Europe’s response to China Shock 2.0: Hold China closer

European Union regulators this month signaled plans to impose relatively modest tariffs on Chinese auto imports.
European Union regulators this month signaled plans to impose relatively modest tariffs on Chinese auto imports.


Squeezed between the threat of Trump and Chinese imports, European leaders are seeking to woo Chinese investment and know-how.

The first China shock that devastated manufacturing in the U.S. in the early 2000s bypassed large parts of Europe. A second shock now under way looks much more threatening.

But rather than simply erect ever higher barriers to the flood of Chinese imports, as the U.S. has done, European leaders are seeking an alternative: rolling out a welcome mat.

European officials have largely been in favor of investments from Chinese battery makers such as CATL and from Chinese electric-vehicle manufacturers such as BYD in Hungary and Chery Automobile in Spain.

In the 1980s, faced with a wave of low-cost Japanese auto imports, the Reagan administration negotiated export quotas that encouraged Japanese manufacturers to build factories in the U.S.

U.S. officials have been less willing to repeat that formula with China, which, unlike Japan, they consider a threat to national security. The White House, for example, is weighing curbs on Chinese “connected cars" that could transmit customer data back to China. Europeans worry less about such risks, although they could change their minds—as they did on telecom infrastructure supplied by Huawei Technologies.

While Chinese purchases of existing European businesses have collapsed in recent years, in part because of growing European scrutiny, greenfield investment—i.e. newly created companies or plants—has risen rapidly, reaching 78% of all Chinese foreign direct investment in Europe last year, according to data compiled by the Mercator Institute for China Studies and Rhodium Group.

Hedging China Shock 2.0 and Trump 2.0

At the core of this strategy is a fear that Europe, and especially Germany, which relies much more on manufacturing than the U.S., could be hit by one of two nightmare scenarios: a global trade war, or a new flood of cheap Chinese imports.

European Union regulators this month signaled plans to impose relatively modest tariffs—the highest will be half the 100% recently announced by President Biden—on Chinese auto imports. Some analysts saw this as an implicit encouragement to Chinese producers to shift auto factories to Europe instead, which some have started doing.

For both Europe and China, closer cooperation would hedge against a return to the White House by Donald Trump, who is pledging 10% across-the-board tariffs on imports. That threat argues against Europe fully throwing in its lot with the U.S., while encouraging China to smooth over tensions with Europe and maintain access to its lucrative market.

If so, Europe’s industrial and technological ties to China could strengthen as the U.S.’s weaken. And Chinese car brands will play an increasingly important role in Europe, but no role in the U.S.

The EU’s approach “accepts that the China-EU industrial complex exists and is explicitly trying to encourage more of it," said Jacob Kirkegaard, senior fellow with the Peterson Institute for International Economics.

This poses risks for Europe, said Noah Barkin, Europe-China expert at Rhodium: “If the European car industry remains deeply integrated with China and the U.S. industry is completely decoupled from China, that is likely to lead to bilateral tensions between the EU and U.S." Indeed, Europe exports twice as much to the U.S. as it does to China.

Europe’s manufacturing sector has a lot to lose

Why risk that? Europe’s car industry is deeply intertwined with China’s already through joint ventures that have a large share of China’s market. About a third of Volkswagen’s sales and a big share of its profit are in China.

Moreover, Europe has more to lose than the U.S. from a breakdown in global trade. It has two-and-a-half times as many manufacturing jobs, and more than a third of its manufactured goods are exported, versus one-fifth for the U.S., former Italian Prime Minister Mario Draghi said in a speech this month.

Manufacturing comprises 15% of Europe’s overall output, and 18% of Germany’s, compared with 11% of the U.S.’s, reflecting specialization in high-tech engineering tools and machinery that helped to power China’s rise. But China increasingly competes in products it used to buy from Europe. Its companies produce more industrial machines and equipment than their rivals in the U.S., Germany and Japan combined.

“The first China shock was a net positive for Germany," said Moritz Schularick, president of the Kiel Institute for the World Economy. “The second shock is a real wake-up call."

China once welcomed foreign investment as a way to import new technology. Now, said Barkin, “We are in a position where Europe is keen for transfers of technology to flow in the other direction."

China is likely to produce seven million battery-powered EVs this year, up from five million last year, said Ferdinand Dudenhoeffer, a German auto industry expert. Europe is likely to produce 1.2 million this year, down from 1.5 million last year, he said. This advantage of scale enabled Chinese manufacturers to move ahead of international competitors in technology for electric vehicles, including batteries.

Allowing Chinese manufacturers to grow in Europe could help European manufacturers by encouraging more people to switch to EVs, and governments to build charging infrastructure, some analysts say. Another advantage: The U.S. electric-vehicle market could lag behind Europe and China’s, with inferior technology and higher prices.

Given the risk if Trump is re-elected, Europe should be more open to China as a hedge, Dudenhoeffer said. “Chinese manufacturers will help us go faster into the future…The big growth region is Asia, not the U.S.," he said.

Write to Tom Fairless at

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