This week, Mark Leonard is joined by Janka Oertel, director of ECFR’s DARE* initiative, and Andrew Small, head of ECFR’s Asia programme, to examine the growing impact of the “China shock 2.0” on Germany and Europe.
A new wave of Chinese competition, driven by overcapacity and state-backed industrial strength, is hitting sectors such as car manufacturing, chemicals and machine tools. Germany is at the epicentre, with mounting job losses raising questions about Europe’s long-term economic resilience and competitiveness. The crisis is reshaping German politics, exposing government divisions and putting pressure on Chancellor Friedrich Merz ahead of September’s potentially divisive regional elections.
Together, Mark, Janka and Andrew discuss the policy options being considered in Brussels and in European capitals—from emergency trade measures to new industrial strategies. Can Europe protect its industrial base without triggering a damaging escalation with China? Is Germany able to lead a coherent European response amid its own political turbulence?
This podcast episode was recorded 12th August 2026.
Bookshelf
China Shock 2.0: The Cost of Germany’s Complacency, by Brad Setser and Sander Tordoir
The art of the swarm: Systemic rivalry with China on European terms, by Andrew Small
Dear Britain, by Annette Dittert
If Europeans need any reminder of the real impact of climate change, they should simply look out of the window. This summer, a few extra degrees of sustained heat have forced school closures, disrupted railways and cut nuclear power plant output. More than 25,000 excess deaths across Europe have been attributed to extreme heat so far, while wildfires are causing over €15bn of economic damage.
The increasing intensity of heatwaves is generally attributed to climate change as a result of the global reliance on fossil fuels. While cutting carbon emissions remains the focus of EU climate policy, European governments also need to ensure that their societies can better adapt to extreme weather. Many households have already taken matters into their own hands by turning to portable air conditioners—often Chinese-made—for relief.
And China’s air-conditioner export boom points to a broader challenge: whether confronting extreme weather or fragile economic dependencies, Europeans need to adapt to the consequences while also addressing underlying sources of vulnerability. They should not just accept the status quo; here, some answers may lie in the lessons of China’s own industrial transformation.
Once again, when Europe looks for a climate solution, China has one ready to ship. China is a powerhouse in technologies used to mitigate climate change, from solar panels to wind turbines; it is also a vital player in helping Europe adapt to warmer temperatures. China produces over 80% of the world’s air conditioners: exports of Chinese AC units to the EU rose by 43% year on year in the first half of 2026. Chinese brands now account for 41% of the European market, up from 27% in 2023.
This success is not only about price and scale. Chinese manufacturers have adapted their products for the European market: for example, Midea’s PortaSplit model is tailored to overcome cumbersome building regulations and high installation costs. Chinese manufacturers were also early adopters of refrigerants less harmful to the climate, ensuring their products meet Europe’s strict environmental rules.
Chinese state media and officials were quick to present the boom in AC unit sales as a success for EU-China trade: it is a “natural result of complementary advantages” and demonstrates the mutually beneficial nature of the EU-China economic relationship. China’s industrial specialisation, supply-chain efficiency and technological competitiveness, they argue, mean manufacturers respond swiftly to shifts in global demand. AC is an example of China acting as an “enabling superpower” in providing efficient and affordable products that respond to climate change—as Beijing would say, a win-win.
But this is not all. Chinese commentators say that Europe should not only adapt to the hotter climate—it should adapt to the patterns of EU-China trade. They portray the EU’s de-risking and trade-defence measures to tackle economic imbalance with China as economically self-defeating, arguing that Europe lacks confidence in its own industries. European policymakers, they say, are approaching trade as a game of “cold statistics” that will ultimately hurt ordinary consumers.
This is a fatalistic prescription for industrial policy from a country that refuses to accept that its position in global supply chains or its existing competitive advantage is fixed. For decades, Beijing has made industrial upgrading a central policy objective that has reoriented global trade patterns. Europeans are experiencing this firsthand in the AC boom, where China’s position reflects decades of deliberate industrial upgrading. And now Beijing is advising Europe to be content with trade patterns as they stand: strange advice, given that this would not pass the political sniff test in Zhongnanhai.
