Europe Loses Big In US-China Economic War

Sino-American diplomacy increasingly marginalizes outside actors, especially Europe.

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In June 2025, as Beijing and Washington sat down for their first round of trade talks in London, which ultimately produced only a truce, Europe sought a diplomatic breakthrough with China. The EU hoped that America’s green skepticism and China’s growing reliance on high-tech green exports would create space for the EU and China to cooperate. The logic was that Europe could absorb low-cost green energy technologies from China as a basis for Europe’s reindustrialization and to help achieve its own climate goals. At the same time, China would gain greater market share in several wealthy, industrialized countries to mitigate losses in America. The breakthrough ultimately failed to materialize due to disagreements over Ukraine, Russia, European protectionism, and state investments. Still, it put the world on notice that Sino-American and, to a lesser extent, Russo-American trade wars were having unforeseen ripple effects.

Of particular relevance to Europe was —and remains —the sundry assortment of sanctions levied against Western adversaries. Sanctions have long been a favored tool of American foreign policy. The often low-cost, high-impact mechanism was usually potent, deriving much of its strength from a globalized economic system. While some outliers stood their ground and debate raged around the ethics of sanctioning dictators who didn’t care about the privations brought upon the masses, most sanctioned countries relented and negotiated with Washington.

Once deployed to punish adversaries, sanctions are increasingly becoming a mechanism to reroute global commerce and to accelerate or stymie protectionism and reshoring. The problem with this strategy of using sanctions as de facto tariffs is that sanctions’ effectiveness depends on a globalized economic order, and they put considerable strain on American allies. Using them repeatedly diminishes their own future utility while simultaneously undermining the basis for many of America’s alliances. Thus far, this has worked, enabling both the second Trump and earlier Biden and first Trump administrations to sidestep a deadlocked legislature and make economic policy. However, Washington finds itself with a hammer in search of nails, and those nails aren’t just Chinese. A great many of them are European.

A New Economic Cold War

The Trump administration has redefined sanctions as economic orthodoxy. The measures against Beijing serve to counter China’s lead in the energy space and wider industrial ascendancy are perfect examples, while China’s rare-earth policies illustrate this most vividly. Beijing’s October 2025 export licensing regime, which requires state approval for all rare-earth and downstream technologies, represents a strategic choke hold on the global economy. Although talks between Donald Trump and Xi Jinping in Seoul ultimately yielded a strategic economic ceasefire and resumption of critical trade links with a permanent solution pending further negotiation, the Trump administration’s threatened response was telling.

Rather than turn to other suppliers or promote some spending, fiscal, or industrial policy, the Trump administration threatened 100% tariffs on Chinese imports and possible secondary sanctions against any company, American or otherwise, doing business with Chinese entities. This was promoted as a defense of U.S. manufacturing and overall economic health.

To some extent, this is not surprising. President Trump’s approach to trade, tariffs, and sanctions has always been transactional, and he has made American diplomacy and foreign policy less beholden to liberal ideological norms. The problem isn’t necessarily that these moves are not ideological, but rather that they aren’t strategic. Many of these transactions are so obsessed with yielding immediate deals that the administration can use to proclaim victory, that long-term structural advantages are neglected in favor of immediate showmanship. This is to China’s advantage.

European de-industrialization has been accelerated by energy fluctuations spurred by inconsistent energy policies. Pictured: A closed factory in Plovdiv province, Bulgaria.

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Winners & Losers In Sino-American Standoffs

Europe is one of the biggest losers under America’s global sanctions strategy and Sino-American and Russo-American rivalries. Europe’s economy largely depends on highly specialized industries that dominate a particular niche within established supply chains through high-quality, capital-intensive investment. Germany’s Mittelstand are the most famous example. The problem with this model, when it over-proliferates, as noted by former Italian Prime Minister and head of the European Central Bank Mario Draghi in the official EU Report on Europe’s Competitiveness Crisis, is that it dampens European innovation and makes Europe extremely vulnerable to increasingly uncertain external market conditions.

