Dependency is vulnerability. In 2025, European industry learnt this the hard way when the Chinese government used its monopoly on rare earths as a geoeconomic weapon. Beginning in April and expanded in October, measures suddenly required automotive suppliers, wind turbine manufacturers, defence producers and advanced machinery firms to have export licenses from the Chinese commerce ministry for certain rare-earth materials and permanent magnets. To obtain these licences, firms had to disclose sensitive commercial information. Inventories emptied, production lines slowed and parts of Europe’s industrial base faced a crisis.
Then on October 30th, at a summit between US president Donald Trump and Chinese leader Xi Jinping, China announced a one-year pause on the second round of measures it had introduced just a few weeks earlier. These had expanded controls to a vast number of technologies needed for mining, processing, refining and recycling rare earths, along with battery technologies and industrial machinery. Business relief was palpable, even though rare-earth trade has recovered only slightly and licensing remains difficult.
It was not the diplomatic envoys from Berlin, Brussels or Paris who were responsible for this respite. While it was the Trump administration’s aggressive trade and technology policy that triggered China’s escalation in the first place, it was also its quick counter-escalations that brought about the economic detente. Even though some European companies benefited from this deal, the EU did not craft it nor is it negotiating its extension. Yet Europe’s defence and industrial bases continue to rely on China for almost all their rare-earth products and technologies, as well as other key imports like pharmaceuticals, semiconductors and energy equipment. On top of this, a flood of Chinese exports into the single market is causing a historic rout in EU manufacturing jobs and risking deindustrialisation across the continent.
This is a troubling state of play. What will the EU do once the fragile year-long truce is over in November? What if it breaks down before that and China deploys its full arsenal of controls? This has already happened to a European ally: in January 2026, Beijing placed a comprehensive mineral and materials export ban on Japan and added dozens of Japanese companies to sanctions lists over its prime minister’s comments on Taiwan. It is a cautionary tale. Plenty of reasons could upset the fragile truce with Europe such as the EU’s recent trade and industrial support measures aimed at offsetting the harm of copious Chinese exports. It is risky to rely on Washington to negotiate too, the three previous trade truces between the US and China were short lived and an erratic administration could always impose new tariffs. Trump has already postponed his March meeting with Xi by several months. And even if the fragile deal holds until November and is renewed, what if it does not include the EU this time?
Countless scenarios could unfold, but all point to the same conclusion: the EU must learn how to fight for itself in the economic battles ahead. To do so, it needs to build a clear strategy of economic leverage to deter Chinese coercion and use “escalate-to-negotiate” tactics. The bloc’s recent poor performance does not mean this is a lost cause. Despite China’s display of manufacturing and supply-chain power, its domestic economy is growing ever more vulnerable to disruption. The EU still has a chance to confront China’s coercive threats and unprecedented trade imbalances. For this, the EU needs to shift its economic security agenda from one primarily concerned with decreasing its dependencies to one that also goes on the offensive by deploying economic leverage and deterrence. Just as Europeans had cards to play in responding to American coercion, they have cards to play against Chinese coercion too.
The first step is to understand where the leverage lies across trade, investment and critical infrastructure. But knowing the cards is only half the story. Leverage and deterrence is also about judgement: deciding when to threaten action, when to follow through and when to step back. In the words of American country legend Kenny Rogers: “You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” Europeans’ problem is not a lack of cards but uncertainty about how to play them. This paper sketches out how they should develop a gameplan.
De-risking without deterrence
“De-risking” and “resilience” have become the organising principles of the EU’s approach to economic security in recent years. The idea is this: by reducing excessive dependencies and diversifying imports and exports, a country’s exposure to coercion shrinks. That logic, also understood as deterrence by denial, is sound but incomplete in an era of “confrontational geoeconomics”. Three factors explain this.
The first is the problem of time. De-risking, even if European governments were to throw all their attention and capabilities at it (which they are far from doing), is inherently slow. Building de-risked supplier networks, infrastructure and industrial capacity can take years and is the work of the private sector. But private markets hardly price geopolitical risks into their operating structures and often need both incentives and disincentives to make meaningful de-risking changes. Even in a near-perfect policy setting, coordinating these incentives across an economic bloc is complex, time-consuming and costly. Coercion, by contrast, is often fast and requires an immediate response. When your factory is missing chips or machines, or when it could lose a market access license, it is often too late for de-risking.
The second is the problem of counter-strategy. Europe is not de-risking in a vacuum. Both Beijing and Washington are pursuing the opposite objective: to tie Europe ever more tightly to their technological and industrial ecosystems. Beijing has pursued the political agenda of deepening others’ dependencies on its industrial chains for years; recently Washington has also become more explicit in its goal of solidifying the dependency of Europe and others on its defence technology, big tech platforms and AI ecosystem. This makes de-risking even more difficult to execute.