Since Deng Xiaoping, Chinese leaders have not simply passively adapted to their inherited competitive advantages. Neither do they treat the existing global division of labour as an efficient market outcome to be preserved. This is especially the case when such patterns risk constraining China from developing the sectors it considers strategically important—robotics, clean technology or aviation, for example.
China’s industrial transformation did not happen through market forces alone. Its latest five-year plan emphasises “self-reliance and controllability” as a guiding principle for technologies underpinning critical infrastructure, including energy systems. Over the years, under the banners of Made in China and Dual Circulation, the country has deployed large-scale subsidies, preferential financing from state banks, government-guided investment funds, public procurement, favourable access to land and infrastructure, and requirements around joint ventures, localisation and technology transfer.
These policies helped Chinese firms “import, digest and absorb” foreign know-how, build scale, and create globally competitive and innovative companies across supply chains. But while the European debate on competitiveness centres on many of the same concepts, European politicians, industries and member states are divided over future industrial policy. One prevailing idea is that Europe should pull a “reverse Deng” by ushering in a new era of industrial policy capable of matching the scale of support and protection that China extended to its domestic industries during the 1990s and 2000s.
Europeans should preserve their ability to source and scale critical technologies through viable alternatives, ensuring they have options should conditions change
But Europe should be cautious in trying to beat China at its own game. It has no centralised state to direct capital and help companies navigate commercial losses in pursuit of their goals. The main lessons from China’s industrial policy lie in the assumptions behind it: Europeans should minimise dependencies that could be strategically constraining; industrial competitiveness is not only about efficient production; Europeans should preserve their ability to source and scale critical technologies through viable alternatives, ensuring they have options should conditions change.
This logic is becoming more relevant as climate shocks intensify and geopolitics grows more volatile.
Europeans need to consider what such options would look like in practice. To borrow the question posed by Chinese commentators: what could Europe do right now without Chinese air conditioners?
Cooling is becoming essential infrastructure. Much like heating and water, Europe will need a broader portfolio of solutions to meet demand. AC is part of the answer, alongside low-energy and passive-cooling technologies such as evaporative cooling, reflective roofs and building retrofits, and stronger building standards. But Europe does not need to develop every solution itself; it could build a network of alternative suppliers and production capabilities.
For example, Singapore and the Gulf states are confronting many similar challenges and could be potential partners in deploying more efficient solutions such as district cooling. Europe can build similar partnerships in clean-tech supply chains. South Korea, the second-largest battery manufacturer globally, holds 78% of installed battery capacity in Europe. It can learn from countries such as Japan, which has diversified its rare-earth supply through partnerships with Australia and Malaysia, as well as Vietnam. India doubled solar-cell manufacturing capacity in the first half of 2026 alone, backed by localisation incentives extending to upstream components like ingots and polysilicon.
China will remain part of Europe’s clean-tech supply chains. For Europe, preserving its options does not mean that it needs to produce every critical technology in the clean-tech supply chain. But it should work with external partners to maintain commercially viable alternatives at scale. This can be done through reciprocal access to public procurement markets, targeted incentives and shared product standards.
Fundamentally, having options means being able to adapt to a problem while tackling its cause. Climate policy offers a useful framework: Europeans have concluded that the impact of heatwaves or floods are not inevitable; they are not relying on AC, seawalls and floodgates as their only response. Instead, they are tackling the cause of climate change by pursuing adaptation while mitigating the underlying problem through cuts in fossil-fuel emissions.
Europe should dare to do the same with its competitiveness and economic dependencies. Rather than simply adapting to change, its governments should invest in Europe’s capacity to innovate, work with partners and build alternatives, with the aim of reducing vulnerabilities and helping preserve its choices.
The summer heat of 2026 is a reminder of the cost of delayed climate action. The same lesson applies to economic security: adapting to today’s dependencies in the name of efficiency will leave Europe with fewer options—and come with a larger bill—tomorrow.
One of Hong Kong’s most unusual sights is the stone wall tree—a mature tree growing directly out of a masonry retaining wall.
These remarkable trees first appeared during the colonial era when thousands of stone retaining walls were built to stabilize Hong Kong's steep hillsides. Over time, seeds carried by birds and wind became lodged in cracks between the granite blocks. Dust, decaying leaves, and moisture accumulated in these crevices, creating tiny pockets of soil where the seeds could germinate.
