest economy and China’s top EU trade partner — consistently more cautious about confrontational measures than France or the Baltic states. Analysts warn that China pursues a ‘divide and rule’ approach, exploiting these divisions by offering targeted economic benefits to receptive capitals.
Strategic Assessment (MERICS, Jan 2026)
Beijing bets that a ‘low-cost reset’ with Europe is achievable — offering rhetorical support and limited concessions while waiting for transatlantic tensions and domestic European pressures to erode coherent de-risking. The evidence suggests this calculus may be partially correct for individual member states, but consistently incorrect for the Commission’s institutional posture.
- Diplomatic Dynamics: High-Level Visits and Their Limits
3.1 The Merz Visit and Its Context
German Chancellor Friedrich Merz’s visit to Beijing on 25 February 2026 was framed by Chinese state media as the latest sign of Europe’s desire to ‘pragmatically recalibrate’ its China policy. The diplomatic optic was carefully managed: a succession of European leaders visiting Beijing in early 2026 — against a backdrop of a second Trump administration imposing new tariff pressures on European exports — appeared to offer Beijing an opportunity to position itself as a stabilising partner.
However, beneath the diplomatic surface, the structural agenda remained unchanged. Merz, like his predecessors, arrived as the EU continued to press ahead with anti-subsidy investigations, outbound investment screening, and the Industrial Accelerator Act. European analysts from Politico, Bruegel, and RAND independently assessed that EU–China trade relations have effectively reached an impasse: neither side has the political will for a genuine reset, and neither can afford the reputational costs of visible rupture.
3.2 Europe’s De-Risking Trajectory
Brussels accelerated its diversification strategy in 2025, concluding trade deals with Mexico, Indonesia, and Singapore, and reviving talks with India. A landmark EU–Singapore Digital Trade Agreement was signed in May 2025 — the EU’s first standalone digital trade agreement and first with an ASEAN country — covering data flows, e-signatures, e-invoicing, and cybersecurity cooperation. The EU also doubled tariffs on steel from third countries and launched a broader economic security doctrine.
French President Emmanuel Macron warned publicly that Europe may have no choice but to adopt tougher trade measures if cooperative rebalancing with China fails. Alicia García-Herrero of Natixis and Bruegel assessed that expectations of China increasing consumption of European products were unrealistic, and that the EU trade deficit with China was unlikely to narrow in the near term. - Singapore’s Position: Strategic Exposure and Opportunity
4.1 Structural Vulnerability
Singapore is among the world’s most trade-exposed economies. Its trade-to-GDP ratio exceeds 300%, and it serves as the second-busiest container port globally. Its economy is deeply integrated into global supply chains that link China to Europe, the United States, and the broader ASEAN region. These characteristics make Singapore acutely sensitive to disruptions in any of the major bilateral trading relationships that form the arteries of global commerce.
Singapore’s Ministry of Trade and Industry (MTI) slashed the country’s 2025 GDP growth forecast to 0–2% in April 2025, explicitly citing the trade war between the US and China and the impact of reciprocal tariffs on global trade volumes. The Monetary Authority of Singapore (MAS) eased monetary policy twice in 2025 in response. Though Singapore ultimately exceeded those revised forecasts — finishing 2025 with stronger-than-expected growth and receiving an upgraded 2026 outlook — policymakers and analysts acknowledge that the structural risks have not receded.
4.2 Three Levels of Impact
Singapore’s exposure to China–Europe trade tensions operates at three analytically distinct levels. At the first level, Singapore is subject to direct tariff impacts from any retaliatory or escalatory measures that affect global trade flows, including the 10% baseline US tariff imposed as part of the ‘reciprocal’ tariff scheme — despite Singapore running a trade deficit with the United States. At the second level, supply chain disruptions between China and Europe indirectly affect Singapore’s role as a manufacturing and logistics hub for goods that transit between the two economies. At the third and most consequential level, a broad-based slowdown in global trade confidence could reduce investment flows, dampen manufacturing orders, and compress Singapore’s financial services sector.
