Several reports last week indicated trade tensions between the European Union and China coming to a head in the near future.
In a discussion on China’s growing economic influence, European Commission Vice-President Kaja Kallas said, “We have a very clear understanding of the diagnosis of the disease, but we don’t have agreement on the cure.” She continued, “If you have a very, very difficult disease, like you have cancer, then you have two choices — either you increase the morphine or you start chemotherapy.”
Domestically, China saw an important announcement on the expansion of basic public services. Until now, several key amenities and rights had been out of reach for the large number of migrants who came to cities for work, thanks to a system of household registration known as hukou. The Communist Party’s mouthpiece, Global Times, said “nearly 300 million long-term urban workers and residents have yet to achieve ‘full urbanization’ as a result.”
Finally, we look at a recent Reuters analysis that mapped the build-up of new infrastructure near Lop Nur, China’s only known nuclear weapons testing site.
Here is a closer look at these developments:
1. EU-China trade tensions
News reports have increasingly discussed long-held concerns about China’s large trade surplus with the EU. The New York Times quoted Jeromin Zettelmeyer, director of Bruegel, a think tank in Brussels, who said that the tone in Europe was one of “panic” and “There’s a sense of imminent collapse of industry, of imminent danger”.
“The EU trade deficit in goods with China worsened from €65 billion in Q1 2024 to €98 billion in Q1 2026,” the EU’s official statistics website noted.
China’s Commerce Ministry also responded to a press question on a recent EU meeting on the subject by stressing the need for dialogue, adding that “If the EU insists on unilaterally introducing new trade instruments and imposing discriminatory restrictions, China will resolutely retaliate and take effective measures to safeguard its own interests.”
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UPSHOT: Writing for the German Marshall Fund of the United States (GMF), research fellow Etienne Soula drew attention to the surplus that’s the “size of Italy’s economy”. “When Beijing joined the World Trade Organisation in the early 2000s, Europe survived the first “China shock”, a wave of cheap toys, textiles, and basic electronics that hollowed out low-end manufacturing across the developed world by moving up the value chain. This time there is no higher ground to retreat to: Chinese manufacturing has followed European industry up that chain and now competes with what is left of it,” he wrote.
This is at the heart of the imbalance — when it comes to Europe, there is no category of goods that China seeks from the region that can substitute the sheer scale and range of what it exports. The resultant loss of manufacturing jobs in the EU doesn’t just affect the economy. A major worry is that disaffection among the unemployed is adding to a political preference for extreme right-wing ideologies.
Pulling back from Chinese imports also brings its own share of cost issues, but Europe may be heading that way gradually. The proposed Industrial Accelerator Act is meant to protect from certain foreign exposure and help domestic industries.
2. Hukou and Chinese demand
Since 1958, the official hukou system has registered citizens based on their place of residence, linking it to several rights concerning education and welfare. At times seen as a means of ensuring state control, it has also been seen as restrictive amid rapid demographic shifts, with China’s urbanisation rate jumping from around 26% in 1990 to 66% in 2024.
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In recent years, more concerted efforts have been made towards its relaxation. The latest change is a guideline that seeks to link rights to the place of ordinary residence rather than the place of birth.
UPSHOT: The relaxation matters as it comes at a time of slowing economic growth for China. A state media report noted that Chinese Premier Li Qiang said a new urbanisation strategy would help “unleash the potential of domestic demand”.
Historically, despite its communist roots, China has not been a proactive provider of welfare systems and social safety nets. This, among other factors, has limited consumption and compelled its people to save more than spend.
Gradual shifts have, however, been reported. The Peterson Institute for International Economics (PIIE) found in a 2025 paper that “Social expenditures have more than doubled as a share of GDP since 2010 and are now roughly on par with other large upper-middle-income countries such as Mexico and Turkey. This increase has contributed to a decline in the household saving rate that in turn has fueled a gradual but significant increase in household consumption as a share of GDP since its nadir in 2010.”
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Household consumption stood at 40% of the GDP in 2024, but this lagged behind the 48% average share of other upper-middle-income countries, it said. Today, as China is looking to boost overall demand to balance its large manufacturing base, widening social safety could be a lever to encourage domestic spending.
3. Changes around Lop Nur
In 1964, the Lop Nur desert in northwestern China became the site of its first atomic bomb test. It would conduct five more tests over the next three years, cementing itself as the latest entrant into the club of countries with nuclear weapons.
Despite later global treaties that limited tests for the cause of non-proliferation, more recent satellite imagery has shown some changes in the region. Reuters has reported, “China’s nuclear missiles can already reach any city in the United States. Now, satellite images reviewed by Reuters show Beijing is building a sprawling web of launch pads, bunkers and communications nodes near the isolated nuclear silos that hold the Chinese military’s longest-range missiles.”
UPSHOT: In 2023, The NYT found that “waves of satellite images reveal that the military base has newly drilled boreholes — ideal for bottling up firestorms of deadly radiation from large nuclear blasts — as well as hundreds of other upgrades and expansions.”
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In 2025, The Washington Post also cited such data to report that “The country’s military has quietly carved new tunnels, hollowed out explosive chambers and built support facilities that researchers say suggest preparations for nuclear testing.”
The latest from Reuters stated that “Taken together, the network signals a significant upgrade in Beijing’s efforts to ensure second-strike capability, underscoring intensifying nuclear competition with the United States as tensions rise over issues such as Taiwan’s sovereignty.” While it is difficult to confirm such shifts due to the obvious secrecy associated with defence activities, it is in line with China’s larger plans to modernise and strengthen its defence forces by 2035.
