On China’s Industrial Playbook (and Europe’s Response)
05 June 2024
Author: EIES
China's industrial strategy and modus operandi in global supply chains pose a threat to Europe's economic security, prompting Europe's leadership to consider how to economically compete in response while providing security and economic prosperity.
Amid German Chancellor Olaf Scholz’s recent trip to China, President Xi Jinping’s first European visit in five years, and escalating tensions over China’s distortive economic practices and material support for Russia’s war on Ukraine, Europe has been seeking new economic security approaches to protect its internal market and industry and manage geopolitical risks. With relatively high domestic energy prices, significant dependencies on China for the critical materials and technologies required for its energy transition and security, internal disagreements on the path forward for European industrial policy, and Washington’s recent moves to support U.S. industry and protect its domestic market, the old continent finds itself in a precarious position.
As Europe’s political and economic leadership considers how to compete in this environment and deliver the energy transition in a way that provides security and economic prosperity, it is important to reflect on China’s own industrial strategy and modus operandi in global supply chains to understand the scale of this geopolitical and economic challenge, and craft policies to address it.
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Key Takeaways
Drive for Autonomy: Beijing’s industrial policies emphasise self-reliance, the need to reduce vulnerability to external shocks, and move China up the manufacturing value chain across strategic value chains (among which renewables, batteries, and artificial intelligence), achieving 70 percent domestic content for their key components and materials by 2025.
Intervention and Capture: The Chinese economy features significant state intervention and surveillance in both private and state-owned enterprises (SOEs) - including via state-owned SASAC - to align them with national goals. Domestic laws compel firms operating in and out of China to share certain data with authorities on request. Technology transfers have often been a pre-condition for market access, where technology was not acquired through industrial espionage and cyber theft.
Maximising Power: China gives its companies a vast protected domestic market, only partly open to foreign firms, while promoting exports. Industrial champions receive generous, opaque financial support, enjoy vertical integration and market dominance, and do not necessarily operate on profit-maximisation principles.
Competitiveness and Security Risks: These policies drive growing Chinese overcapacity and dominance of raw material and clean technology supply chains and market. Combined with Europe’s comparatively high production costs, this tilted the playing field and has contributed to the loss of capacity across strategic value chains. This is compounded by broader security risks: from overdependence to climate, cyber and technology risks. This is especially concerning as China has recently demonstrated willingness to flex its supply chain dominance.
Weighing the Benefits: The security and competitiveness impacts of privileging low-cost inputs and goods for European industry and consumers over other economic, social and environmental benefits must be seriously analysed - especially impacts on capacity and jobs across strategic industries, political stability and support for the EU’s security and decarbonisation agenda.
For a China-Specific Strategy: To better understand the challenge and drive substantial positive change in Beijing’s behaviour at home and abroad, Europe needs a long-term China strategy, setting shared principles, goals, and actions built on economic and security imperatives to be implemented through a mix of competition, trade, industrial and security policy tools.
Aligning Interests for Joint Action: This should be underpinned by continued dialogue between European policymakers, industrial players and global partners to define and invest in strategic value chains; align business interests with long-term security objectives and mitigate the risk of retaliatory measures; and commit to international action to deter adverse practices and effectively de-risk strategic supply chains.
Using our Market Power: Europe must deepen engagement with like-minded countries and the private sector to use collective demand power and define and enforce realistic environmental, labour, security and transparency standards. Targeted initiatives may be required to provide a rapid response. The EU’s growing arsenal of defensive policies and tools should be updated to tackle intimidation, anticompetitive practices, and unsustainable practices. This must come with greater control of goods entering the EU market and the enforcement of reciprocity in market access.