Credit: Wikimedia Commons
Most wartime diaries are written on paper. Some are scribbled in notebooks or loose sheets and hidden beneath floorboards, or tucked inside clothing. The most famous wartime diary is undoubtedly that of Anne Frank, but there are many others whose accounts are equally compelling. One of the most unusual records of the Second World War, however, was kept by Day Joyce, a biologist interned at Stanley Camp in Hong Kong. Her diary was not written on paper at all. Instead, she stitched it into a bed sheet.
The Day Joyce Sheet. Credit: Imperial War Museums
This week, Mark Leonard is joined by Adriana Abdenur, a Brazilian policy expert and co-president of the Global Fund for a New Economy, and Jorge Castañeda, former foreign minister of Mexico and professor at Sciences Po, to explore debates about development and ideas of strategic autonomy across Latin America.
Jorge explains why China’s role is varied across the region, arguing that Mexico and much of Central America remain deeply constrained by their economic ties to the US. Adriana discusses Brazil’s long tradition of strategic autonomy, describing how policymakers engage with China as both an economic partner and a source of ideas on development, technology and global governance.
Together, Mark, Adriana and Jorge explore how intensifying US-China competition is reshaping the region’s choices. Can Latin American countries balance relations with both powers? Is China a model, a market or simply another partner in a multipolar world? And what does strategic autonomy look like in an increasingly coercive geopolitical environment?
This podcast episode was recorded on July 31st 2026.
Bookshelf
Latin American Foreign Policies in the New World Order: The Active Non-Alignment Option, by Carlos Ominami, Jorge Heine and Carlos Fortín
Manifesto Antropófago (Cannibal Manifesto), by Oswald de Andrade
Reluctance among German decision-makers has long stopped Berlin taking a tougher economic approach towards China. When France, Italy, Lithuania, the Netherlands and Spain recently pressed the European Commission for tougher measures and faster trade defence action against China, Germany not only declined to join, it even called for stronger industrial ties with Beijing.
Yet, one thing Berlin should not worry about is voters’ disapproval should it pursue a more hawkish China policy. ECFR polling data find that Germans are the most China-sceptical out of 15 European countries surveyed. No fewer than 60% of Christian Democrat and Social Democrat supporters regard the country as an adversary or rival. In contrast, elsewhere in Europe, majorities still see China as either a “necessary partner” or even an ally. In Italy and Spain, 56% and 65% of people hold this view respectively. (Closest to the sceptical Germans are the French public; President Emmanuel Macron’s increasingly hawkish political posture vis-à-vis Beijing may have found an audience willing to listen.)
The China shock has hit Germany particularly hard: its manufacturing sector lost around 420,000 jobs between 2019 and 2025 and it continues to shed 10,000 jobs each month. The car industry is paying the highest costs, being squeezed out of a market increasingly dominated by Chinese manufacturers at home and abroad.
The mood in the European Council is shifting, and with Germany’s acquiescence. When EU leaders met in June 2026, they backed a stronger trade defence toolbox of existing measures against China. This included instruments such as the Industrial Accelerator Act’s “Buy European” provisions and limits on high-risk Chinese technology. Despite its past hesitations, Germany no longer acts as a spoiler on firmer EU action, and it has cautiously supported this new direction. Nevertheless, the combination of growing public scepticism towards China, mounting pressure on German industry and appetite for a more assertive policy on the European level creates a political mandate that German decision-makers could yet seize.
The German public’s views on the energy transition should also prove encouraging for their leaders. Voters want to see investment in renewables: 57% back what would amount to the growing electrification of the economy. Across the countries polled by ECFR, 61% of respondents say they support prioritising renewables and the clean tech sector.
This public support should help persuade leaders, including in Germany, that they can take action to limit emerging dependencies on China. They can accelerate the energy transition while de-risking the clean tech sector through providing support for domestic European industries, from wind to batteries.
For Berlin, and capitals across Europe, it is safer to move ahead rather than delay. Chinese economic policy is already doing irreparable damage to European industry—but European policymakers still need to protect an increasingly electrified economy from weaponisation by China. If they fail to do so, governments will almost certainly pay the price at the ballot box. Those that pursue electrification and economic de-risking as a single package are most likely to reap the political rewards.
