China’s under pressure on two fronts 

THE world continues to drift towards greater protectionism and economic fragmentation.

China is increasingly caught in a pincer between two structurally different forms of external pressure, each operating according to its own rules.

The United States-China relationship remains confrontational, but it is also relatively episodic and deal-driven. Tariffs, agricultural purchases, energy, technology controls and critical minerals can all become bargaining chips.

The European Union (EU)-China relationship, by contrast, is becoming more structural and institutionalised as Brussels increasingly embeds economic security and “European preference” into the rules governing market access.

This structural pressure resurfaced in September, when China’s Commerce Ministry (Mofcom) expressed serious concern over the European Commission’s (EC) proposed overhaul of the EU’s public procurement framework.

Mofcom urged the EU to comply with World Trade Organisation (WTO) rules, preserve market openness and revise what Beijing described as discriminatory provisions. It also said it would closely monitor the legislative process and assess the proposal’s potential impact.

The EC adopted the proposal on Sept 9. This is more than a technical adjustment. It would replace the three principal procurement directives introduced in 2014 with a single, directly applicable regulation, representing the most substantial overhaul of the EU procurement framework in more than a decade.

With EU public procurement amounting to roughly €2 trillion (US$2.27 trillion) annually, or around 14% of EU’s gross domestic product (GDP), the economic stakes are considerable.

Two elements are particularly relevant for China.

First, the proposal would institutionalise a horizontal framework for European preference.

Public buyers would be given greater scope to favour European suppliers, as well as suppliers covered by the EU’s international procurement commitments, via restrictions on participation or advantages in tender evaluation.

China is neither a party to the WTO Government Procurement Agreement nor covered by an EU free trade agreement containing procurement commitments.

Chinese suppliers could therefore face greater uncertainty over their access to the European procurement market.

Second, the proposal would explicitly incorporate economic security and resilience into procurement decisions.

Public buyers could be permitted, and in some circumstances required, to consider cybersecurity, sensitive information, critical infrastructure, supply-chain resilience and “undue third-country influence”.

The EU also wants to reduce the emphasis on awarding contracts primarily on the basis of the lowest price.

The best price-quality ratio would become the standard approach, with quality normally accounting for at least 30% of the evaluation and 50% for labour-intensive contracts.

Taken together, these changes could give European authorities substantially greater discretion to consider the origin, security profile and strategic implications of suppliers, rather than price alone.

The important qualification is that this remains a proposal, not law. The European Parliament and Council must negotiate the final text.

Its eventual impact will depend on how binding European-preference requirements become, how individual sectors are treated and whether localisation by foreign companies can mitigate some of the restrictions.

Nevertheless, the significance of the proposal extends well beyond public procurement. It illustrates how Europe’s approach to China is becoming progressively embedded in institutions, regulations and market-access rules.

Unlike tariffs that can be raised, reduced or exchanged during negotiations, institutional restrictions can be considerably harder to reverse once they are built into the regulatory architecture.

Against this backdrop, the US track looks very different. China President Xi Jinping’s decision to bypass the United Nations General Assembly in New York and travel instead to Washington for talks with US President Donald Trump on Sept 24 appears to underscore Beijing’s interest in preventing strategic pressure from intensifying on multiple fronts at the same time.

From China’s perspective, there are strong incentives to stabilise relations with the United States.

First, the US and European pressures are increasingly asymmetric.

Washington remains a difficult counterpart, but potentially a transactional one. Tariffs, purchases and selected restrictions may still be subject to negotiation.

Europe’s approach is slower-moving, but it is becoming more deeply embedded in legislation and institutional processes.

Second, even a limited United States-China truce could reduce the risk of another escalation in technology controls and restrictions involving critical inputs. It would not resolve the underlying strategic rivalry, but it could lower the immediate risk of further disruption.

Third, a more stable external environment would buy Beijing valuable time.

With domestic demand still soft and credit demand subdued, avoiding simultaneous escalation on the US and European fronts would give China greater policy room to rebalance its economy, strengthen domestic demand and manage existing financial pressures.

Financial markets also appear to be reflecting expectations of a more constructive near-term backdrop.

The yuan strengthened noticeably ahead of the summit, with the currency appreciating against the US dollar and the People’s Bank of China setting a firmer daily fixing.

We would be cautious, however, about interpreting this move as the beginning of a sustained yuan appreciation cycle.

A stronger and relatively stable currency helps create a more constructive environment for United States-China negotiations and reduces the scope for renewed accusations of competitive depreciation. But the wide United States-China yield differential and China’s still-soft domestic fundamentals remain important constraints.

Part of the recent appreciation may therefore reflect policy-managed stability around the summit rather than a fundamental rerating of the yuan. China’s regulators have already encouraged exporters to increase their foreign-exchange hedging as the stronger currency begins to affect corporate earnings.

The broader takeaway is that China is no longer managing a single trade conflict. It is confronting two distinct forms of external economic pressure.

The US challenge is volatile, political and potentially negotiable. The European challenge is more gradual, but increasingly embedded in institutions, regulations and market-access rules.

For Beijing, reaching a workable accommodation with Washington therefore has value beyond the bilateral relationship itself. It could prevent the two fronts from tightening simultaneously and provide China with greater strategic flexibility.

For Asean, rising US and European trade pressure on China could further accelerate regional economic integration with China.

As direct access to Western markets becomes more constrained, Chinese companies are likely to expand their use of Asean as a production, assembly and investment base.

This would reinforce the evolving “China+1” model and redirect more manufacturing capacity, supply chains and outbound investment into the region.

The shift presents substantial opportunities. Asean could benefit from stronger foreign direct investment, faster industrialisation and deeper participation in global supply chains.

It could also capture activities that extend beyond final assembly, including component production, logistics, digital infrastructure and business services.

But the opportunities will come with greater scrutiny. Deeper integration with Chinese production networks could expose Asean exporters to more intensive Western examination of transshipment, rules of origin and the extent of genuine local value creation.

The key distinction will be between investment that establishes substantive production capabilities within Asean and trade flows that merely use the region to circumvent restrictions elsewhere.

Asean governments are therefore likely to pursue a pragmatic middle path. They will strengthen customs enforcement, rules-of-origin compliance and supply-chain transparency to reassure the United States and Europe.

At the same time, they will continue to welcome Chinese capital, technology and intermediate goods that support the region’s manufacturing competitiveness.

Rather than choosing between China and the West, Asean will seek to make itself economically indispensable to both. Chinese production networks will remain important on the supply side, while Western consumer demand and capital will remain critical on the demand side.

Asean’s emerging role therefore goes beyond being an alternative manufacturing location. As geopolitical tensions redirect global trade and investment, the region is evolving into a critical intermediary connecting Chinese production capabilities with Western markets.

It is becoming one of the few parts of the world where economic integration may continue to deepen even as the wider global trading system fragments.

The challenge for Asean will be to preserve this position without becoming a conduit for trade circumvention or a battleground for competing geopolitical demands.

If it can maintain credible rules, genuine local value creation and access to all major markets, the region could emerge not merely as a beneficiary of global fragmentation, but as an increasingly important bridge across it.