Finally, there is the problem of intelligence. Despite years of risk assessments and mapping exercises, few would have had Nexperia, the Chinese-owned Dutch maker of automotive semiconductors, on their bingo list as a supply chokepoint last year. And yet, the forced shutdown of a single packaging factory in China caused major disruption to the global automotive industry. It illustrated that knowing about possible supply chain vulnerabilities is vital for governments in the geoeconomic age. Japan shows that prioritised intelligence efforts are difficult but doable. Yet simply chasing intelligence about a country’s own vulnerabilities to know when to de-risk would be a Sisyphean task.
None of this makes de-risking obsolete, but it cannot be the only game in town. Effective de-risking relies on China being faced with enough deterrence that it does not retaliate. If you have a gun to your head loaded with six bullets, removing four of those bullets does not make you safe. To deter coercion rather than outpace others’ reloading, Europe must draw its own gun. That is the logic of deterrence by punishment, and it must be a foundational pillar of any deterrence agenda.
China’s coercion playbook
Much has been written about how China is using its economic power to coerce friends and foes alike. What matters for Europe is not the long list of past targets—from Japan to Norway, minerals to salmon, supermarkets to clothing stores—but how the nature of Chinese coercion has changed.
First, China has formalised its economic power tools. In the past, Beijing relied heavily on opaque inspections, unofficial boycotts and administrative harassment. Those remain in use, but they are now complemented by an expanding arsenal of official tools: sanctions regimes, export control laws, blacklists, anti-foreign sanctions legislation and increasingly sophisticated enforcement mechanisms.
The result is that Beijing can engage in more sophisticated campaigns of coercion, retaliation and deterrence. Its lower escalatory steps include, for example, investigating politically salient imports like agricultural products. After the EU imposed tariffs on Chinese electric vehicles, Beijing retaliated with probes into imports of European wines, brandy and dairy—a fairly proportional response. Higher up the ladder, foreign firms operating in China face regulatory scrutiny when tensions rise, for instance, via merger and competition authorities. At the top sit formal export controls, including those targeting China’s near-monopoly on processed rare earths and magnets. Crucially, Beijing is investing in the administrative machinery to collect economic intelligence on supply chains and enforce export controls globally and beyond its borders for a wide range of critical materials and technologies.
Second, and more importantly, China’s leadership appears to know that its economic leverage has spiked. Last year’s mineral export controls may have reinforced this perception. At the very least, the episode showed that both the US and China command chokeholds over each other’s critical sectors. A more forward-leaning reading could say China holds, at least temporarily, the escalation advantage over Western economies because their militaries rely on Chinese rare earth products. This would mean that, short of military action, China could come out on top of any economic confrontation by playing its stronger cards. Whether this is accurate or not, if policymakers in Beijing believe they can sustain or win cycles of escalation, their threshold for using coercive tools will fall. And if those tools appear to work, extracting concessions from dependent partners could become routine.
In other words, economic coercion and deterrence are moving away from niche case studies at the edge of the global economy and towards an organising principle between powers at the centre of it. The shift towards refined, formal measures does not mean that grey-zone actions will fade either; Beijing’s approach blends both for maximum flexibility. Europe must prepare accordingly.
If Europe blinks
What happens if the EU fails to build and use economic deterrence against China? The experience of the past year offers a glimpse. A slow response and a lack of credible leverage left the EU merely reacting to Chinese demands to scrap key policies—such as tariffs on Chinese-made electric vehicles (EVs) and export controls on goods with both civilian and military use (dual-use)—in return for relief on rare-earth exports. The stakes go far beyond diplomatic embarrassment. The future of the continent’s security and industry is intimately linked to its ability to deter China.
First, Europe’s defence build-up and support of Ukraine—and by extension, the continent’s security—are directly exposed. Modern defence systems depend on minerals like rare earths, graphite and niche compounds, all of which Chinese production dominates. Supply disruptions are already straining European defence production, particularly among the small and medium-sized firms that form the backbone of the defence industrial base. If Beijing tightened export controls further, EU governments and businesses could find themselves triaging production: prioritising some systems over others not because of battlefield needs, but because of shortages in key materials. Failing to check China’s economic weapon would therefore hand Beijing a partial veto over Europe’s defence industry expansion.
