Europe Braces for China Shock 2.0

Chatter in Brussels about an ominous "China shock 2.0" is increasing. In late May, five EU member states circulated a joint “non-paper” calling for stricter protection against “unfair trade practices”, and now all 27 members are debating their China posture at the highest level. A string of reports published in the first half of 2026 adds to the anxiety. The hard numbers are a warning that European industry risks being, in the words of a recent report by France's strategy commission, flattened by a "steamroller" of cheap Chinese exports targeting the highly advanced manufacturing sectors that fuel the European economy.

When Beijing joined the WTO in the early 2000s, Europe survived the first "China shock", a wave of cheap toys, textiles, and basic electronics that hollowed out low-end manufacturing across the developed world by moving up the value chain. This time there is no higher ground to retreat to: Chinese manufacturing has followed European industry up that chain and now competes with what is left of it. 

A Surplus the Size of Italy’s Economy

The root of the problem lies within China's own political economy. A party-state determined to keep capital at home produces an enormous savings glut, while industrial planners pour investment into favored sectors regardless of whether anyone will buy the output. A currency kept deliberately weak compounds the effect, making Chinese goods cheaper abroad and foreign goods more expensive at home. Electric vehicles are the textbook case. According to a Council on Foreign Relations report, China has built capacity for roughly 25 million cars a year against a home market barely half that size. Weak household demand cannot absorb the surplus, so the only outlet is export. Since the pandemic, Chinese export volumes have surged while imports have stayed flat.

The scale is hard to overstate. The Centre for European Reform puts China's manufacturing surplus at around $2 trillion, roughly the size of Italy's entire economy. With the United States walling itself off behind tariffs and connected-vehicle bans, that overcapacity flows toward whomever remains open. The European Union, the largest open market left, is the obvious destination.

 Going for the High Ground

In a report published in February 2026, France's strategy commission Le Plan estimates the share of national manufacturing output exposed to abnormally strong Chinese competition at roughly 70% in Germany, 60% in Italy, 40% in Spain, and 36% in France.

The automotive sector, accounting for around 13 million direct and indirect jobs across Europe, is the flashpoint. In a February 2026 report, Rhodium Group finds that German carmakers are shedding workers at the fastest pace since the 2008 financial crisis, faster even than during the pandemic. The market share of German brands inside China collapsed by roughly a third between 2020 and 2025. European auto-supplier association CLEPA, mentioned in the same report, warns that 350,000 supplier jobs across the continent are at risk over the next five years. They cite a cost disadvantage against Chinese rivals of up to 35%.

The damage is not confined to cars. In chemicals, BASF, the world's largest producer, is shutting down European capacities and pouring investment into a vast new site in China. At the same time, its leadership bluntly decries the continent's lost competitiveness. In machinery and power-generation equipment, long-standing German strongholds, Chinese firms have already pulled ahead of their German rivals in global markets. The country that once rode China's rise is now being squeezed in China, in third markets, and, increasingly, at home.

 Not Just a European Story

Beijing's answer to this diagnosis is that the imbalance is structural: Europe's troubles stem from high energy costs and a failure to keep pace with Chinese innovation, not from any distortion in China. While this argument has some merit, it does not account for the fact that the same displacement is happening everywhere.

Indonesia watched Chinese exporters seize more than seven percentage points of import market share in three years, and saw 80,000 textile workers laid off in 2024 alone. Brazil, ostensibly China’s partner in BRICS, has had to raise auto tariffs as Chinese carmakers ship in fully built or knocked-down vehicles rather than manufacturing locally. In the EU's direct neighborhood, Türkiye has tried a different approach, hitting Chinese cars with tariffs of up to 60% but carving out exemptions for firms willing to build on Turkish soil.

These episodes demonstrate a consistent pattern. China imports raw commodities such as minerals, energy, and grain, but seeks to retain manufacturing at every rung of the value chain no matter how far downstream. For developing economies counting on industrialization as their path upward, the ladder is being pulled away.

A Reaction and Its Limits

As the evidence for a new “China shock” mounts, Brussels is finally gearing up for a more decisive response. Behind the joint non-paper denouncing “the rise of unfair trade practices” there is a more concrete toolkit. On May 19, the European Parliament approved stricter foreign-investment screening across sensitive sectors from defense and semiconductors to critical raw materials. In an even more radical move, the proposed Industrial Accelerator Act (IAA) would set "made in Europe" content thresholds in procurement and major investments. Beijing took the threat seriously enough to warn of potential "countermeasures" should the EU move ahead with its plans.

None of this will provide rapid relief to Europe’s beleaguered industry. The investment rules will not come into effect before late 2027 and the IAA is farther back in the pipeline and more contentious still. Spain has wavered on the joint non-paper, and German Economy Minister Katherina Reiche warned just after meeting her Chinese counterpart on May 27 that the EU must preserve “openness” to exports. Crucially, Europe's deep dependence on Chinese inputs blunts its own weapons: just weeks ago the Commission had to reverse sanctions on a Chinese chip supplier after carmakers warned they would soon run out of components.

No Painless Way Out 

The recent Trump-Xi summit looked less like a reset than a settlement on Beijing's terms. A US-China trade truce frees China to concentrate its pressure on the largest remaining open market: Europe. For Brussels, there is no quick fix and no external rescue. If the EU wants its industrial core to survive, it will have to absorb significant short-term pain to keep strategic capacity alive and close the gaps in its own defenses. Concretely, that means widening the EU's trade defenses well beyond the roughly one-tenth of Chinese imports they now cover and securing the raw materials and components that leave European firms exposed. Both steps involve higher costs before they bring relief. They also mean pressing Beijing on the source of the imbalance: an undervalued currency and chronically weak domestic demand. Only when these measures are in place will Brussels have the credibility to lead the coalition of economies elsewhere facing the same steamroller. The pain is unavoidable. The question is whether Europe chooses to have it now, on its own terms, or have it imposed later, on Beijing's.

The views expressed herein are those solely of the author(s). GMF as an institution does not take positions.