For China Books Review, Zhang Er reflects on growing up in Beijing during the Cultural Revolution, and how she owes her love of reading to Auntie Zou, a librarian who stripped banned books of their covers and any pages marked with the library seal of the Workers’ Club, smuggled them home, and secretly loaned them to her. Even amid the chaos of that era, Er remembers this part of her childhood as magical, a time “where characters sprung from their pages and interwove with each other’s lives,” and she imagined worlds far beyond the one she lived in.
By the time I was 12 or 13, I could read fast enough to finish the weekly book loan in two days, so I had time to spare before returning it to Auntie Zou. By then I had made a good friend, Yu Ping, who loved reading too. Her home was three blocks from mine. I would bicycle to her place and deliver the book to her. Yu Ping would read day and night to finish the book and return it to me before the due date. We would keep the book wrapped in old newspapers, so that we could read in class without getting into trouble, while our teachers repeated the same quotations from Mao, week after week.
In this harrowing, incredibly reported story co-published by Science and Retraction Watch, Brendan Borrell uncovers how “Mei,” a 6-year-old girl in China, died a week after an experimental gene-editing trial went wrong—and how her medical team, led by neuroscientist Zilong Qiu, downplayed the risks to her parents, did not publicly disclose her death, and has faced no real accountability.
On 23 March 2025, the day before the procedure, the family settled into a shared room inside a crowded pediatric ward. When the other girl in the room broke into tears, Mei handed her one of her favorite stuffed animals: a blue bird. “She liked to give things to other kids,” Jason said.
The next day Mei put on a brave face as she was taken to the procedure room. Yu’s handpicked doctor inserted a needle between two vertebrae on her lower back and withdrew just over a teaspoon of spinal fluid to create space for the drug. Then, he swapped syringes and gently pressed down on the plunger, filling her spinal canal with viruses.
Growing popularity of electric vehicles (EVs) from China is causing headaches for European carmakers – and for Brussels, with national governments clamouring for protection for their national champions.
The European Commission, which is in charge of trade policies for the bloc, has to square the circle between avoiding a trade war and injecting some life into the idling economy.
In one recent step the EU is attempting to introduce minimum prices for Chinese made EVs to offset subsidies instead of slapping on more tariffs.
The EU in 2024 had introduced tariffs of up to 35.3 percent on EVs imported from China after an anti-subsidy probe concluded that the country’s support undercut European automakers. Manufacturers in China benefit from unfair subsidies that give them a significant advantage in the European market. Since then, the two sides have been engaged in talks to find other solutions.
Under new guidelines published by the Commission last week, companies can commit to setting minimum prices for vehicles exported to the European Union in order to avoid the price surcharges. In addition, in the case of a corresponding offer, commitments to invest in the EU or to limit exports would be positively taken into account.
Such offers would be assessed objectively and fairly by the Commission, according to the new guidelines. A prerequisite for acceptance is that the measures eliminate the damaging effects of subsidies and have an effect equivalent to the tariffs.
The published document was “intended to provide guidance to Chinese exporters who may be considering submitting price undertaking offers for exports of battery electric vehicles to the EU, which are currently subject to countervailing duties,” Commission spokesman Olof Gill said.
He said that at present, the Commission has received one price undertaking offer, without specifying which company or for which model. He added that the Commission is ready to consider other proposals, provided that they “adequately address the unfair competitive advantage” and demonstrate that they are “feasible in practice”.
Leading German automotive expert Ferdinand Dudenhöffer, head of the private institute Center Automotive Research (CAR), was sceptical of the effects of the minimum prices could have on competition.
According to EU calculations, manufacturers in China benefit from unfair subsidies that give them a price advantage of around 20 percent on the European market. For this reason, tariffs ranging from 7.8 to 35.3 percent were imposed from 2024, depending on the manufacturer. German and US companies that manufacture in China are also affected. In retaliation, China imposed special tariffs on EU goods such as spirits, pork, and dairy products.
