China Sends EU a Direct Warning Over the Overcapacity Tool

Beijing signals anti-discrimination and supply chain security investigations as its countermeasures, with EU cosmetics, wine, meat, and luxury exports as the likely targets

Today, Yuyuan Tantian (玉渊谭天), a social media account affiliated with China Central Television (CCTV), published an article discussing the EU’s proposed “overcapacity instrument” and laying out how China might respond if Brussels presses ahead with it. I believe it's worth noticing.

What stands out most is that the article relies on “exclusive disclosures from sources” to suggest that China could launch anti-discrimination and supply chain security investigations into the EU’s practices. The use of unnamed “sources” typically signals an unofficial backchannel, suggesting this is not the journalist’s personal speculation but rather a message to Brussels that, if the “overcapacity instrument” actually moves forward, these are the tools China is prepared to use in response.

Equally telling is that, in the following paragraph, the article goes out of its way to single out several EU exports to China. French cosmetics come first, with the article emphasizing that France has been the top source of China’s cosmetics imports for three consecutive years, accounting for 29.6% of total cosmetics imports in 2025. Meat, wine, and luxury goods are mentioned next. In my view, these product categories all command a significant share of the Chinese market, and their sources are concentrated in core EU member states such as France, Italy, Germany, and Spain. They are also “national flagship industries” in the countries concerned, tied to substantial employment and local political interests.

If the EU’s logic is that “production capacity exceeding domestic demand” qualifies as overcapacity, then these flagship European exports to China fit the same definition just as well, and could naturally become targets for countermeasures. Taken together with China’s earlier anti-dumping investigation into French cognac, the signal the article is sending, in my reading, is that the cost of pushing this legislation forward will fall first on the EU member states’ own pillar industries, and it is time to hit the brakes within the European Commission.

Below is the full article:

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Exclusive Disclosure: If the EU Insists on Pushing the “Overcapacity Tool,” China Will Retaliate

On the 29th, the European Commission is set to convene a meeting to explore adjustments to its economic and trade policy toward China.

Just days before the meeting began, several EU member states submitted a proposal seeking to push forward the “Resilience Tool”—the so-called “Overcapacity Tool.”

While the EU has not stated it explicitly, this new tool is strongly targeted at China by design.

As early as 2023, the European Commission began hyping up the “China overcapacity theory.” Since the beginning of this year, whether it is the “Overcapacity Tool,” the draft amendment to the Cybersecurity Act, or the recently released Industrial Accelerator Act, all signify that protectionism is being directly entrenched by the EU into its economic and trade policy framework toward China.

The EU’s economic and trade policy toward China is moving further and further down a radical path.

So, where does this radical turn come from? And what impact will it have on the EU itself?

Some EU officials believe that traditional anti-dumping and anti-subsidy investigations take too long, and that it is more efficient to directly preset quotas—imposing tariffs as soon as the quota is exceeded, which would be faster and more efficient.

This means that once a country’s products exceed the limit, the EU can systematically attack all related industries of that specific country under the pretext of “overcapacity.” Any industry with high market share and competitiveness in the EU market could become a target.

The conceptual logic applied here is full of holes. To understand why the EU is accelerating its turn toward protectionism at this moment, one must extend the timeline.

It must be recognized that this is not a momentary impulse on the EU’s part. Over the past two decades, Europe’s industrial competitiveness has continued to decline, and now this “chronic disease” has deteriorated to the point where extreme measures must be taken.

From a macro data perspective, European industrial production had just strongly recovered from the pandemic in 2021, with industrial production growth reaching 8.5%; in 2022, the year-on-year growth rate plummeted to 0.3%, almost stagnant; in 2023, it fell 1.4% year-on-year; in 2024, it fell 2% year-on-year.

Why did European industrial production growth suddenly hit the brakes in 2022? The answer lies in the energy bill.

Europe’s benchmark natural gas price soared from about €20/MWh in early 2021 to nearly €340/MWh in the summer of 2022.

Over the following three years, although the EU worked hard to diversify its energy imports, energy costs failed to fall back to low levels. In 2023, EU industrial electricity prices were about 158% higher than those in the United States, and natural gas prices were 345% higher; this gap had still not significantly narrowed by 2026. In other words, this is not a one-time price fluctuation, but a structural wound.

When energy costs remained high, the defenses of European industry began to collapse.

The chemical industry is the EU’s fourth-largest manufacturing sector, long known as “the industry of industries,” with its products penetrating 95% of manufacturing categories. From automobiles to medicine, from defense to daily necessities—once the chemical industry falls, the entire industrial chain will be affected.

And the data for the chemical industry presents precisely a collapse-style decline.

Data from the European Chemical Industry Council shows: chemical production capacity announced for shutdown in 2022 was 2.9 million tons; in 2023 it surged to 8.7 million tons; in 2024 it remained at a high level of 8 million tons; in 2025 it further skyrocketed to 17.2 million tons.

