(Bloomberg) -- German Chancellor Olaf Scholz will take a delicate message to China this week: Beijing has not acted on European warnings to end discriminatory business practices and failure to do so will result in an escalation in tensions.

Scholz arrived in the southwest city of Chongqing Sunday on his second visit to China as chancellor, China Central Television reported, describing the trip as the first by a state leader of a major Western country this year.

Scholz will warn Chinese President Xi Jinping that he needs to act soon to avoid European Union tariffs meant to rebalance the trade relationship, including on electric vehicles, according to people involved in the preparations, who asked not to be identified discussing confidential planning. 

The EU is increasingly wary of China’s use of massive public support in critical sectors and has been toughening its stance in recent months. That puts Scholz in a tricky position as China remained Germany’s biggest trading partner last year — with a volume of more than €250 billion ($266 billion) — despite increasingly difficult conditions for doing business there.

Scholz is due to visit Chongqing, Shanghai and Beijing, and is expected to tell Xi and Premier Li Qiang that he favors free and fair trade but will steer clear of anything that could be viewed as undermining the EU’s tougher stance on commerce, the people said.

Instead, he’ll tell Chinese officials that it’s in the country’s own interest to avert a possible trade war by reducing overcapacity and giving non-Chinese companies the same advantages and subsidies as local manufacturers.

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A survey published Wednesday by the German Chamber of Commerce showed that two out of three German com

panies operating in China say they face unfair competition, which threatens to push up costs and erode profit margins.

Chinese carmaker BYD Co. received at least €3.4 billion in direct government subsidies as part of Beijing’s push to dominate electric vehicles and other clean technologies, according to a separate study published the same day.

The EU has spent the past year building up its economic leverage with China through the use of trade tools and the launch of its economic security strategy.

“That leverage can be undermined very quickly if the leader of Europe’s biggest economy sends different signals to Beijing,” said Noah Barkin, a Berlin-based analyst on Europe-China relations at Rhodium Group.

That’s one reason diplomats in Brussels will closely follow the talks between Scholz and Xi in Beijing on Tuesday, and those between French President Emmanuel Macron and Xi in Paris a few weeks later, Barkin said. “European unity on China is on the line,” according to Barkin.

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Among senior managers accompanying Scholz on his trip are the chief executive officers of Siemens AG, Bayer AG, Merck KGaA, BMW AG and Mercedes-Benz Group AG, according people familiar with the planning.

Volkswagen AG said Chief Executive Officer Oliver Blume will not be joining the delegation due to scheduling conflicts.

His absence comes as Europe’s largest carmaker tries to stem an existential crisis about its declining market share in the world’s biggest auto market. Blume is preparing to host a capital markets presentation on China in Beijing on April 24 before attending the Beijing car show.

VW continues to face scrutiny over its presence in China’s far western province of Xinjiang, where the government has been accused of widespread human-rights abuses against the mainly Muslim Uyghur ethnic minority.

VW announced in February it was considering various options regarding its operations in Xinjiang. That followed media reports that a giant car testing track it developed with its local partners in the city of Turpan was built using forced labor.

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The Chancellor’s arrival in China comes as Iran launched armed drones and missiles against Israel, marking a new and more volatile phase of the Middle East conflict. Scholz condemned the attack “in the strongest possible terms,” said government spokesman Steffen Hebestreit. “In these difficult hours, Germany stands closely by Israel’s side. We will now discuss further reactions closely with our G7 partners and allies.”

Amid differing views on Russia’s war against Ukraine, Scholz also wants to gauge Beijing’s willingness to use its influence over Moscow and join international efforts for a high-level peace conference for Ukraine in mid-June.

Joerg Wuttke, a former president of the EU Chamber of Commerce in China, expects the chancellor to make a strong case on the Ukraine war and its impact on Europe, but doesn’t anticipate any shift from Beijing.

“The Chinese cannot move an inch away from the Russians,” Wuttke said from Beijing. “They cannot change horses.”

--With assistance from Colum Murphy, Wilfried Eckl-Dorna and Monica Raymunt.

(Updates with report of chancellor’s arrival in second paragraph, comment on Middle East in fourth-last paragraph.)

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