RED THREAD: Europe absorbs China’s factory excess
I’m Christina Zhao in Oceania, joined by Anupriya Datta in Europe.
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The thread of the week
[Photo by Jackal Pan via Getty Images]
Europe is becoming the shock absorber for China’s economic slowdown.
Chinese exports surged 21.8% year-on-year in the first two months of 2026, up sharply from 6.6% growth recorded in December. Over the same period, shipments to the US fell 11% while exports to the EU jumped 27.8%, reinforcing fears in Brussels that excess Chinese capacity is being redirected into the bloc as access to the American market tightens.
EU trade spokesperson Olof Gill told Red Thread the Commission has stepped up monitoring of potential trade diversion, setting up a “dedicated import surveillance task force” to track whether goods originally destined for other markets are being rerouted into the bloc.
That pressure lands on top of an already lopsided trading relationship. Last year, the EU’s trade deficit with China reached €359.3 billion – a gap Brussels says has widened in recent years amid concerns over structural distortions such as industrial overcapacity and state support.
Part of the explanation lies in Beijing’s economic model. Weak household consumption and a prolonged property slump have left growth increasingly reliant on manufacturing and exports.
When China produces more than its own economy can absorb, the surplus tends to be exported, particularly in sectors such as solar panels and batteries, where global capacity has expanded fastest.
Alicia García-Herrero, a senior fellow at Bruegel, told Red Thread that the surge in shipments to Europe may also reflect companies rushing exports ahead of potential new industrial restrictions from Brussels. She believes the EU’s trade deficit could continue “ballooning” throughout the year, to more than €500 billion.
The European Commission last week proposed the Industrial Accelerator Act, which would introduce “Made in Europe” requirements for subsidies and public procurement in key clean technology sectors.
Beijing reacted sharply. Speaking during China’s annual parliamentary meetings, Foreign Minister Wang Yi urged Europe to leave the “attic of protectionism” and enter the “gymnasium of the Chinese market.” Beijing’s commerce ministry echoed the criticism, accusing Brussels of “discrimination” and urging it to “observe World Trade Organization rules.”
China has made similar arguments against US tariffs, filing complaints at the WTO and warning that barriers to trade undermine the global economic order. In recent years Beijing has stepped up its use of the WTO dispute system, challenging tariffs and industrial policies targeting its exports.
The irony is hard to miss. As Western economies turn to defensive trade measures, the Chinese Communist Party is emerging as one of the world’s most forceful advocates of free trade.
From Asia-Pacific
Invented headline sells stability
The People’s Daily, the Chinese Communist Party’s propaganda outlet, on Wednesday proudly cited what it said was a foreign media headline declaring: “While the world burns, China defines the future.” We could not verify the existence of such a headline – and believe me, we looked.
That flourish sets the tone for a commentary presenting Beijing’s annual Two Sessions, the country’s most important political meeting, as proof that China is uniquely capable of protecting order in an age of war, economic fragmentation and political volatility.
The piece portrays China as quietly shaping the technologies and industries of the next era while Western capitals lurch from crisis to crisis. Long-term state planning is cast as an anchor, contrasted with liberal systems portrayed as inherently turbulent. China’s governance model is framed as a source of reassurance for investors and citizens alike, reinforcing Beijing’s narrative that centralised policymaking offers stability in an unsettled world.
China races to deploy AI
China is stepping up efforts to deploy artificial intelligence across its economy, with policymakers placing the technology at the centre of the country’s latest five-year blueprint.
Officials also presented AI as a response to demographic pressures. As labour shortages emerge with population aging, the Communist Party is promoting automation and robotics to sustain productivity in sectors facing worker constraints.
From Europe
A unleashes record oil reserves
The Paris-based International Energy Agency has agreed to release a record 400 million barrels of emergency oil stocks to cap crude prices after supply disruptions linked to the US-Israeli war with Iran rattled global markets.
The unanimous decision by its 32 members marks the largest intervention in the agency’s history, eclipsing the coordinated response to Russia’s 2022 invasion of Ukraine, though analysts warn the pace of releases will determine whether the move can offset losses from a de facto closure of the Strait of Hormuz.
Japan signalled it would act ahead of formal coordination, pledging to release about 80 million barrels from national and private reserves as soon as mid-month to stabilise supply. This announcement has done little to calm markets, where oil prices are hovering around $100 per barrel.
Brussels-Canberra defence pact coming
The EU is set to sign a defence partnership with Australia in the “upcoming days,” the bloc’s foreign policy chief Kaja Kallas said on Monday, adding that similar arrangements are being explored with Iceland and Ghana.
Brussels first committed to the deal at the June 2025 G7 summit in Alberta, Canada. The partnership is expected to deepen cooperation on defence, cyber security and counter-terrorism, according to earlier EU statements.
EU mulls ‘coherent’ China approach
Commission President Ursula von der Leyen will convene an “orientation debate” on EU-China relations on April 13 – a procedural step that typically signals Brussels is seeking to lock in a shared strategic line before moving ahead with sensitive policy decisions.
“Orientation debates are a regular practice,” an EU spokesperson told Red Thread, adding that all commissioners are expected to take part in discussions aimed at shaping a “realistic, effective and coherent relationship, based on our values and interests.”
The spokesperson did not specify which experts would contribute, but said such debates are typically reserved for high-level security discussions.
Also on Euractiv
EU seeks input on new security strategy amidst shifting geopolitical landscape
The EU’s diplomatic service is circulating a scoping paper to national capitals as it prepares a new security strategy addressing strategic dependencies – including on China – and shifting US priorities under Donald Trump’s presidency.
The document, set for discussion by ambassadors on Friday, asks how the bloc can better defend its interests while balancing multilateral commitments with a more “principled pragmatism” on the global stage. Read more.
