Economics Update August 2026 - Europe's China Dilemma: Why Confrontation Is Not the Answer

The recent initial public offering (IPO) of the Chinese semiconductor manufacturer CXMT has once again made it clear: When it comes to high-tech markets, new competitors are more likely to emerge from China than from Europe. Given the strategic focus of China’s economic policy, this comes as no surprise. From Beijing’s perspective, semiconductors are among the key technologies in which the country aims to take the lead. Considerable efforts are being made to achieve this goal.

From a European perspective, Chinese suppliers are increasingly becoming a threat: European companies are losing market share in China, they are increasingly falling behind their Chinese competitors in global markets, and Chinese products are also becoming increasingly popular in European markets. Consequently, there is increasing public discussion—as well as in statements from the European Commission—regarding state subsidies in China and dumping practices. This regularly leads to calls for Europe to defend itself through state intervention, either by imposing tariffs on Chinese imports or by providing its own support to European companies.

Now, the protection of its own market and the promotion of Chinese companies are an integral part of the country’s strategic economic policy. The European Union (EU) does not simply have to accept all the consequences of these practices. However, focusing primarily on this overlooks two important points: First, even without government support, Chinese companies are increasingly catching up to the world’s best in sectors that have long been the domain of European providers. This reflects the loss of global competitiveness that local companies have suffered over the past decade. Many of them underestimated this trend—and as they attempt to catch up, the economic conditions in Europe are increasingly proving to be an obstacle rather than a help.

Second, China is becoming increasingly successful in fields such as semiconductors, AI, robotics, biotechnology, and space exploration—areas that are considered particularly promising for the future. Europe plays no role, or at best a very minor one, in many of these segments. This is due, among other things and quite significantly, to a generally prevailing societal aversion to risk—and the orientation of economic policy tends to reinforce this situation rather than counteract it.

However, a general strategy of isolation and confrontation toward China is not a good idea for the EU—if only because, given its size and abundance of natural resources, China can inflict greater economic damage on the EU than it would suffer itself. Furthermore, the Chinese leadership is, if anything, more willing and better able to make use of these strategic options. Last year’s trade conflict between the U.S. and China provides a striking illustration of this.

A Return to Europe’s Strengths

Establishing a centrally controlled strategic industrial policy in the EU as well—as France, for example, envisions—is also not particularly promising: There is much to suggest that China, with its political system, is better at this than Europeans could ever be. It would therefore be more effective for Europe to refocus on its original strengths: a strong education and training system, a fundamentally high capacity for innovation, good infrastructure, political stability, and comprehensive protection of property rights against arbitrary government action, to name just a few. Simply removing the barriers that still exist in the European single market could trigger a surge in innovation and growth and would therefore be a worthwhile goal in and of itself. Avoiding unnecessary regulations and creating a unified European capital market would be further worthwhile areas of focus for policymakers at the European and, of course, national levels. On this basis, we could and should then discuss whether, in specific cases, government support for strategically important investments in future technologies might be necessary.

The increase in European strength resulting from such a program would ultimately put the EU in a better position to negotiate with the Chinese leadership on equal footing and, for example, to proactively demand equal access to the Chinese market for European providers. Selective confrontation with China or strengthening Europe’s own competitiveness is not a simple either/or decision; it depends on how priorities are set—and at present, it appears that Europe is making a strategic mistake in this regard.