According to CAR, Chinese manufacturers sell their models in the EU at an average markup of 118 percent on top of the domestic price. “Given the current price level in Europe, there should still be significant scope for Chinese manufacturers to reduce prices,” said Dudenhöffer.
According to the latest report by the EU research agency Eurofound, the automotive industry in the EU directly employs around 6 million workers and another 6 million in related sectors.
Since 2019, the pace of job losses in the sector has clearly accelerated. In 2024 alone and at the beginning of 2025, layoffs announced by European companies affected around 100,000 jobs.
The largest employment losses have been recorded in countries with a strong presence of Europe’s biggest car manufacturers. In France, a structural decline is feared, while since 2019 job cuts have also affected Germany, Italy, and, to a lesser extent, Spain. Central and Eastern European countries – Czechia, Hungary, Poland, Romania, and Slovakia – are facing the relocation of production outside the EU to countries with lower labor costs.
This is happening because sales of cars originating from China, including electric vehicles (EVs), are increasing in the EU. In practice, some of these cars on EU markets are not only models of Chinese brands but also vehicles produced in China for Western brands.
Germany, for many years a global carmaking powerhouse, is facing a dilemma. Demand for EVs is rising, but it is not just the battery powered Volkswagens or BMWs customers are flocking to – and the long-term outlook is dire.
Electric vehicle sales rebounded strongly in Germany in 2025, according to official data from early January this year, with Chinese manufacturers making inroads from a low base in the EU’s largest economy despite tariffs.
EV sales rose 43.2 percent last year to 545,142 in total, the KBA federal transport authority said, representing 19.1 percent of all new cars sold.
Chinese EV giant BYD – which last year overtook Elon Musk’s Tesla to become the worlds largest electric carmaker – saw its German sales rise over 700 percent to more than 23,000 cars, giving it 0.8 percent of the overall auto market.
“International vehicle manufacturers with affordable battery electric vehicles and plug-in hybrids have contributed disproportionately to growth in these segments,” said Imelda Labbé, head of the VDIK foreign carmakers’ lobby in Germany.
The rise in EV sales last year comes after a fall of almost 30 percent in 2024 following the withdrawal of government subsidies, and Germany’s electric car market is still smaller than optimists had hoped for. After the decline in the market in 2024, the government said in December it would introduce subsidies again.
Some motorists will be able to benefit from 5,000 Euro for the purchase of new EVs or hybrids so long as their components are largely made in Germany. But industry figures say that better charging infrastructure and cheaper power would be needed to really boost EVs and warned that the planned subsidy would have limited impact.
On the other hand, German carmakers have been reporting strong declines in vehicle sales in China. Volkswagen said in January its sales dropped by 8 percent in 2025 year-on-year, as it was facing intense competition on the Chinese market from local producers. Mercedes-Benz reported a 19 percent decline in sales for the year, while BMW sold 12,5 percent fewer cars in China.
German manufacturers like Mercedes or VW sell about 30 percent of their cars on the Chinese market.
The tug-of-war affects not just major players, but the automotive sector across the continent.
Bulgaria for example is not a major car producer, but it is increasingly important as a supplier of automotive components to European manufacturers. The sector has grown into one of the country’s strongest industrial branches, generating close to 11 billion Euro in annual turnover, according to business media and industry analyses.
This means that it is indirectly exposed to the EU-China trade dispute over electric vehicles: weaker competitiveness of European carmakers could reduce orders for Bulgarian suppliers, while a recovery in EV sales in core markets such as Germany would have the opposite effect.
At the same time, Chinese manufacturers are not only exporting cars to Europe but are also expanding production and partnerships within the EU, with Bulgaria being increasingly part of China’s automotive strategy in Southeast Europe according to analysts.
For Bulgaria, this creates a mixed impact: EU trade measures may protect European carmakers, but Chinese localization in Europe could also open new opportunities for Bulgarian suppliers.
Dudenhöffer expects the sector to shrink in the next years in Germany and Europe, as manufacturers shift their production to the US or Asia, he said in his market forecast for 2026.
“Growth is taking place in Asia, and Asian car manufacturers (Japan, Korea, China) are increasingly dominating the car business.”
