This is basically a mutually assured destruction scenario.

The US is not going to let all US companies get fined out of retaliation, so there would be more retaliation from the US against the EU, and everyone else. In the end everyone loses, except for China, which as you mentioned is not stupid enough to play these games and decided to simply pick a lane.

China locks down the Internet and blocks foreign players (to varying levels of success). They don't reach overseas to prosecute foreign executives or fine Meta for not removing Party-critical content from Facebook. Of all the parties that could be involved in this censorship drama, China is somehow the most honest.