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The Iran war has darkened Europe’s economic outlook and sharpened tensions in the transatlantic relationship. In response, some European capitals are showing interest in hedging against American unpredictability through ties with China. Europe has always struggled to form a common policy towards Beijing. Member states have their own relationships with China that shape their thinking, and Brussels has struggled to rally the EU around its preferred strategy. However, the Iran war has brought about a sharp escalation in Europe’s concerns about Washington’s reliability and created new economic and political drivers for Europe to build out ties with China. Despite that, significant fractures in European China policy are likely to remain. This creates an ambiguous policy environment affecting businesses’ own exposure hedging strategies. Stronger EU ties with China could strain the transatlantic relationship further, but adopting a hawkish policy towards China could leave the EU exposed to retaliation from Beijing.
A History of Fractured European China Policy
There have always been different camps inside the EU on how to approach China. The first camp orients China policy around economic security and reducing dependencies on Beijing. Brussels and Paris both fall into this group. The EU Commission implemented tariffs on many Chinese-produced EVs in 2024 and a ban on Chinese companies in some public procurement tenders in 2025 out of concerns about China’s allegedly anticompetitive practices. French policy likewise emphasizes European sovereignty, industrial policy, and a tougher approach to protecting EU economic competitiveness. However, despite the more hawkish view of China, this camp has resisted alignment with the US, instead trying to remain outside the ongoing US-China rivalry.
In contrast to the economic security camp, some countries have looked towards China as a major economic opportunity. Spain, Hungary, and Slovakia have committed to deepening economic and political ties to Beijing and to attracting Chinese investment. In the 2024 vote over EV tariffs on China, both Slovakia and Hungary voted against the tariffs, and Spain switched its vote from support to abstention after Spanish Prime Minister Pedro Sánchez visited China. Madrid has also positioned itself as an attractive destination for Chinese clean technology investments and has resisted objections from the EU about investment screening and security concerns.
Between these two camps, some countries, such as Germany, fall in the middle. Although Germany built an impressive economic relationship with China over the last several decades, Berlin has taken a more cautious approach in recent years. This has meant trying to keep a steady economic relationship while also labeling China a “systemic rival” and emphasizing economic derisking and China’s alleged unfair trade practices. Taken together, Europe’s approach to China has often been unpredictable and failed to define goals or clarify an overall direction of travel.
The War in Iran Tests the Transatlantic Relationship
Washington’s decision to strike Iran introduced numerous new elements into Europe’s geopolitical calculus on China. The war and the subsequent global energy crisis have created severe economic pressure on Europe. Heightened energy prices – coming only four years after the EU’s 2022 energy crisis – have depressed growth projections and triggered new fiscal challenges. The European Commission has warned of stagflation due to high energy costs, and a global economic slowdown would further weigh on Europe’s economic prospects. Moreover, these stresses come at a time when many European states are already devoting significant financial resources to rearmament and sustaining support for Ukraine.
The energy crisis has also highlighted the continent’s continued dependency on energy imports, including some still coming from Russia, which has complicated Ukraine’s war effort. Between January and March 2026, Europe imported 69 cargoes of LNG from Russia’s Yamal Arctic LNG project worth in total €2.88 billion, with France, Spain, and the Netherlands taking the most deliveries. High energy prices have benefited Moscow, whereas Ukraine’s important agricultural sector has suffered. While Ukraine has mitigated Russia’s excess profits by striking Russian energy infrastructure, some of Ukraine’s partners have pushed Kyiv to decrease the pressure on Russian exports. For its part, the US has issued limited sanctions relief for Moscow, which drew significant criticism from Europe.
The Iran war has exacerbated overall US-European tensions beyond the economic fallout, which adds a political element to Europe’s geostrategic considerations about future partnerships. US President Donald Trump has criticized European capitals for their stance on the Iran war, and he and other figures in the administration have linked Washington’s criticisms with repercussions for US contributions to NATO. In return, European NATO members began developing a fallback plan for European security in the case of an American withdrawal from the alliance. These steps, combined with prior flashpoints like the EU-US trade war, demonstrate Europe’s growing concern about Washington’s reliability and Europe’s growing interest in diversifying its geopolitical relationships.
