‘China shock 2.0’ and Europe’s industrial future

How the EU and UK can respond to Chinese technological supremacy

Research paper

Published 30 September 2026

ISBN: 978 1 78413 692 5

Image — Industrial robots operate on a production line as workers manufacture new energy vehicle parts at Zhejiang Zhixin Technology Co. Ltd. in Jinhua, Zhejiang province, China, September 2026.

Advanced robots operating on a production line in China.

James Kynge

Senior Research Fellow for China and the World, Asia-Pacific Programme

The global industrial landscape has shifted dramatically since the turn of the century. China’s rise as a manufacturing powerhouse has enabled the country to produce increasingly sophisticated goods at scale and at low cost. This phenomenon, known as the ‘China shock 2.0’, is placing growing pressure on European industry with far-reaching impacts.

This paper examines how China has come to dominate key industrial sectors and assesses the implications for Europe (including the UK). It explores how policymakers should balance the economic benefits of trade and investment with the need to protect strategic industries and national security interests.

DOI: 10.55317/9781784136925

Summary

The advance of industrial technology in China over the past few decades is one of the world’s most consequential trends. The resulting ability of Chinese companies to manufacture high-tech products at low cost is disrupting some of the West’s leading companies. This development is referred to as the ‘China shock 2.0’. For the West, the competitive pressure is only likely to intensify as Chinese firms leverage structural advantages that are set to strengthen and endure for years to come.
Europe is particularly vulnerable. In industries as varied as pharmaceuticals and machine tools, the impact of an upsurge in Chinese competition is clear. The closure of production sites and resulting unemployment across the continent are an ominous sign for the long-term viability of entire European strategic industries.
The first priority for EU countries and the UK is to recognize at the highest levels of government the nature of China’s technological ascendancy and engage in open and regular debate on this topic. Governments should not downplay the scale of the disruption in prospect.
The EU and UK should use the ‘China Shock 2.0’ as a spur to speed up reforms aimed at boosting productivity and industrial competitiveness. This includes accelerating the EU’s current slow implementation of the recommendations in the 2024 Draghi report, which outlined how Europe should boost its competitiveness, in part through slashing red tape and administrative burdens. The EU Antici Group on Simplification can play a role in this.
Europe, including the UK, should adopt a hybrid approach to inward Chinese investment. This would involve the clear identification of ‘red flag’ areas of the economy that should be protected from Chinese investment, due to national security concerns. At the same time, Europe should actively court Chinese high-tech investment in all other ‘green flag’ (non-circumscribed) sectors, offering incentives to lure technological leaders while also devising policies to encourage local content and technology transfer. This approach echoes China’s own policies on inward investment.
The EU and UK should upgrade the transparency of their investment screening mechanisms regarding China to increase trust and sustainability. This should include the formulation of guidelines on acceptable levels of dependency on Chinese imports of critical minerals, pharmaceuticals and other essential products. Without clarity, Europe and the UK risk creating a Cold War dynamic in which shadows, suspicion and confusion derail mutually beneficial engagement.
The EU should open talks with China on the renminbi’s structural undervaluation with a view to redressing chronic trade imbalances. Furthermore, to strengthen its position, the EU should create a rapid response mechanism – not unlike the US Section 301 tool that allows the president to take unilateral tariff action – to safeguard against import surges that threaten the viability of European industrial sectors.

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‘China shock 2.0’ and Europe’s industrial future

James Kynge

Summary