The Second China Shock and the Growing Threat to European Industry

China’s government is accelerating its efforts to dominate advanced technologies through state-backed industrial policies, reshaping global trade and posing a significant risk to European industrial competitiveness. As the authorities in Beijing pass the new 15th five-year plan, their ambitions are clear: to lead the emerging industries of the fourth Industrial Revolution and position China at the centre of a reconfigured global order.

This push for leadership comes amid domestic economic complexities. Recent meetings of China’s central leadership have produced commitments to easier monetary policy, higher fiscal deficits, real estate stabilisation, and increased social spending. The key objective for 2026 is to strengthen domestic demand and elevate household consumption. Despite repeated pledges, tangible progress on boosting consumption has been slow, with official analysis continuing to misinterpret weak demand as a supply constraint rather than a structural or income-based challenge.

The overarching industrial policy remains at the heart of China’s economic strategy. Industrial support in China represents a larger portion of GDP than in almost any other country outside major defence spenders. The government has prioritised industry and manufacturing, often at the expense of rebalancing efforts directed towards services or household consumption. Policies supporting export-oriented manufacturing have led to structural imbalances, evident in persistent overproduction and deflationary trends; China’s GDP deflator has fallen for ten straight quarters.

The impact of this approach is increasingly visible on the international stage. Chinese exports have surged, driven by strong supply, subdued domestic demand, and a currency that is undervalued by roughly 20 percent compared to three years ago. In 2025, China recorded a trade surplus in goods of one trillion dollars, with about a third of this with Europe and the United Kingdom. Export volumes from China have risen by half since 2022 while its imports have stagnated, reflecting both local weakness and the government’s drive for greater self-reliance.

Europe now faces an unprecedented influx of Chinese goods, ranging from electric vehicles and high-tech equipment to traditional sectors such as apparel and steel. The French president, Emmanuel Macron, described this trade imbalance as “a question of life or death” for European industry. In response, the European Union has imposed some tariffs on Chinese electric vehicle imports and launched an import surveillance mechanism to monitor for unfair competition and dumping. The United Kingdom, by contrast, has responded more cautiously, initiating collaboration with the EU on steel policy and granting new investigative powers to the Trade Remedies Authority.

Addressing this challenge calls for strategic clarity. Decision-makers must recognise that China’s model does not generate global or UK growth in the way that is sometimes assumed and that mercantilist industrial policy is now a major source of risk to both European industry and broader patterns of trade. Future engagement with Chinese counterparts must be grounded in a sober assessment of these threats and a commitment to strengthening domestic and regional industrial resilience.