Europe at an inflection point on China

BRUSSELS — For almost two decades, Europe viewed China as a land of opportunity, a market with nearly unlimited hunger for its handbags and aeroplanes, chemicals and cars – punctuated by occasional tensions.

But that framing has now collapsed, as a consensus forms across European countries – including the biggest, the industrial powerhouse of Germany – that China poses an existential challenge. Europe is now experiencing China Shock 2.0 (“China Shock 1.0” permanently hollowed out towns in the American midwest, costing about one million blue collar jobs) and at the same time as trying to manage with an increasingly hostile American president.

Talking to officials, experts, parliamentarians and representatives of both business and unions over a week in Brussels and Berlin, a clear message emerged: There is now a near-universal consensus across Europe that China’s industrial overcapacity, helped by state subsidies and an artificially low currency, is hastening Europe’s deindustrialisation.

The economic threat has been reinforced by a growing political consensus: China’s support for Russia’s war against Ukraine is prolonging the energy crisis that is weighing on European economies at the same time as forcing them to channel more spending to defence.

What remains unresolved, and is becoming an increasingly urgent question, is what Europe should do about China, its third biggest trading partner. As one recurring line in our discussions, however, was this: The least defensible option now is simply continuing as before.

When it became clear that China was making progress towards its “Made in China 2025” ambitions to transform the low-end manufacturing economy into a global leader in technologies including in robotics, automated machine tools, biopharmaceuticals and new-energy vehicles, the European Union acted. In 2019 it adopted a “three-pillar” strategy to deal with China, calling it a partner, a competitor and a systemic rival.

By Beijing’s deadline of 2025, the achievements were clear: The value of its manufacturing output has risen from US$3.2 trillion in 2015 to US$4.85 trillion last year, meaning China now accounts for around 30 percent of global manufacturing output.

China has moved decisively up the value chain, exporting far more sophisticated products across nearly every industrial sector: commercial shipbuilding, robotics, agricultural machinery, biopharma, lithium-ion batteries, solar panels and EVs. BYD overtook Tesla last year as the world’s top EV seller.

The impact of China’s progress is clearly seen in European statistics. The European Union's goods trade deficit with China hit a record €360 billion (US$410 billion) in 2025, or a record €1bn a day, according to official trade data.

The EU and China agreed to enter three months of formal consultations to try to avoid a trade war over the imbalance, with EU trade commissioner Maroš Šefčovič and Chinese commerce minister Wang Wentao issuing their first joint statement in seven years. They will hold their next meeting in Beijing in October.

A study by France's High Commission for Planning published earlier this year estimated up to 55 percent of European manufacturing output could be threatened over the medium term if current trends persist. But this figure varies sharply by country: it reaches about 70 percent in Germany, 60 percent in Italy, 50 percent in Spain and 36 percent in France.

Germany remains the central and most conflicted actor in Europe. The country built decades of prosperity on exports to China — led by cars, chemicals and machinery — and firms like Volkswagen, BMW, and BASF still earn substantial profits from Chinese operations, even as direct exports from Germany to China decline.

But sentiment is shifting. Chancellor Friedrich Merz – while sometimes giving mixed messages in public, like his invoking of a “comprehensive strategic partnership” while he led a large business delegation to Beijing earlier this year – is said to now be convinced that Chinese overcapacity accounts for a large proportion of Germany’s deindustrialisation.

German employer associations estimate 400,000 industrial jobs have already been lost over the past three years, roughly 300,000 of them attributable to Chinese competition, with another 500,000 projected to be lost by 2030.

Germany as a whole is estimated to be losing 10,000 to 15,000 industrial jobs a month, a trend tied to both the energy shock following the loss of Russian gas and the competitive pressure from Chinese imports.

Chemicals firms like BASF have also become more supportive of trade restrictions, while generic drug manufacturers and biotech are similarly pushing for more protection, people here say.

