Europe’s China Dilemma

The continent has concluded that its economic relationship with Beijing is unsustainable. It still cannot agree on what should replace it.

For much of the past three decades, Europe believed it had discovered a mutually beneficial formula for engagement with China. The arrangement appeared straightforward. China would provide inexpensive manufactured goods while Europe specialised in advanced engineering, high-value manufacturing, finance and premium consumer brands. The relationship was never perfectly balanced, but it was profitable enough for both sides to tolerate its asymmetries.

That bargain is now breaking down.

European officials increasingly argue that China has moved far beyond the role envisaged for it during the era of globalisation. Rather than remaining concentrated in labour-intensive industries, Chinese firms have climbed the technological ladder and entered sectors once regarded as Europe’s industrial strongholds. Electric vehicles, batteries, solar panels, telecommunications equipment, industrial machinery and advanced chemicals are no longer areas of uncontested European advantage.

The result is a growing sense in Brussels that the continent faces a structural challenge rather than a temporary trade dispute.

The European Union’s trade deficit with China has expanded dramatically over the past decade, reaching more than €400bn annually. Imports continue to rise while exports have largely stagnated. European policymakers increasingly argue that Chinese industrial policies—combining state support, subsidised finance, economies of scale and strategic planning—have created manufacturing capacity that far exceeds domestic demand. Surplus production is therefore channelled into overseas markets, placing pressure on foreign competitors.

This concern is hardly new. What is different is the context.

For years Europe managed its economic relationship with China while relying on the United States as both strategic guarantor and economic partner. Today that assumption looks increasingly uncertain. Trade disputes with Washington, disagreements over foreign policy and broader doubts about American reliability have weakened Europe’s room for manoeuvre. At precisely the moment when European leaders wish to reduce dependence on China, they find themselves less certain of the alternative.

This has transformed what might once have been a straightforward trade debate into a broader strategic dilemma.

The European Commission has responded with increasingly assertive language. Officials now openly describe the current relationship as “unsustainable”. New initiatives under discussion would tighten investment screening, strengthen trade-defence mechanisms and favour domestic production in sectors deemed strategically important. Investigations into Chinese electric vehicles, e-commerce platforms and industrial subsidies reflect a broader shift in thinking across Brussels.

Yet identifying a problem is easier than agreeing on a solution.

Europe remains divided.

France, Italy, Lithuania and several other member states support a more confrontational approach. Their argument is that Europe can no longer afford to remain passive while Chinese firms gain market share in industries central to the continent’s future prosperity. They see Chinese industrial expansion not merely as economic competition but as a strategic challenge requiring a coordinated response.

Germany views matters differently.

As Europe’s largest economy and manufacturing powerhouse, Germany remains deeply integrated with China. German firms rely on Chinese suppliers, Chinese consumers and Chinese production networks. Companies such as BASF, Volkswagen, BMW and Mercedes-Benz have invested billions of euros in the Chinese market and continue to regard it as indispensable for future growth.

This creates an uncomfortable contradiction.

German policymakers recognise the risks associated with excessive dependence on China and increasingly worry about Chinese competition. Yet they are also acutely aware that retaliation from Beijing would fall disproportionately on German industry. For Berlin, economic de-risking and economic self-harm often appear separated by only a narrow margin.

The tension is visible in sectors far beyond trade. European debates over telecommunications infrastructure, supply-chain security and technology standards increasingly reveal the same divide. Some governments see Chinese involvement as a strategic vulnerability. Others fear that excluding Chinese firms would impose significant costs on businesses and consumers without providing immediate alternatives.

China, meanwhile, is not a passive observer.

Beijing has made clear that any significant restrictions on Chinese firms will be met with countermeasures. Such warnings carry weight because Europe’s dependence on China extends far beyond consumer goods. Chinese companies dominate critical segments of global supply chains, including rare-earth processing, battery materials, industrial chemicals and numerous intermediate inputs essential to European manufacturing.

This gives Beijing considerable leverage.

Europe may wish to reduce dependence on China, but doing so is easier in theory than in practice. Diversifying supply chains requires time, capital and alternative suppliers that often do not yet exist at sufficient scale. The process resembles what some European officials describe as economic chemotherapy: painful, costly and potentially unavoidable.

The deeper issue, however, extends beyond tariffs or trade balances.

For much of the post-Cold War era, many Western policymakers assumed that economic integration would eventually produce political and economic convergence. China’s rise was expected to reinforce a liberal international order largely designed by the West. Instead, China became richer, more technologically sophisticated and more influential while preserving its own political and economic model.

That outcome has forced a reassessment across Europe.

Chinese competition is no longer confined to low-value manufacturing. It increasingly appears in sectors that Europeans once assumed they would dominate indefinitely. At the same time, China remains one of Europe’s largest export markets and one of its most important suppliers. Europe therefore confronts a strategic challenge unlike any it has faced before: a rival that is simultaneously a customer, a supplier, an investor and a competitor.

This explains why the debate in Brussels remains unresolved.

Most European governments now agree that the status quo cannot continue. Few believe the existing relationship is politically sustainable or economically balanced. Yet there is no consensus on what should replace it. Protectionism carries costs. Dependence carries risks. Confrontation risks retaliation. Accommodation risks further erosion of industrial competitiveness.

Europe is therefore attempting something unusually difficult: recalibrating its relationship with a power that has become too important to ignore, too integrated to isolate and too formidable to confront without consequence.

The central question is no longer whether Europe should adapt to China’s rise. It is whether Europe can do so while preserving the economic model on which its own prosperity has long depended.