Trade war to cooperation: scrutinizing China’s strategies to the EU carbon border adjustment mechanism

Abstract This paper delves into the anticipated impact of the European Union’s Carbon Border Adjustment Mechanism (EU CBAM) on its trading partners, with a particular focus on China. Centralizing to China’s critical sectors of iron, steel, and aluminum, findings suggest the CBAM may complicate the EU-China trade war, exacerbating trade imbalances. Analysis of various scenarios of potential retaliatory measures and policy alternatives for China reveal possible escalation into a trade conflict between the EU and China, with potential retaliatory measures improving China’s welfare but posing economic costs. The EU CBAM may also introduce trade discriminatory implications favoring the EU, raising concerns about WTO compliance. China might adhere by engaging in resource shuffling, such as offsetting emissions or prioritizing the use of green electricity solely for exports to the EU. This approach has demonstrated beneficial outcomes, enhancing both production efficiency and overall welfare. These findings suggest the importance of the coercive measures in facilitating collective implementation for more effective CBAM implementation. The complex dynamics between the EU and China underscore the multifaceted challenges and potential consequences associated with the EU CBAM.