The auto sector, while moving, remains the most reluctant to support protectionist measures: It is still deeply reliant on China for both sales and technological learning around electrification and autonomous driving.

But the threat at home is clear: Chinese EV exports to Europe rose 26 percent between 2024 and 2025, despite EU tariffs introduced the year before. Business leaders are so worried about hollowing out that they’re openly discussing whether Stuttgart will become the next Detroit.

At the same time, there is real acknowledgment that Germany cannot blame China for everything. Loss of domestic productivity, high energy costs, and regulatory slowness have compounded its problems.

Politically, the stakes are high. Germany faces a difficult election environment in which the far-right Alternative for Deutschland is a serious contender, fuelled in part by industrial job losses tied to the changing relationship with China. One of the states holding elections in September is Saxony-Anhalt, a major hub for the chemicals, automotive and machinery industries. If AfD wins there, it could fundamentally change Germany.

Almost all of them now accept that the nature of the competition has shifted: China is now selling high-tech products that are both cheaper and higher quality than European alternatives.

China's edge is not simply about innovation or ambition – it's structural. China is estimated to hold a 50-60 percent cost advantage over European manufacturers in some sectors, with currency undervaluation accounting for 20-40 percent of that gap, layered on top of lower labor costs and lower environmental standards.

Furthermore, Chinese industrial clusters can simply move faster: Innovation cycles that would take years in Europe happen in months in China, aided by a regulatory system that can introduce measures – such as outbound investment rules – far more quickly than Brussels can respond.

The leaders did not agree on a tougher, coordinated stance. Instead, they gave the European Commission a mandate to design new trade-defence tools and instructed it to pursue further dialogue with Beijing.

While the result was something of a damp squib, Europe is now swinging into action.

The questions now are what instruments Europe should use to tackle this challenge, and how much economic pain Europe is willing to risk in response.

There is broad skepticism that Europe can or should adopt a single, blunt instrument akin to the US Section 301 tariffs targeting “unfair” foreign trade practices, which the first Trump administration unleashed against China since 2017.

Not only would this be too blunt, it would take too long – as long as two years – for the European Commission to develop, with no guarantee of political mandate at the end.

Instead, the preferred approach inside the Commission is often described as “a thousand small cuts”: Using existing anti-dumping, anti-subsidy, procurement, and market-standard tools more quickly, more flexibly, and without waiting for lengthy investigations before acting.

“Instead of looking at one big push to counter Chinese imports, we have to use the instruments we have faster, better and more flexibly,” said one representative for German industry. “This basically comes down to not having a year-long investigation first then coming up with one instrument for the problem.”

The centrepiece of the more structural response is the Industrial Accelerator Act (IAA), a regulation the Commission proposed in March to both revive Europe's manufacturing base and speed up industrial decarbonisation. Essentially it would focus on Europe’s internal market to boost its industrial competitiveness.

Though not named as a China-specific measure, everyone involved understands the target of the legislation, which is expected to be finalised in October or November.

Even German unions say this kind of industrial policy would have been written off as a communist idea five years ago, but the China shock has focused minds.

German companies know the moves could bring blowback, but even the German auto industry is warming to the idea of taking action – or at least acknowledges that Germany needs to stop hampering the European Commission.

Disagreements within Europe – France is leaning into protectionism while Spain is resisting confrontation – stand to weaken Europe’s main source of leverage: Its unity.

That could be an additional complication as the Commission tries to build consensus faster than China can move.

Time is of the essence in Europe too. In addition to the looming regional elections in Germany, France will next year hold a presidential election – which the far-right National Rally has a decent shot of winning, meaning there is a very short window of opportunity for Europe to act.

Beijing, which prefers working with member states rather than the EU institutions, has signalled it will retaliate if the IAA takes effect, although the talks are an effort to prevent that.

“There’s more and more of a consensus on how to deal with the China challenge,” said one person who works for the European Commission president, summing up the approach. “But a willingness to apply tools and show resilience only works if we have a dialogue. We have to engage from a position of strength.”