‘China Shock’ or ‘China Gift’? Europe weighs its defences

Germany is shedding 10,000 manufacturing jobs every month; Europe’s industrial heartland risks becoming a new “Rust Belt”; China is engaging in the “industrial colonisation” of Europe. In recent months, warnings about “China Shock 2.0” have reverberated across European political and business circles, putting the spotlight once again on the impact of China’s high-tech industrial development on Europe and the rest of the world.

Despite mounting tensions between China and Europe, the European Union (EU) has so far refrained from adopting tougher measures against Beijing. Analysts interviewed said that while there is growing consensus within the EU on the diagnosis of the problem, member states remain divided over how to respond. As a result, the likelihood of a full-scale China-EU trade war breaking out in the near term remains low.

In the latest development, the EU and China have agreed to three months of formal trade talks in a bid to avert a trade war over their 360 billion euro (US$410.6 billion) annual trade imbalance, marking their first joint statement in seven years after weeks of escalating tensions over potential EU measures to curb a surge of Chinese imports.

Navigating ‘China Shock 2.0’

“China Shock 1.0” refers to the impact on manufacturing industries in Europe and the US following China’s accession to the World Trade Organization (WTO) in 2001, when exports of low-value-added goods surged. The concept of China Shock 2.0 emerged in Western political and academic circles in 2024. It refers primarily to China’s rapid rise in advanced industries such as electric vehicles (EVs), batteries and solar panels, coupled with weak domestic demand and industrial overcapacity, which has compelled Chinese firms to expand exports and, in turn, intensified competitive pressure on Western manufacturers.

In recent months, concern in Europe over China Shock 2.0 has risen markedly. Several think-tanks have warned that a surge in Chinese exports is crowding out European industries; German and French media have carried a flurry of features exploring how China is devouring Europe; and French President Emmanuel Macron has said bluntly that Chinese exports are “literally killing a large part of the European industry”.

At present, one of the key pieces of evidence behind the “China Shock 2.0” argument is China’s steadily widening trade surplus. Last year, the EU’s goods trade deficit with China grew to a record high of about €360 billion.

A report by European think-tank the Centre for European Reform (CER) argues that China Shock 2.0 is being driven not only by technological development, but also by three overlapping distortions.

First, China’s very high savings rate and weak household consumption depress domestic demand. Second, Beijing supports its manufacturing sector through massive subsidies and preferential policies, such as cheap land and machinery. Judging from its 15th Five-Year Plan (2026 to 2030), China will double down on state-led industrial policies. Finally, the renminbi exchange rate remains relatively undervalued.

Germany is at the centre of China Shock 2.0. The report notes that since 2023, Germany’s net export losses have amounted to about 3% of its GDP. What is even more worrying is that China is gradually coming to dominate sectors in which Germany has a competitive production edge, such as automobiles, machinery and electronic equipment, and aerospace manufacturing.

Europe weighs tougher trade defences

Discussion around China’s trade imbalance has been around for some time. Why, then, has the “China Shock 2.0” narrative heated up again recently? Sun Chenghao, a senior fellow at Tsinghua University’s Centre for International Security and Strategy, told Lianhe Zaobao that there are several drivers behind this.

Sun believes that after US President Donald Trump erected a tariff wall and the US market shrank, some Chinese exports were diverted to Europe, exacerbating the EU’s anxiety over its trade deficit and industrial competition. At the same time, Europe’s own sluggish economy has prompted politicians to seek external explanations.

He also pointed out that the Group of Seven (G7) is currently promoting a critical minerals alliance to reduce dependence on China’s rare earths and critical materials. Against this backdrop, the “China Shock 2.0” narrative has become more embedded in the discourse of economic security and geopolitical competition.

In an interview, Joerg Wuttke, a partner at strategic consultancy DGA-Albright Stonebridge Group and a former president of the European Union Chamber of Commerce in China, cited a series of figures on China’s exports and industrial performance. In May, semiconductor exports surged 110% year on year, while exports of computers and components rose 66%. Meanwhile, value added in the specialised industrial machinery industry — a sector traditionally seen as a European technological stronghold — increased 9.1%.

Wuttke said: “These are remarkable numbers, and they reflect a genuine structural shift in what China makes and sells to Europe.”

Macron and some European think tanks have proposed a “European equivalent of Section 301” — the US legal mechanism that allows Washington to investigate and impose tariffs on countries deemed to engage in unfair trade practices — to give the EU greater flexibility to levy industrial tariffs on China. Some commentators therefore believe that there is a growing risk of a China-EU trade war.

However, at the recent EU summit in Brussels, a tougher stance on China did not materialise. EU leaders did not put forward any concrete new measures, saying only that they would continue to refine the bloc’s trade defence toolbox and maintain constructive dialogue with major economic partners.

Following the summit, relevant sessions and discussions were held. On 22 June, European Central Bank president Christine Lagarde urged global leaders to discuss the undervalued renminbi, while EU Trade Commissioner Maros Sefcovic met with Chinese Commerce Minister Wang Wentao in Brussels on 29 June.

Tsinghua University’s Sun said the fact that the EU summit did not immediately introduce tougher new measures shows that while there is relative consensus within the EU on the diagnosis of the problem, there are still differences over how to act. “Germany, France and Italy place greater emphasis on industrial protection; countries such as Spain, however, are worried about a trade war and Chinese retaliation.”

When interviewed, Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said the summit reflected a pragmatic and cautious approach, with the focus on preparing balanced options that support both competitiveness and stable economic relations.

Chinese state media: a gift, not a shock?

On the other hand, China maintains that it is not the root cause of the “China Shock”. Speaking at the China International Supply Chain Expo on 22 June, Chinese Vice-Premier Ding Xuexiang rejected the “China Shock” narrative, stressing that China never actively pursues a trade surplus, and that the greatest obstacle to China increasing its imports does not lie within itself, but rather with certain countries that abuse export controls.

Chinese state media outlet Xinhuanet also published a commentary saying that the “China Shock” narrative ignores the real competitiveness China has built through sustained investment in research and development and through market discipline. It said the argument shifts the blame for structural problems such as the hollowing-out of Western industries, rigid innovation systems and unfair social distribution onto China. Chinese products, it argued, are not “China Shock 2.0”, but “China Gift 2.0”.

As tensions between China and Europe intensify, whether the two sides will break into a trade war has drawn close attention. However, experts interviewed believe that the current situation has not yet spiralled out of control.

Sun Chenghao believes the likelihood of a full-scale China-EU trade war is low, but an intensification of localised, sector-specific friction is almost certain. After all, the two economies are highly complementary, and European companies are also unwilling to lose the Chinese market.

Garcia-Herrero said the EU is likely to make fuller use of existing instruments, such as anti-dumping and anti-subsidy investigations. “Any steps are expected to remain calibrated, rules-based, and aimed at minimising broader trade disruptions.”

Wuttke believes that China and Europe do not want to escalate trade tensions. He said bluntly: “If Beijing retaliates by withholding rare earth or legacy chips, European plant closures might happen already after 12 weeks. No politician in Europe can risk it.”

This article was first published in Lianhe Zaobao as “ “中国冲击论”卷土重来 欧洲警报频响对华重拳却难落下？”.

Related: ‘We’re not that wealthy’: Beijing’s answer to China Shock 2.0 | Europe copies China’s industrial playbook: A protectionist turn?