Exposure Channel Mechanism Current Severity
Port throughput Reduced China–Europe cargo flows; trade diversion re-routing Moderate — offset by AI goods surge
Electronics & semiconductors Export controls on critical materials; supply chain reconfiguration High — elevated uncertainty
Financial services Investor risk aversion; reduced cross-border M&A and FDI flows Moderate — SGD positioned as safe haven
Deflationary pressure Chinese overcapacity redirecting goods to ASEAN at compressed prices Rising — impacts manufacturing margins
Rare earths & clean tech China export controls on materials needed for Singapore’s green tech sector Emerging risk
4.3 Singapore as Strategic Hub: Opportunities in Fragmentation
Against these risks, Singapore’s attributes position it to capitalise on the very fragmentation driving global uncertainty. The World Economic Forum and multiple financial analysts have identified Singapore as a ‘gateway to Asia’ — a neutral, rule-of-law jurisdiction with strong institutions, an internationally trusted currency, and an established role in intermediating between competing economic blocs.
Singapore has actively pursued trade diversification in parallel with its partners’ own efforts. It is already party to FTAs with both the EU (the EU–Singapore FTA, in force since 2020) and China (through ASEAN-China arrangements and RCEP). The May 2025 EU–Singapore Digital Trade Agreement strengthens its position as a digital trade gateway. In October 2025, Singapore also benefited from the signing of CAFTA 3.0 — the upgraded ASEAN–China Free Trade Agreement — which expanded coverage to digital economy, green economy, and supply chain connectivity provisions. Singapore recorded $8.2 billion in new agreements with China in 2024, alongside expanded EU trade ties.
The ‘China plus one’ strategy pursued by multinational corporations — diversifying production away from sole reliance on Chinese manufacturing — creates structural demand for alternative regional manufacturing and logistics hubs. Singapore, together with Vietnam, Malaysia, and Indonesia, stands to benefit. Singapore additionally launched the Future of Investment and Trade (FIT) Partnership in September 2025, involving 14 small and medium-sized states across six continents, aimed at buttressing WTO-consistent multilateral trade frameworks.
4.4 Foreign Policy: Structured Neutrality
Singapore’s foreign policy response has been characterised by what analysts at ISEAS describe as ‘structured neutrality’: maintaining strong bilateral relationships with both the US and China without alignment with either, while actively championing multilateral rules-based frameworks. Singapore’s Ministry of Foreign Affairs acknowledged in late 2025 that Singapore’s foreign policy must ‘adapt swiftly’ to realities including ‘sharper major power rivalry.’
Singapore will not choose between China and Europe, or between China and the United States. But its traditional approach — that open, rules-based trade is an unqualified good — is under strain in a world where trade is increasingly weaponised. Prime Minister Lawrence Wong’s government has emphasised the importance of maintaining relevance and agency through coalitions of like-minded smaller economies, rather than dependence on any single major power.
Oxford Analytica Assessment (Oct 2025)
Singapore seemingly believes the US is no longer willing to underwrite the global order and has weaponised trade. It will not choose between the US and China, but will seek to consolidate relations with both while working with like-minded countries to buttress the international rules-based order.
- Forward Outlook and Policy Implications
5.1 EU–China Trajectory
The consensus view among analysts at MERICS, Bruegel, Rand, and Natixis entering 2026 is that EU–China trade tensions will intensify rather than abate. China’s export-led growth model shows no structural shift; EU trade defence measures are tightening; and the geopolitical overlay from Russia and from technology competition is unlikely to soften. The EU’s trade deficit with China is projected by some analysts to approach €400 billion annually, and the deflationary pressure from Chinese overcapacity will continue to compress European industrial margins.
The diplomatic visits of early 2026 represent managed engagement, not resolution. They reflect the shared interest of both parties in avoiding open confrontation while structural divergence proceeds. Alicja Bachulska of CHOICE warns that 2026 will see ‘divergent push-pull factors driving Brussels farther from Beijing, while drawing some European capitals closer in a classic divide-and-rule play.’
