One major focus of autumnal Brussels trade and industrial policy conversation will be relations with China and the belief that protection is needed to avoid economic doom. Much of this debate unfortunately rests on the outdated thinking behind too many “China Shock 2.0” commentaries that advocate damaging options of economic warfare and incumbent protection without any kind of long-term thinking as to where that leads.
In contrast, businesses and member states are engaging with the reality of a new long-term economic superpower while knowing at least some of the risks. Such an approach is where the EU needs to go, one that adapts to today’s inter-connected global economy and uses the bloc’s strengths rather than throwing them away to support those who shout loudest during a general panic.
Misunderstanding China
Far too little critical reasoning is applied to China. There is a broad assumption that it has perfected industrial policy such that subsidies are perfectly targeted for global dominance.
To put it mildly this is improbable, but various studies[1] confirm a considerably more varied picture of advance in some sectors (electric vehicles) and less in others (aviation). There are also serious questions to ask about the relationship between subsidies and gains in market share[2], the level of thinking behind the weaponisation of rare earths[3], as well as the extent to which increased Chinese imports are displacing those from other countries rather than replacing EU production[4].
Also ignored is the role of their individual entrepreneurs whose hunger to grow companies into global giants can be contrasted with large European players which can by contrast resemble large bureaucracies. Continued lamentation over the loss of the EU solar panel industry is illustrative. Prices continued to fall after this[5], leading to global rollout in a way that would simply not have been possible under a model of continued EU-dominated high-cost production.
This is also one of the sectors that shows the extent of innovation now coming out of China. EU companies complaining to a willing media about how cheating is putting them out of business might just be finding themselves outcompeted by an economy in catch-up mode, never pleasant, but requiring rather different policy options. This is not least as it is robust competition that is such a key driver for innovation and growth while protecting inefficient incumbents is the opposite[6].
Worrying EU Attitudes
There is below the surface more than a hint of imperialistic views towards China and others, that Europe and North America can’t possibly be losing in a fair contest, therefore it is explained by cheating. For example, arguments about the under-valuation of the yuan rarely mention that the same was said of German exports when the Euro was introduced. The rest of the world notices the inconsistency, and a time of G7 dominance that has passed.
As successful sports managers often say, when you complain it means you’re losing. In international diplomacy there’s a more damaging effect from this attitude, which is that it offers no basis for successful coalition, since it assumes the global leadership of the G7 with the EU and US bickering for primacy.
Talk of supporting development would thus turn out to be empty, not a comfortable place for apparent liberals to place themselves, or for building alternate relationships with countries like India and Brazil. Variants, to warn China that they might be heading for a fall[7] or complain they are squeezing out developing countries, look too often like patronising others from the point of view of the superior.
Also little mentioned is the way the EU and US assume China behave as they would and indeed have. For the US was spying on the world’s internet traffic as they subsequently accused Huawei and others[8]. The EU tried and failed to weaponise the Brussels Effect to stop Chinese imports, mainly because new regulations added too much to domestic burdens. Our companies appear only too happy to raise prices after knocking out competitors, while subsidies are common.
China in the New Global Context
In truth we don’t know enough about China’s economy, something to urgently fix, but momentum in some sectors is obvious. There is a desire to expand, innovate, ell to the world, and above all to build. Excellent books by Dan Wang and Patrick McGee[9] detail that this is far more than government initiatives such as dual circulation and subsidies.
Indeed, one of the big questions is the extent to which obvious Chinese success will be threatened by its future state intervention. For there is also a clear suspicion of successful international companies and concern about overseas investment. Continued expansion can therefore not be taken for granted, not least given similar demographic challenges to European countries and the difficulties of continual innovation once winning companies become established.
What is unlikely to change any time soon is that China is not a friend to the G7, does not share many political values, and presents obvious security issues such as support for Russia over its invasion of Ukraine. Human rights objections are also likely to persist, as are tensions regarding Taiwan. This can be recognised while still understanding that a global economic superpower that is the main trading partner of more than half the world’s countries is unlikely to be marginalised[10].
Equally the global economy is likely to remain interlinked notwithstanding political pushback because of the way technology has reduced barriers to goods and services trade, and the fact that the largest companies want to do business as widely as possible. This is now a global competition in which the EU and US can’t just put up the barriers such that China will take the role of the Soviet Union in the Cold War, though some misguided policy prescriptions might lead to the EU reprising the losing side by closing its economy.
Outright economic warfare is not a good strategy in this context, inevitable and sometimes satisfying though short-term conflicts may be. There are simply too many players, connections, and dependencies for any power to decisively win, and initial evidence suggests that there are in most cases sufficient workrounds to reduce the potency of weaponisation. Resilience or economic security are similarly tricky concepts, not least as all the inter-connections lead to a delivery record far superior to anything governments are likely to achieve. Trying to replicate or even enhance this is leading to a wide range of largely unfocused initiatives.
