Europe’s Dual-Use Dilemma: Balancing Trade with China and Tech-Security with Taiwan

For much of the past twenty years, Europe’s commercial ties with China have been straightforward: European machine tools, industrial software and high-end components found ready buyers in China’s vast manufacturing sector, while luxury goods makers enjoyed a fast-growing consumer base. Concerns about labour rights or geopolitics rarely slowed the flow of trade.

That picture is now changing. A combination of export controls on “dual-use” technologies, which are products that can be used both for civilian and military purposes, and the EU’s quiet embrace of Taiwan as a “like-minded” partner in semiconductors has forced Europe into a difficult balancing act. Policymakers must reconcile economic interests with national security concerns and a commitment to democratic values. The way Europe navigates this challenge will help shape its role in global technology and geopolitics.

The Dual-Use Debate

“Dual-use” goods cover a wide range of technologies, from precision lasers and advanced machine tools to semiconductor manufacturing equipment. These technologies are essential for industries such as telecoms, aerospace and clean energy, but they also have potential applications in weapons systems and surveillance.

The EU maintains a growing body of export control rules to prevent the misuse of sensitive technologies. Since Russia’s invasion of Ukraine in 2022, Brussels has accelerated its efforts, adding new technologies to its control lists and increasing coordination with allies. For many companies, the issue is no longer abstract: a shipment of high-end photonics or chip tools to a Chinese buyer may now require licenses, inspections, and government approval. The Dutch firm ASML, for example, has faced mounting restrictions on exporting advanced lithography machines to China under U.S. and EU pressure.

China, however, remains a huge market. According to Eurostat, the EU exported €213.3 billion worth of goods to China in 2024, with capital goods and machinery making up a significant share. For exporters in Germany, Italy, and the Netherlands, these sales support jobs and industrial capacity. A sudden, sweeping halt in dual-use exports would therefore come at a high cost.

US Pressure and European Hesitation

The United States has continued to lead efforts to tighten semiconductor export controls, aiming to slow China’s progress in advanced chips. Since 2022, Washington has imposed sweeping restrictions on the export of chipmaking equipment and has repeatedly urged allies to follow suit. The Netherlands, home to ASML, the only company in the world producing extreme ultraviolet (EUV) lithography machines essential for leading-edge semiconductors, remains at the center of this strategic dispute. Under updated rules introduced in 2024 and 2025, The Hague requires ASML to obtain export licenses for certain high-end equipment sold to China, and most sales are now excluded from publicly reported dual-use export data, reflecting a delicate balance between commercial interests and geopolitical pressure.

Europe has responded unevenly. Brussels has updated control lists and signaled greater cooperation with Washington, but member states are divided. Some argue that excessive restrictions risk undermining Europe’s competitiveness. Others insist that without tighter rules, Europe will simply help arm its biggest strategic rival. What was once the preserve of trade lawyers has become a subject of daily diplomacy.

Taiwan: A Partner of Values and Strategy

If trade with China forces compromises, Taiwan presents the opposite: a partnership that is both security-relevant and values-compatible. The island nation dominates several segments of chip manufacturing and has been actively courting the EU as part of a broader bid to diversify and stabilise global supply chains. Brussels has reciprocated with a visible, if unofficial, deepening of ties, trade and investment dialogues, chips cooperation under the European Chips Act, and pledges to explore resilience measures. For officials in Brussels, Taipei is attractive: it offers access to critical expertise and capacity, and the relationship aligns with democratic rhetoric about supporting “like-minded” states. For industry, Taiwan represents both customers for European equipment and partners for on-shoring higher-value assembly and R&D to Europe.

Supply Chain Interdependence

Yet this two-track approach, restricting China while deepening ties with Taiwan, is fraught with contradictions. Supply chains in East Asia are tightly interconnected. Many European components shipped to China are later integrated into products assembled in Taiwan, South Korea or elsewhere. Cutting one link can have unintended consequences for others.

Export controls are also blunt instruments. It is often difficult to track how a dual-use item will ultimately be used. Companies complain that rules are complex and inconsistent across member states. And Beijing pays close attention to Europe’s warming ties with Taiwan. Any move that looks like favouritism can spark retaliation, ranging from regulatory harassment of European firms in China to informal trade restrictions.