Europe Contemplates Hedging with China
The economic consequences of the Iran war have created structural drivers for increased European engagement with China. Green technology and electrification are chief among them. In response to the energy crisis, the European Commission has developed the “AccelerateEU” program to coordinate the bloc’s energy response, including investments in electrification and clean energy to reduce Europe’s import dependencies. China is the dominant provider of many key green technologies and their inputs, such as critical minerals. China accounts for more than 80% of global battery production and more than 70% of solar panel and wind turbine production. China is also a leading global producer of electric vehicles, and European car companies have faced intense competition from Chinese-produced EVs. Any major shift in European energy policy towards China would bring risks for many American energy companies, which export large quantities to Europe; about 60% of European LNG came from the US in January 2026.
European capitals could also look to China as an overall economic lifeline. This could mean attracting increased Chinese foreign direct investment or working to keep the Chinese market open to European investment projects and exports. Spain has positioned itself as the leading destination for Chinese green technology investment, and German companies have deepened their investments in China. German car makers continue to depend on the Chinese market, though their market share is slipping as local competition grows. The unpredictable approach to trade policy implemented by President Trump is another factor in Europe’s economic calculus regarding China. Washington’s ongoing trade war with China prompted Beijing to implement a series of retaliatory measures, including export restrictions on critical minerals, reinforcing Europe’s motivation to maintain a positive relationship with China.
Over the last several months, European hedging towards China has accelerated both economically and politically. Spanish Prime Minister Sánchez’s visit to China in April is a clear example. While in China, Sánchez, one of President Trump’s most outspoken critics in Europe, emphasized Beijing’s global leadership role and the need for Europe and China to deepen their relationship. Sánchez likewise institutionalized a Permanent Strategic Dialogue and secured a multitude of economic agreements. This positions Madrid as an economic and political bridge between Europe and China. Spain is not alone in this. In April, Czech Prime Minister Andrej Babiš announced a policy reorientation away from Taiwan and towards Beijing, largely due to commercial concerns. Italian Foreign Minister Antonio Tajani, who also visited China in April, framed his visit as an attempt “to relaunch strategic dialogue” and reportedly discussed increased Chinese investment in Italy.
Germany’s approach has also seemingly evolved towards engagement over security. During a late-February trip to China, German Chancellor Friedrich Merz focused more on “comprehensive strategic partnership” than on competition with China, and he proposed a restart of government consultations. In late March, Merz unexpectedly raised the prospect of pursuing a free trade agreement (FTA) with China in the future. Given Germany’s economic weight and relationship with China, as well as Germany’s status as a cornerstone of the US-European partnership, the change in Germany’s approach is particularly meaningful.
Despite moves by Berlin, Madrid, and other capitals, Brussels’ focus hasn’t moved away from economic security and competitiveness. One of Brussels’ current goals is to increase the scale of green technology manufacturing in Europe, and the EU Commission proposed the Industrial Accelerator Act (IAA) in March 2026. The IAA would utilize targeted public procurements to boost demand for European producers over Chinese competitors across sensitive industries, including green technology. The EU’s wariness towards China sets the stage for continued intra-European conflict over how Europe’s relationship with China should develop going forward and what Europe’s interests are.
The Risks
European interest in hedging with China is unlikely to taper off in the near term. This creates both upside and downside risks for businesses with interests in Europe. Greater trade and investment from China could create downside risks for domestic manufacturers facing immense Chinese competition in areas like EVs. However, punitive actions against China and its core interests could result in retaliation, creating significant supply chain disruptions or a stranded consumer market. Notably, China on April 24 implemented export bans on dual-use items to seven European entities for selling arms to Taiwan. Nonetheless, Washington could react negatively to a perceived European shift towards China, perceiving this as reneging on the July 2025 Turnberry trade truce. This would create downside risks for the transatlantic economic relationship, which is far larger than the EU-China relationship. On the upside of an EU economic security approach, a push towards EU-coordinated electrification and energy infrastructure expansion could lower costs and reduce price volatility for energy-intensive sectors in Europe. However, for companies involved in oil and gas exports to Europe, it would signal a reduction in future LNG and oil exports to Europe. Ultimately, Europe is facing a critical geoeconomic moment, but is struggling to find the unity to define its own interests amid global rivalry between the US and China.
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