Ferdinand Dudenhöffer, German Automotive Expert
And then there are of course the EU’s green policies: The EU in December rolled back a 2035 ban on new petrol and diesel cars seen as a milestone in the fight against climate change, as the bloc pivots to bolstering its crisis-hit auto sector.
Under proposals slammed by green groups as an act of “self-sabotage”, carmakers will have to cut exhaust emissions from new vehicles by 90 percent from 2021 levels – down from an envisaged 100 percent.
This means that in practice automakers will still be able to sell a limited number of polluting vehicles – from plug-in hybrids to diesel cars – beyond 2035, provided the resulting emissions are “compensated” in various ways.
The EU’s Industry Commissioner, Stéphane Séjourné, insisted the bloc’s green ambitions stood intact as he put forward a plan billed as a “lifeline” for Europe’s auto industry.
The combustion-engine ban was hailed as a major win in the climate fight and a key tool to drive investments in electrification when adopted in 2023.
The compromise plan was slammed by both environmentalists and industry groups.
While the EU had recognised that remaining open to different technologies was important, its proposal was “fraught with so many obstacles it threatens to remain ineffective in practice”, the president of the German Association of the Automotive Industry (VDA), Hildegard Müller, said. “In times of increasing international competition, in times when European economic power is crucial, this overall package from Brussels is disastrous.”
The future of German car manufacturers – and by extension automakers in other EU member states – is closely linked to the Chinese market.
According to Dudenhöffer, they must develop and build electric cars “in China for China”. In this context, he criticised the softening of the combustion engine phase-out. He said it was not possible to disconnect from developments, but that it is necessary to face competition in the tough Chinese market. “If you’re not in China, you’re not in the car business.”
This article is an ENR Key Story. The content is based on information published by ENR participating agencies.
Long before the first commercial oil wells appeared in North America, Chinese engineers had already mastered the art of drilling deep into the earth. In the salt-producing region of Zigong in China's Sichuan Province, workers were sinking wells hundreds of meters deep using techniques that would not become common in the West until many centuries later. These remarkable salt wells not only transformed the economy of inland China but also helped inspire the drilling methods that fuelled the 19th-century oil boom in the United States.
A salt drilling field near Zigong, Sichuan, in 1929. Credit: South China Morning Post
A remote village in north-western China, on the edge of the Gobi desert, is said to have been founded by Roman soldiers. According to this controversial theory, the village of Zhelaizhai in China's Gansu Province was established by Roman legionaries who were captured after a disastrous battle, carried across Central Asia, and eventually settled on the far eastern edge of the known world. While most historians remain sceptical of the claim, the story has become one of the most fascinating legends linking the ancient civilizations of Rome and China.
Re-enactment of a Roman legion. Credit: Wikimedia Commons
This week, Mark Leonard is joined by LuHan Gabel, associate director of the Ideas Workshop at the Open Society Foundations; Ooi Kee Beng, political historian and executive director of the Penang Institute; and Chelsea Nguyen, research assistant in the Department of International History at the London School of Economics.
LuHan highlights how young people in China are increasingly questioning the meaning of development and modernity beyond material progress. Kee Beng reflects on Malaysia’s complex relationship with China, arguing that their growing engagement is reconnecting South-East Asia to older historical patterns of regional interaction. Chelsea explains how, in Vietnam, attitudes towards China have shifted dramatically since the covid-19 pandemic, with young people becoming more curious about Chinese technology and society.
Together, Mark, LuHan, Kee Beng and Chelsea explore whether a post-Western, rather than anti-Western, generation is taking shape across the region. How did the covid-19 pandemic reshape perceptions of China in South-East Asia? Which aspects of Chinese modernity resonate most with younger generations? Is China becoming a new reference point for development and aspiration? And what do these shifts mean for Europe’s role in an increasingly multipolar world?
This podcast episode was recorded on July 10th 2026.
Bookshelf
A Maritime Vietnam: From Earliest Times to the Nineteenth Century, by Tana Li
State Building in Cold War Asia: Comrades and Competitors on the Sino-Vietnamese Border, by Qingfei Yin
Border Country, by Raymond Williams
The Scythian Empire: Central Eurasia and the Birth of the Classical Age from Persia to China, by Christopher I. Beckwith
Adrift in the South, by Xiao Hai
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