Europe debates tougher China stance: ‘We have to defend ourselves’

European leaders are grappling with how to respond to China's rapidly growing economic influence, particularly its dominance in strategic industries like electric vehicles and solar panels. What was once known for cheap, low-quality goods has transformed into a global manufacturing powerhouse, moving up the value chain and challenging European competitors.

Economists like Sander Tordoir and Brad Setser highlight a "new China shock" reverberating through global markets, with Germany's manufacturing sector feeling the impact acutely. German companies in core industries such as automotive, machinery, chemicals, and aircraft are facing pressure both in China and on their home turf.

The core issue is China's significant industrial overcapacity. With domestic demand weakened by a property market slump, China relies heavily on overseas markets to absorb its vast production. This leads to a flood of products, from steel to EVs, entering the European market, often at prices that undercut European producers. Simultaneously, European businesses are finding it increasingly difficult to access the Chinese market, exacerbating an already uneven trade relationship.

There are growing fears that this imbalance could hollow out European industries, leading to a lopsided dependence on China. Some European factories are already closing or shedding jobs, and businesses are even relocating operations to China to gain market access. The Chinese Communist Party's model, which heavily supports strategic sectors and fosters intense internal competition, further fuels this excess production and export pressure.

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There is a growing consensus a new China shock is reverberating across global goods markets. Nowhere is that shock more consequential than in Germany. Its manufacturers in core industries – cars, machinery, chemicals and aircraft – are being simultaneously squeezed out of China and other foreign markets, and at home.