Disputes with Beijing have taken on a bigger scale in recent months and Brussels brought its biggest ever trade case against Beijing in September after European companies accused China of dumping solar panels in Europe.

The EU is also gathering evidence to see whether Chinese telecoms companies Huawei Technologies and ZTE are dumping or receiving illegal subsidies.

"We are not going to shy away from what we have to do," De Gucht told Reuters in an interview.

"But we are not interested in escalating tensions. I believe that the Chinese also realize that this has to be kept within limits," he said from his office in the European Commission.

The growing trade spats come at a dangerous time. Europe's economy is hardly growing and the continent is suffering from record unemployment, while China's much-faster growth is cooling. Both downturns raise the specter of social instability.

De Gucht, who first got to know China during his term as Belgium's foreign minister between 2004 and 2007, sees the tensions persisting precisely because China is seeking to produce sophisticated products that will compete with Europe.

"China is facing a tremendous challenge: how to get a larger share of the value-added pie, as it otherwise can't possibly take the next step in economic development, which Japan, Taiwan, South Korea, Singapore and Hong Kong have already taken," De Gucht wrote in a book published this month called "Freedom: Liberalism In A Time of Cholera".

There he cites a Chinese curse: "May you live in interesting times."

Trade between China and the European Union has doubled since 2003, rising to 428 billion euros ($558 billion) in 2011, making the EU China's biggest trading partner. China is the second biggest destination for European goods after the United States.

But ongoing disputes range from metal tubes to China's restrictions of exports of rare earth metals.

In the solar panel case, European makers want duties placed on Chinese imports amid a sharp drop in prices, something the United States has already implemented.

NOT AN EASY PARTNER

EU diplomats say De Gucht could be using the solar panel dispute in Europe as leverage over Beijing to push the Communist government to cut what they see as illegal subsidies to Huawei and ZTE and avoid another formal trade case with Brussels.

De Gucht declined to go into details about either case, but said he hoped solutions could be found.

"You can imagine that: a mushrooming of problems between China and Europe," said De Gucht, one of Europe's most powerful commissioners and who leads trade policy on behalf of the EU's 27 countries. "Both parties realize that this would be a very bad thing for the whole of the world economy."

The U.S. ambitions of Huawei and ZTE were stopped in their tracks earlier this month as a congressional report urged American companies to stop doing business with the firms, raising fears of retaliation from China.

The U.S. House of Representatives' Intelligence Committee warned industry that Beijing could use equipment made by the two companies to spy on certain communications and threaten vital systems through computerized links.

Europe's dealings with Beijing lack the geo-political dimensions of China's relations with its other big trading partners, such as Japan, which is in a tussle over the ownership of some islands, and the United States, which has a naval fleet based in Japan to wield influence over the region.

That means Europe lacks leverage beyond trade defense instruments, but also makes the partnership less complicated.

"That fact deprives us of a number of possible levers, but on the other hand also facilitates a more rational discussion on a number of trade issues," De Gucht said.

Trade has always been a fundamental aspect of the European Union and is one of the few things that still unite eurosceptic Britain with EU enthusiasts such as De Gucht's Belgium.

The European Union implemented a landmark free-trade deal with South Korea in 2011, which went beyond tariff reductions and took in regulation and services. Now it is seeking to forge similar pacts with Japan and the United States.

While a free-trade pact between China and Europe is unlikely even in the medium term, Brussels and Beijing could agree on an investment pact that would lay down rules for companies expanding in both regions, something De Gucht said was gaining momentum. "It is of prime interest for us," he said.

As things stand, burdens on European investors in China - including rules requiring companies to share their know-how with Chinese firms - makes deepening investment links problematic.

"They are much more ready than in the past to put these topics, which are rather sensitive for them, on the negotiating table," he said. "That doesn't mean that China is suddenly an easy partner, but they realize they have to engage."

($1 = 0.7674 euros)

(Additional reporting by Robert-Jan Bartunek; Editing by Sophie Hares)

• A Permanent Economic Emergency