Second, Europe’s industrial transition is at risk. EVs, batteries, wind turbines and other clean technologies rely heavily on Chinese minerals and derivatives, such as magnets. Europe’s clean-tech shift is, for now, hostage to access to Chinese minerals. Even if controls were fully relaxed, the damage would linger now that Beijing has demonstrated its capabilities. Investors will have to price in the risk of sudden shortages or production slowdowns in projects using Chinese-sourced inputs. This could make projects like battery gigafactories or solar cell plants much harder to finance, eroding Europe’s already strained competitiveness in this and other industrial sectors. Such a market adjustment would weigh on Europe’s industrial ambition and can only be partially alleviated with local content requirements as Europe simply does not have the materials. But it is not only clean technologies at risk. If Beijing’s economic coercion threat successfully deters the EU from taking necessary trade measures to reach a level playing field with China’s overcapacity, Europe’s industrial backbone and millions of manufacturing jobs could disappear over the coming months and years. Deterrence therefore is not only about security. It is also a backstop to the competitiveness of Europe’s industrial future.
None of this is inevitable. But without credible economic deterrence, Europe will repeatedly face the same dilemma: to push back and face short-term economic pain, or to restrain and face mid-term industrial and competitiveness decline. Deterrence and de-risking come at a cost, but it is more costly to do nothing at all.
Events from last year have not inspired confidence that the EU is up to the task. Europe’s response to China’s use of its mineral monopoly has been lacklustre. Throughout 2025, EU capitals and Brussels focused on mostly diplomatic missions and technical clarifications from Beijing. At times, they attempted deals for national industry. Clear signals of counteraction were, by and large, absent from the agenda. Europe’s timidity on China reflects familiar constraints: forging unity among 27 member states, a habit of working inside World Trade Organisation (WTO) rules even as China bends them, and the exposure of European multinationals to retaliation in a heavily export-dependent economy. The deeper problem is uncertainty. Uncertainty about leverage and how to organise the EU around using it, uncertainty about China’s escalation playbook and off-ramps, and uncertainty about who ultimately bears the costs—across member states, sectors and rounds of retaliation—has kept Europe’s deterrence largely theoretical.
Taken together, this has led to a lack of capability, clarity and credibility. What looks like caution is often just paralysis from not having a gameplan. But blinking is fixable: a credible doctrine on how and when to use its cards can close the EU’s resolve gap. Below, this paper maps the leverage Europe has and what it needs to do to make use of it.
Europe’s cards
The tables below show where Europe could generate the most influence in a coercive scenario with China. They are organised by export and import restrictions, critical infrastructure and technology, and some wildcards. Each table explains the rationale for deploying such leverage, the actions the EU could take, and an indication of the level of escalation it carries. This ranges from the lowest rung of escalation, 1, which is limited to measures like private warnings, public signalling and launching investigations, up to the highest rung, 10, measuring a systemic rupture of embargo-like measures and near-total decoupling. (A full explanation of these rungs can be found in the annexe.)
To be sure, playing these cards does not guarantee successful deterrence. Some carry high economic and political costs for Europeans, and these would often damage the bloc unevenly. Most of the measures listed could mean retaliation, supply disruption, inflationary effects or harm to Europe’s own industrial base. Others would only be effective if coordinated with key partners or rely on strong market interventions. In some cases, China has already implemented similar measures on Europe, lowering the cost of potential retaliation. The objective of this paper is not to settle these trade-offs, but to expand the range of strategic options on the table. It is then up to governments to decide which cards are worth playing.
Export restrictions
Export restrictions on critical goods and services could have a meaningful deterrent effect if they threaten to halt or slow industrial production in China. These can be highly targeted to specific sectors and thus exploit any asymmetry between European technology providers and Chinese importers. The downside is that the costs of export restrictions on Europe are hyper-localised and it can be difficult to share the burden across the bloc. And, unless Europe has a truly hard-to-replace technology, it will need to work with partners like Japan and the US to pressure China effectively, making export restrictions more complicated to use for the bloc.
In the EU, dual-use export controls remain a national competence and are closely guarded by legal procedures which limit their use as leverage. However, the EU’s anti-coercion instrument (ACI) could temporarily add or expand export restrictions, including through licensing or quota measures. This could de facto result in temporary export controls. The EU could also, in extreme cases, adopt sanctions against specific Chinese firms or place them on the Russia sanctions circumvention list, which could also affect export licensing and intellectual property (IP) as well as knowledge transfers—though the unanimity requirement of sanctions makes this unlikely.
About the Authors:
Tobias Gehrke is a senior policy fellow at the European Council on Foreign Relations.
Nina Schmelzer is a research assistant for the DARE* initiative at the European Council on Foreign Relations, based in Berlin.