Europe Must Adapt More Than Protect
Equally true is that existing trade rules are not sufficient for today’s inter-dependent global economy, and falling into disrepair partly as a result. China unconvincingly claims to be their protector as the US is breaking them, reflecting who thinks they benefit, but both would have to change their attitudes towards constraining their own power, of which there is currently no sign. With Brussels conversations similarly deep in denial, the EU is not helping. Discussions about global imbalances are similarly currently futile not least given deep disagreements among economists over them still less any signs they could easily be fixed[11].
As a former Biden administration official wrote with regard to the US and China, “The strategy most consistent with lasting stability is not dominance at all, but a shared doctrine of restraint”[12]. While ultimately there will need to be new mechanisms in which the major powers accept a degree of binding, we are a long way from any of them wanting this.
Though obviously adding up to a huge political and economic challenge, this total picture need not be a cause for despair, because the European political economy is still strong. Trying to balance economic success, social and environmental protections, security, innovation, and international trade is inevitably challenging, but also a source of power. This is an attractive proposition making for a continent where people want to live and do business, including those born in China.
What Europe should be setting out to prove is that these ideals are not incompatible in today’s world of competition, indeed that our political system is the best way to produce positive results balancing all the different objectives. We should be working with those that agree, notwithstanding the challenge that is a social media age of insecurity and discontent that strengthens domestic populist forces pushing various forms of unrealistic nostalgia particularly for an age of mass manufacturing.
Adaptability will be more important than resilience in the policy mix, to see new opportunities rather than hanging on to old ways at increasing cost, identify a few genuine priority sectors for state intervention, support people through change, respond where there are genuine crises, and above all to provide individuals and companies with the tools to reassert global competitiveness that is currently under such severe pressure. This means accepting that China and others are currently winning more or less fairly in some sectors traditionally considered European strengths.
In some circumstances this will mean protection of particular sectors through WTO-compliant mechanisms, support for strengthening supply chains, as well as new rules appropriate to 21st century trade. However, the EU should maintain the logic of comparative advantage and business-led activity that must underpin any fair system of global governance, as well as engaging with China and other countries, because this rather than protection is the only basis on which we ultimately maintain leadership and competitiveness.
Conclusion
Even in the unlikely event that China is perfecting industrial policy for the long term more than catching up, that model will not work for Europe, we need to find mechanisms within our own traditions. Jobs are changing, manufacturing productivity continues to rise, AI and quantum will bring opportunities and threats, and this all remains best handled by a mixed political economy which allows for renewal, where some companies will fail to provide the space for others to succeed.
One of Europe’s strengths should be learning, which would mean far fewer scary articles prophesising doom, and far more seeking new answers to new issues. That is the way Europe continues to compete globally, not least as being what the rest of the world wants to see from us.
Real economic security does not come from self-sufficiency but from global competitiveness, and the scapegoating of China is a massive backward step to this. In all likelihood, the lack of focus and difficulty of a protective strategy in an inter-connected world economy means that adaptation will almost certainly be what happens rather than the excitable hysteria around China Shock 2.0. Policy-makers would therefore be best focusing now on how best to shape that process.
[1] See for example https://www.csis.org/analysis/power-innovation-strategic-value-chinas-high-tech-drive
[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7247198
[3] https://www.foreignaffairs.com/china/how-china-found-most-potent-weapon-xiong-weiss
[4] https://globaltradealert.org/reports/Trade-Redirection-of-Chinese-Exports-During-2025
[5] https://ourworldindata.org/grapher/solar-pv-prices
[6] “I have seen and discussed many papers showing that competition is good for growth. I have not seen a paper that convincingly shows that protecting incumbents through patents, barriers to entry, or any other stratagem leads to an increase in productivity. It is highly unlikely that no researcher would have found the effect if it was in the data.” Thomas Philippon, The Great Reversal
[7] https://www.foreignaffairs.com/china/next-global-economic-crisis-made-china-michael-froman
[8] Underground Empire: How America Weaponized the World Economy by Henry Farrell and Abraham Newman
[9] Breakneck by Dan Wang, Apple in China by Partick McGee
[10] https://www.visualcapitalist.com/do-countries-trade-more-with-usa-or-china-map/
[11] https://www.economist.com/by-invitation/2026/07/28/dont-blame-global-imbalances-on-the-undervalued-yuan
[12] https://acf.sais.jhu.edu/the-path-to-u-s-china-stability-in-an-era-of-economic-warfare/