China and Manufacturing War: Europe is Lagging Behind

By China Business Spotlight

China is waging an all-out production war that is redefining the global economic order. While the USA is fighting an open trade conflict with punitive tariffs and subsidies, Beijing is pursuing a quieter but more effective strategy: control over global supply chains and production sites. Europe is not only facing the challenge of declining competitiveness but also the consequences of its political inaction. With a “Great Reset” of German industry and structural weaknesses, the eurozone is facing an economic collapse.

This final part of the mini-series looks at how China’s manufacturing dominance is permanently changing the global economy, trade flows and geopolitical balance of power. The previous articles – “The power of factories: China builds – the world shakes” and “China wins: USA in the import trap ” – shed light on the foundations of this development and China’s strategic export offensive.

Germany in the production trap

China’s strategic export policy is based on massive overproduction that cannot be absorbed by the domestic market. The state-sponsored overcapacity is flooding markets worldwide and squeezing out local manufacturers. As economist Brad Setser emphasizes, stable export growth is one of Beijing’s key priorities, which is supported by extensive government measures.

Brad Setser, former senior economist at the US think tank Council on Foreign Relations (CFR), has conducted extensive research into China’s trade and export policy. What sets China apart from other manufacturing nations is its control over global supply chains. The BRICS countries supply raw materials, while China refines them and exports them as finished products. As a result, the foreign trade balance is almost balanced, while China’s overall foreign trade surplus is constantly increasing.

Figure 1: China’s foreign trade balance with the BRICS countries vs. general foreign trade balance in billions of US dollars. Data source: WITS, own calculations

This model increases China’s influence on global trade and exacerbates the dependence of other nations. The USA is absorbing the majority of Chinese overproduction. Europe, on the other hand, is facing a decline in exports to China – a development that is not only due to trade tariffs, but also to China’s own supply of high-tech products

Germany’s economic backbone, industrial production, is facing a profound change. Production has fallen significantly since 2017 – a “Great Reset” that has massively weakened Germany’s role in the global supply chain. The correlation with the slump in exports to China is unmistakable. At the same time, this process is being exacerbated by structural problems at home: a lack of digitalization, a shortage of skilled workers and excessive bureaucracy are slowing down economic momentum. A comparison with China’s targeted industrialization shows how far Germany and Europe are from a strategic response.

Abbildung 2: Industrieproduktion in Deutschland, aktuelle Zahlen und Trend, Quelle: Marginal Revolution

China’s strategy is forcing German companies to adapt – often to the detriment of their domestic location. Brad Setser warns:

“Germany really needs to wake up here. The German economy will not thrive if VW concludes that the only way it can compete globally with Chinese EV makers is to essentially become a Chinese company – with design, engineering, software, batteries and production entirely in China. The new chancellor needs to think very carefully about Germany’s economic interests.”

China has not only adopted raw materials, but also technologies from Germany and Japan, transforming itself from a buyer of European high-tech products into an innovator in its own right. Noah Smith, prominent columnist and economist, summarizes:

“In the 2000s and 2010s, Germany’s manufacturing exports boomed as it sold China high-tech machinery and components. China has now copied, stolen or reinvented much of Germany’s technology and is crowding out German suppliers.”

Friedman’s observation adds to this picture: Europe’s most important economic allies – Germany and Japan – are bearing the brunt of China’s industrial offensive. This dynamic, according to Friedman, founder of Geopolitical Futures and columnist for the New York Times, is not new, but has been prepared for decades by China’s copying and adaptation of Western technologies. However, the geopolitical consequences of this development are more serious than ever, as they are massively shifting the economic balance between East and West.

Figure 2: Chinese imports from Germany as a share of German GDP, source: Brad Setser

Germany is not only suffering from a slump in exports to China, but also from structural problems: a lack of digitalization, a shortage of skilled workers and excessive bureaucracy are hampering economic momentum. A comparison with China’s targeted industrialization shows how far Europe is from a strategic response.

Europe in the shadow of China’s production war

While the US absorbs China’s exports, Europe is losing manufacturing power and global competitiveness. Noah Smith describes this development as part of a wider manufacturing war:
“The US and its allies are not just falling behind China in drone and battery production – we are falling behind in all areas of manufacturing.”

Europe has not only lost the competition with China, but also fails to recognize the scope of the problem. While China is openly pursuing its ambitions with its “Made in China 2025” strategy and the “Great Rejuvenation of the Chinese Nation”, Europe lacks a coherent response. Although institutions such as MERICS documented these developments at an early stage, political and economic measures have largely failed to materialize.

Figure 3: US imports vs. exports from the eurozone and China. Data source: WTM, own calculations

China controls the future of production

While the US is waging an open trade war against China, Beijing is secretly pushing ahead with its battle to control global production. Europe has long been caught in the crosshairs of China’s strategy – and hasn’t even noticed. Europe’s elites have made an unprecedented failure on a political and economic level over the last ten years. The “Made in China 2025” and “Great Rejuvenation of the Chinese Nation” plans were no secrets – they were openly communicated. Nevertheless, Europe failed to respond.

The consequences are obvious: An economically weakened Europe, a Germany dependent on Chinese supply chains and a global trade order that consolidates China’s dominance.