5.2 Implications for Singapore
For Singapore, three forward-looking observations are salient. First, the risks are asymmetric by sector: advanced manufacturing, port logistics, and financial intermediation face different exposure profiles that require differentiated risk management strategies at the firm and policy level. Second, Singapore’s diversification efforts — through its expanding FTA network, the FIT Partnership, and the EU Digital Trade Agreement — provide meaningful buffers, but cannot fully insulate a city-state this deeply integrated into global supply chains from a broad-based trade slowdown. Third, Singapore’s institutional comparative advantage — its rule of law, political stability, neutral diplomatic posture, and digital infrastructure — is most valuable precisely in periods of geopolitical fragmentation. The question is whether Singapore can convert that comparative advantage into durable economic positioning before the global rewiring of supply chains reaches a new equilibrium.
5.3 Policy Recommendations
Deepen EU engagement beyond trade into digital and green economy cooperation, leveraging the 2025 Digital Trade Agreement as a foundation for broader regulatory alignment.
Actively position Singapore as a preferred arbitration and dispute resolution centre for EU–China commercial disputes, given its neutral status and strong legal infrastructure.
Accelerate investment in rare earth alternative supply chains and clean technology manufacturing to reduce downstream exposure to China’s export control regime.
Expand the FIT Partnership to include coordination on WTO reform and supply chain transparency standards, building a coalition of rule-based trade advocates among mid-sized economies.
Ensure macroeconomic buffers remain robust — the MAS’s SGD appreciation policy and fiscal reserves provide meaningful shock absorption capacity — and maintain flexibility to ease monetary conditions quickly in the event of a sharp global demand contraction. - Conclusion
The China–Europe trade relationship is best understood not as moving toward resolution but as institutionalising its tensions. Both sides have too much at stake economically to rupture relations, but too many structural, geopolitical, and normative differences to achieve genuine alignment. The result is a managed divergence: diplomatic engagement as a pressure valve, while de-risking, industrial policy competition, and regulatory friction proceed beneath the surface.
Singapore operates in the interstices of this relationship. It is exposed to its volatility, dependent on its overall health, and yet — precisely because of its neutrality and institutional quality — positioned to benefit from the fragmentation it generates. The strategic challenge for Singapore is not to choose between China and Europe, but to ensure that as global trade rewires, Singapore remains a node that both sides depend upon. That requires continued investment in institutional credibility, active multilateral engagement, and the kind of strategic patience that has historically distinguished Singapore’s foreign economic policy.
Selected Sources
Brussels Signal. (January 2026). China-EU Trade Up 5% in 2025, Despite Disputes.
Bruegel. (2025). Europe Needs a Broader Trade-Defence Toolkit Against a Mounting China Shock.
China Briefing. (February 2026). EU-China Relations in 2026: What to Watch.
China Observers / CHOICE. (January 2026). Why 2026 Will Test Europe’s China Strategy.
European Commission Trade Policy. EU Trade Relations with China. policy.trade.ec.europa.eu
East Asia Forum. (January 2026). Singapore Must Balance Growth and Social Mobility.
ICIS. (April 2025). Singapore Slashes 2025 GDP Growth on Escalating US-China Trade War.
IMF. (2025). Asia Can Boost Economic Resilience Amid Surging Trade Tensions.
MERICS. (January 2026). China Bets on a Low-Cost Reset with Europe.
National Herald India. (January 2026). EU-China Trade Tensions Set to Sharpen Further in 2026.
Oxford Analytica. (October 2025). Singapore Will Emphasise Balance in Its Foreign Policy.
SCMP. (January 2026). How Europe, Not the US, Became China’s No.1 Trade Headache.
The Diplomat. (October 2025). ASEAN, China Upgrade Free Trade Agreement.
The Straits Times. (February 2026). No Easy Path Ahead for China and Europe.
World Economic Forum. (2025). ASEAN Is Turning Global Tensions into Regional Opportunities.
World Geostrategic Insights. (November 2025). Singapore’s Strategic Positioning amid US-China Rivalry.