How a trade deal with China could help rebuild Europe’s defense industry and where It could backfire
By Dinair Alves
Europe is rearming, but the industrial base that must deliver the hardware—munitions, air defenses, sensors, space systems, and secure communications—still faces bottlenecks in inputs, financing, and scale. A carefully designed commercial agreement with China wouldn’t replace Europe’s push for strategic autonomy, but it could ease specific constraints that slow production and raise costs—especially in the short term.
The same deal could also deepen dependencies that Europe is actively trying to reduce. Whether it helps or harms depends on what, exactly, is negotiated, what is excluded, and how enforcement works.
Europe’s defense-industrial problem: Demand is rising faster than supply
The European Union has acknowledged that Europe needs a stronger industrial base and more cooperative procurement, but progress remains uneven. The EU’s new industrial push includes the European Defence Industry Programme (EDIP)—budgeted at €1.5 billion for 2025–2027—intended to boost readiness and incentivize common procurement.
That money is politically significant, but small relative to the scale of rearmament. Multiple major policy assessments argue Europe faces a much larger investment challenge: the “Draghi competitiveness” framing commonly cites an annual investment gap up to €800 billion across areas that include defense and high tech. Separately, analysis around rearmament has suggested needs on the order of hundreds of billions over the coming years.
So the industrial question becomes practical: How do you secure materials, components, and machine capacity fast enough to expand output—without handing an adversarial supplier leverage over your supply chain?
Where a china deal could help – 5 high-impact channels
1 – Critical minerals and magnets: easing the hardest bottleneck
Modern defense production is increasingly constrained by rare earths and permanent magnets, used in missiles, radars, electric motors, drones, and satellites. Europe remains highly exposed to Chinese supply and processing. The European Central Bank has highlighted the euro area’s exposure to Chinese exports of rare earths and noted China’s dominance in global rare earth supply.
Recent reporting on EU policy debates also underscores just how concentrated the risk is—for example, the EU importing roughly 90% of permanent magnets from China has been cited in coverage of Europe’s new raw-materials push.
A trade agreement could, in theory, include:
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Long-term supply contracts for specific rare earth oxides/metals and magnet inputs
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Transparent licensing and export procedures (to reduce “surprise” export controls)
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Joint stockpiling mechanisms for agreed categories of critical inputs
This would lower cost volatility and reduce production interruptions—an immediate benefit for defense manufacturers and tier-2 suppliers.
2 – Electronics and industrial subcomponents – stabilizing lead times
Defense programs rely on civilian supply chains for:
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power electronics and sensors
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specialized chemicals and composites
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connectors, cables, actuators, batteries, and PCB manufacturing
A narrowly written deal—focused on non-sensitive inputs—could improve predictability and reduce tariffs or customs friction for components that are not classified but still essential to production cadence.
3 – Industrial capacity: machine tools, robotics, and manufacturing equipment
Scaling munitions and vehicle production often hits “factory throughput” ceilings. China is a major supplier of machine tools and industrial equipment. A trade framework could reduce costs for factory modernization in Europe—especially for SMEs—if paired with strict cyber, data, and security requirements for networked equipment.
4 – Financing and demand certainty – accelerating investment
Europe’s defense industry still struggles with fragmented demand and financing constraints. Even small EU-level incentives like EDIP are designed to encourage common procurement and industrial investment.
A commercial arrangement that improves input pricing and availability can make long production runs more bankable—reducing risk premiums for lenders and improving the case for expanding lines.
5 – Non-sensitive dual-use exports – improving cashflow for European firms
Many European defense primes also sell dual-use products: secure communications, avionics subsystems, satellites, sensing, and cyber tooling. A deal that improves market access for non-sensitive lines could strengthen balance sheets and fund European production upgrades—so long as it does not create IP leakage risks.
The hard part – Europe is trying to “de-risk,” not re-couple
The political trend in Europe is not toward deeper reliance on China, but toward managed exposure. The EU is actively discussing diversification and resilience measures in critical raw materials; senior officials have emphasized recycling, stockpiling, and faster deal-making to reduce dependency.
There’s also the reality that major EU–China frameworks are politically constrained. The Comprehensive Agreement on Investment (CAI) remains effectively frozen, tied to political conditions in the European Parliament.
So any “trade deal that helps defense redevelopment” would likely have to be:
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sector-limited
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security-screened
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enforcement-heavy
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explicitly carved away from defense end-use
How this could escalate (and how to design against it)
A poorly designed agreement could increase Europe’s vulnerability in three ways:
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Export-control leverage: If Chinese controls tighten during a crisis, European production lines could slow or stop (magnets, gallium, specialty inputs). Europe is already debating these vulnerabilities.
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Technology leakage: Even “civilian” manufacturing equipment and software can expose data and processes that matter for defense supply chains.
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Political backlash inside Europe: A deal seen as undermining strategic autonomy could trigger legal limits, procurement restrictions, or de facto noncompliance by member states—reducing any promised benefit.
What reduces escalation risk
A deal structured as a Critical Inputs and Industrial Resilience Protocol, not a broad “trade reset,” with:
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fixed lists of non-sensitive materials/components
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diversification requirements
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stockpile triggers and dispute mechanisms
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strict cybersecurity and audit rules for industrial equipment
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parallel investment in EU mining/processing/recycling targets (so dependency trends down even if trade rises in the short term)
A narrowly framed trade arrangement with China could, in practical terms, give Europe some breathing room as it works to rebuild its defense-industrial base. By smoothing access to key materials and reducing uncertainty in supply schedules and pricing, such an agreement could help manufacturers expand output while domestic capacity is still catching up. The benefits, however, would depend on restraint: the arrangement would need to ease short-term constraints without locking Europe into patterns of reliance that run counter to its broader push for industrial resilience.