China shock 2.0 - how Europe's industry can protect itself

Analysis of the danger for key industries China shock 2.0 - how Europe can defend itself As of: October 21, 2026 • 6:41 a.m

China is putting increasing pressure on European companies - including with massive subsidies. But higher tariffs alone are hardly enough. What else can the EU do to protect its economy?

Europe's industry is suffering more and more from the Chinese export offensive. Chinese manufacturers also benefit from massive government subsidies. The EU is therefore looking for countermeasures. Will higher tariffs help - or does Europe need a new strategy?

For Edgar Walk, chief economist at Bankhaus Metzler, it has long been about more than just ordinary competition. "China is pursuing a policy of destroying European and American industry. There is no other way to describe it," says Walk in an interview with the ARD financial editorial team. He cites the decline of the German solar industry as a warning example. Something similar is now threatening on a much larger scale.

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A new study by the Kiel Institute for the World Economy shows how much competition has intensified. China is now also competing with Europe in sectors in which European industry is traditionally strong.

This now affects almost 40 percent of these economic sectors - at the beginning of the 2000s it was only a quarter. Automotive, chemical and mechanical engineering are particularly affected. The Kiel researchers speak of a “China shock 2.0”. Unlike the first China shock in the early 2000s, this time it is primarily technologically sophisticated industries that are coming under pressure.

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Chinese companies have learned a lot from the West, says Walk. At the same time, Beijing focused on innovation, education and infrastructure early on. This strategy is now paying off: China now has “extremely competitive, innovative, strong companies.”

Europe's companies, on the other hand, suffer from too much bureaucracy, poor infrastructure and a lack of investment in research and development.

However, China's industrial strength does not rely solely on technological advances. According to an OECD study, the large Chinese industrial companies examined received on average three to eight times as much government support between 2005 and 2024 as comparable companies from OECD countries.

Particularly noteworthy: almost 60 percent of the global market share gains of the Chinese companies examined can be explained by the subsidies they received. The OECD considers this to be a conservative estimate because not all aid is recorded.

According to a recent study, Germany is increasingly becoming an alternative market for Chinese companies. more

Added to this is the yuan. Brad Setser, an expert on international financial flows at the Council on Foreign Relations, estimates that the Chinese currency is undervalued by around 30 percent.

Setser argues that China's actual current account surplus is significantly larger than officially reported. A low exchange rate makes Chinese exports cheaper.

The growing competition from China is also reflected in German foreign trade: in the first eight months of 2026, German exports to China fell by 12.9 percent compared to the same period last year. At the same time, imports from China increased by 10.1 percent.

The importance of China for the German export industry is dwindling. In the first half of 2026, the People's Republic only ranked ninth among Germany's export markets. In 2021 it was still second place.

This fits with Beijing's strategy of "dual circulation": Since 2020, China wants to strengthen the internal market and its own technologies in order to be less dependent on imports - but at the same time continue to benefit from global trade.

Metzler economist Walk puts it this way: "Every German company that exports goods to China today must know that there is a Chinese policy that wants to prevent precisely these exports in the future." The stated goal is for a Chinese company to produce these goods in the future.

After the summit last week, the EU Commission now wants to develop new instruments to better protect Europe's industry from unfair trading practices. For example, access to the internal market should be restricted more quickly.

Johannes Gernandt, chief economist at the Association of German Mechanical and Plant Manufacturers (VDMA), is not going fast enough: "While China is acting, we are still talking. We need threatening potential that makes it clear to the Chinese that we can also strike back."

Metzler economist Walk is even calling for import tariffs of at least 30 percent for automobile and mechanical engineering - also to compensate for what he sees as significant exchange rate distortions.

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But tariffs also pose risks: Walks believes that competition within Europe could decrease. In the worst case, there is a risk of “sclerotic zombie companies” - companies that hold their own behind trade barriers but would not be competitive on their own.

The Kiel researchers also see limits to classic protective tariffs. They want to link access to the EU internal market for strategically important products to production in Europe. For this, the EU needs a new legal basis. The model is the US regulation “Section 232”, which allows import restrictions for reasons of national security.

The mechanical engineering association VDMA is urging the European Union to renegotiate the customs dispute with the USA. more

China could respond to such new regulations and trade restrictions with countermeasures. However, Jörg Krämer, chief economist at Commerzbank, does not expect a major escalation, after all, China is already in a trade conflict with the USA.

“That’s why I think this trade conflict between the EU and China is being kept to a lesser degree,” says Krämer. "Otherwise China would have too many trade wars at once."

The EU repeatedly denounces unfair competition practices by China. more

In any case, one thing is clear: trade barriers alone will hardly make the local industry more competitive in the long term. But they can buy time to catch up technologically - and improve Europe as a location.

At the same time, the EU must decide which key industries and production capacities it wants to preserve for security reasons. Simply making imports more expensive is not enough.

This topic in the program: NDR Info | News | Oct 20, 2026 | 05:37 Uhrtagesschau.de | Stock market: China shock - How can Europe defend itself? | Oct 20, 2026 | 11:51 a.m