Over four years, cumulative lost capacity totaled 37 million tons, directly leading to 20,000 job losses, with nearly 90,000 indirect jobs at risk—the industry is on the “brink of collapse.”

At the same time, the decline of these industries is spreading to other sectors: the construction industry continues to decline, and the aluminum industry has been almost uprooted—the EU’s primary aluminum production is only 950,000 tons, while annual consumption is as high as 13.5 million tons, with a structural gap of 93%.

Together, these industries paint a bleak picture: a complete energy-intensive industrial chain is quietly disintegrating.

It can be seen that the root cause of the EU’s industrial predicament is structural, and its manifestation at the trade level is the widening trade deficit.

As the China Finance 40 Forum’s research concludes: the widening deficit is not the spillover pressure of so-called Chinese “overcapacity,” but rather “the combined result of the upgrading of Chinese manufacturing and Europe’s energy constraints.”

In other words, it is not that Chinese industry has “attacked” Europe, but rather that Europe itself has fallen into difficulty.

However, we have seen that since 2023, the European Commission has been trying at the level of economic and trade policymaking to deflect contradictions in order to avoid the truly difficult structural problems.

According to a report by the European Council on Foreign Relations, the EU is aware that whether rebuilding supply chains or cultivating domestic industries, it will take years to see results, while real-world shocks are often immediate.

Therefore, the report argues that only by adopting tough confrontational measures can the EU gain the initiative in economic and trade competition, and uses this as an excuse to accelerate the turn toward trade protectionism.

Last December, the document “Strengthening EU Economic Security” explicitly proposed shifting “from a reactive posture to a more proactive and systematic use of various policy tools.” Even in some cases, “the EU, its member states, and industry will increasingly need to be prepared to bear corresponding economic costs in order to reduce external dependence and enhance overall security levels.”

This was followed by the successive appearance of documents such as this year’s Industrial Accelerator Act.

Taking the Industrial Accelerator Act as an example, this act claims to be industrial support, but in reality wraps layer upon layer of discriminatory provisions, setting up multiple barriers against foreign enterprises in the four major industries of batteries, electric vehicles, photovoltaics, and critical raw materials.

Its main proponent is Stéphane Séjourné, Executive Vice-President of the European Commission in charge of industrial strategy, who is also a representative figure of EU protectionism. And people like him are not few among current EU economic and trade policymakers. Behind these policymakers, an important force is surging.

Related reports show that within one year of the launch of the Clean Industry Deal, more than 750 lobbying sessions were held around it—an average of more than three per working day.

Among them, the most active are not new energy enterprises, but traditional heavy industry giants in steel, energy, automobiles, cement, and so on. Séjourné and his team are among the most frequently lobbied targets, having held 131 meetings with 192 lobbying groups.

These industries, without exception, are the sectors that find it most difficult to pivot amid the EU’s structural economic predicament.

However, for an EU economy in urgent need of structural transformation, engaging in protectionism according to the demands of these traditional industries runs completely counter to the direction of energy structure and industrial structure transformation—it is essentially drinking poison to quench thirst.

This is a vicious cycle—the more difficulties internally, the more protection; the more protection, the less impetus for transformation, and the deeper the entanglement in the predicament.

Based on the above analysis, several conclusions can be drawn.

First, the EU’s turn toward trade protectionism is essentially the result of the long-term decline of European industry colluding with the lobbying of vested interest groups. The structural disadvantages in energy costs, the continuous shrinking of manufacturing... these chronic ailments accumulated over two decades have erupted at an accelerated pace after 2022.

Faced with the predicament, the EU has not chosen to “scrape the poison from the bone” but instead uses layer upon layer of barriers to avoid reform. From the draft amendment to the Cybersecurity Act to the Industrial Accelerator Act, from the “Overcapacity Tool” to the Foreign Subsidies Regulation—standing behind all of these are both politicians who accumulate political capital through “tough narratives” and traditional industrial giants worried about being eliminated by the green transition. Preserving market share and defending vested interests is the real script of this drama.

Second, China’s countermeasures are not verbal warnings.

According to exclusive disclosures from sources, China can launch anti-discrimination investigations and supply chain security investigations into the relevant EU practices. The Ministry of Commerce has made it clear that once China’s national interests and the rights and interests of its enterprises are harmed, China will resolutely take countermeasures.

If the EU insists on pushing forward the so-called “Overcapacity Tool,” China will immediately take action and adopt comprehensive countermeasures. China is neither unfamiliar with nor afraid of trade frictions, and will see it through to the end.

Third, the logic of the EU’s accusations does not hold up in itself.

For three consecutive years, France has been China’s largest source of cosmetics imports, accounting for 29.6% of China’s total cosmetics imports in 2025. EU exports to China—meat, alcohol, luxury goods, cosmetics, and other products—all occupy significant shares of the Chinese market.

If the EU accuses Chinese products of “overcapacity” using the absurd logic of “production capacity exceeding domestic demand,” then whether these European products sold in China face the same situation is also worth considering.