Europe’s Hedge

So far, Brussels has tried to hedge. It has tightened its export control regime while stressing that most trade with China remains legitimate. At the same time, it has pursued discreet but meaningful engagement with Taiwan on semiconductors, research, and investment screening. The European Parliament has been more outspoken, passing resolutions calling for stronger ties with Taipei, while the Commission prefers careful language. This cautious approach allows flexibility but comes with risks. It requires unity among 27 member states, something difficult to maintain when national economic interests diverge. Enforcement also demands resources and intelligence-sharing that the EU has not always delivered consistently.

The Business Perspective

For European businesses, the trade offs are stark. A manufacturer of lithography components or high-precision assembly machinery confronts three uncomfortable possibilities: comply fully with a growing web of export restrictions and lose access to some Chinese clients; attempt to navigate legal grey areas and risk sanctions or reputational damage; or shift investments toward Taiwan and other partners to reduce exposure, a choice that involves upfront cost and strategic risk but may offer safer long-term access to advanced ecosystems. Company boards, especially in countries with large industrial bases, will weigh revenue losses against longer-term geopolitical risk, like being cut out of global value chains. That balancing act will shape investment flows and lobbying at both national and EU levels.

Policy Paths Forward

Policy options for Brussels are available but far from straightforward. Each path reflects the tension between Europe’s economic dependence on China and its growing strategic concern over technological security.

1. Clearer and Unified Export Rules  The European Union’s current export control framework remains fragmented, with implementation largely left to member states. A harmonised system, perhaps under an expanded mandate for the Commission’s Directorate-General for Trade, could provide greater legal clarity for firms navigating sensitive sales to China. Uniform rules would also close loopholes exploited by companies operating across different jurisdictions. Some policymakers have proposed a centralised EU export licensing authority, modelled loosely on the U.S. Bureau of Industry and Security, to coordinate decisions and share intelligence on dual-use risks. However, such a move would require political consensus that has so far proved elusive. Member states like Germany and Hungary, wary of economic fallout, have resisted ceding more control to Brussels.

2. Industrial Policy and Technological Autonomy 

The EU’s Chips Act, approved in 2023, earmarks more than €43 billion in public and private investment to bolster Europe’s semiconductor ecosystem,  from research to fabrication. While the initiative has spurred new partnerships, including Intel’s investment in Germany and TSMC’s planned plant in Dresden, experts caution that building a self-sufficient semiconductor supply chain will take years and require sustained political will. Expanding joint procurement and funding under the Act could strengthen European foundries, but risks duplicating U.S. and Asian efforts without addressing Europe’s comparative weaknesses in advanced lithography and materials. Some analysts suggest focusing EU funds on niche strengths, such as power semiconductors and advanced packaging, rather than competing directly in leading-edge chips.

3. Pragmatic Cooperation with Taiwan 

Europe’s engagement with Taiwan has deepened quietly, avoiding overt political gestures that might provoke Beijing while expanding cooperation in technology and supply-chain resilience. The EU-Taiwan Trade and Investment Dialogue, revived in 2023, has become a platform for discussing semiconductor research, cybersecurity standards, and raw material supply chains. Several member states, including Lithuania, Czechia, and the Netherlands, have signed memoranda of understanding with Taiwanese institutions to facilitate research and development and workforce training. Brussels could formalise these efforts through sectoral agreements on technology standards and mutual recognition of export controls, deepening ties with Taipei without crossing Beijing’s “red lines” on sovereignty. Still, China has already signalled its displeasure, warning of “serious consequences” for countries that “use Taiwan as a pawn.”

Each path comes with trade-offs. Tighter export controls could invite Chinese retaliation, such as restricting access to critical raw materials like rare earths and graphite. Industrial policy requires enormous capital, bureaucratic coordination, and long-term patience, an uncomfortable fit for Europe’s often fragmented political cycles. Closer cooperation with Taiwan, while strategically valuable, risks diplomatic backlash and economic pressure from Beijing, potentially fracturing EU unity.

The Bigger Picture

Europe’s dual-use dilemma is ultimately about more than chips or machinery. It is about Europe’s ability to act as a coherent player in a world where economics and security are tightly bound. A sharp break with China would be costly and politically divisive. An overly soft line risks leaving Europe vulnerable to coercion. The most realistic course is a middle path: clear but targeted restrictions on sensitive technologies, industrial investment in critical sectors, and quiet but substantive cooperation with Taiwan. This strategy may not produce dramatic headlines, but it offers the best chance of balancing prosperity, security, and values.

The stakes are high. Europe’s choices on dual-use exports and semiconductor partnerships will shape its role in Asia and its credibility as a global actor. In the digital age, managing this balance will be as important as the technologies themselves.