This structural problem, combined with Washington’s indifference, makes Europe unnecessarily vulnerable. If Washington doesn’t correct these missteps, American policies designed to counter Chinese industrial and energy dominance may undermine European partners, driving them towards Beijing or leaving them exposed to energy supply disruptions.

When sanctions-induced supply chain disruptions occur, America reaps a theoretical boon: reindustrialization. In the American domestic market, supply chain contractions may generate immediate pain, but at least have the theoretical long-term benefit of advancing the stated goal of the former Biden and current Trump administrations. In Europe, with limited ability to engage in further resource extraction and already at or near peak industrial capacity, such disruptions are purely negative.

America’s critical minerals drive may have benefited some American companies, such as MP Materials or the Australian mining giant Lynas, but it devastated Europe. Europe depends on China for 97% of its rare-earth processing, the critical link in producing advanced electronics, magnets, and renewable technologies. The restrictions, however brief, have already disrupted production lines across Germany and France. Major firms such as Volkswagen, Siemens, and Airbus face primary product cost surges of up to 20%.

This can also be seen in the LNG space. When Russian gas became unpalatable to Europe after February 2022, American policymakers used sanctions not only to signal disapproval of Moscow but also to promote American LNG as the alternative supplier. This was understandable, and in the short term, Europe did need an alternative supplier on short notice. This was taken to an extreme when American sanctions allegedly undermined the rational and mutually beneficial Trans-Saharan Gas Pipeline to Europe and openly called for the United States Export-Import Bank to halt funding for European-linked LNG programs in Southern and Eastern Africa. While these moves were ostensibly about combating Chinese influence in Africa, they also helped motivate the aborted Brussels-Beijing talks in June 2025.

Recent eclectic American policy towards international LNG companies only further confuses and damages Europe. It makes no sense for the US to lift sanctions on Rosneft Germany, while simultaneously sanctioning alternative non-Russian sources of hydrocarbons long cultivated by Europe on Turkmen and Azeri gas production in the Southern Caspian, under the strained logic that these sanctions are against Russia and China, even though Russian companies such as Lukoil and Rosneft, or China’s CNPC, are minority stakeholders. The difference is simply the presence of American energy companies.

What this does is effectively sanction Europe, which is seeking non-Russian energy sources and any non-American energy supplier. Even more ironically, when Lukoil projects were not sanctioned, although they were subject to controversy, it was harder for the company to move capital or assets into Russia. Now that these sanctions are in place, Lukoil has fewer incentives to comply with international regulators and is embarking upon a fire sale of assets, with proceeds likely to flow into Russia’s war machine.

Sanctions against Lukoil in support of Ukraine would be fine if they were applied consistently within a broader geopolitical strategy or in consideration of America’s international and European partners. Lukoil and its many European subsidiaries are now sanctioned, while some projects with American partners remain exempt. Washington would be better served by going one direction or another rather than a compromise that pleases nobody and alienates allies.

Between Solidarity and Survival

America’s schizophrenic energy sanctions policy, unable to decide whether to loosen or tighten pressure on Russia or China while de facto sanctioning Europe, is going to make it easier for Brussels to listen to voices casting doubt on the utility of the Western alliance.

In instance after instance, America’s single-minded pursuit of economic victory against China and, to a lesser extent, Russia is undermining its long-term partnership with Europe. The pursuit of American economic interests is understandable, but in its current form, self-destructive. Few dispute that sanctions on China’s security and human rights practices have moral and political utility. But morality does not pay electricity bills or secure raw materials.

Washington’s challenge is that it must not take Europe for granted and recognize that even allies with shared democratic traditions require material incentives to remain on side. Greater care for European energy and industrial challenges needs to feature in American foreign policy. Brussels, for its part, must reasonably accommodate justified American actions against China and understand market disruptions as a reality of great power competition. If Washington can’t make these minimal accommodations, American soft power will continue to erode to China’s advantage.