China’s emerging lead in many technology sectors threatens to fundamentally erode Europe’s industrial base. The continent now faces the pressing challenge of formulating a comprehensive response.
China’s ascent to the cutting edge of global technology is one of the world’s most consequential trends. The ability of Chinese firms to produce advanced technology at highly competitive prices is disrupting the business models of some of the West’s largest companies – a phenomenon referred to as the ‘China shock 2.0’. As a result, in 2025, China’s annual trade surplus swelled to almost $1.2 trillion, the largest in history. In Europe, this development is ringing alarm bells at the highest levels of government and in industries as varied as pharmaceuticals and machine tools. Factories are being shut, jobs lost and the viability of strategic industries thrown into jeopardy. The pressure is unlikely to abate. A series of interviews and company visits conducted by the author in Beijing, Shenzhen and Tianjin in the spring of 2026 show that China’s competitiveness is based on several structural advantages (see Chapter 3) that are likely to endure for decades.
The evidence depicting China’s rise to the forefront of technology is plentiful. According to several measures, China’s competitiveness now leads that of the US in a majority of advanced technologies, with some key exceptions being semiconductors, frontier artificial intelligence (AI) models, quantum computing, aerospace and advanced biotechnology. Europe has fallen significantly behind both China and the US in all but a few discrete areas. This paper looks briefly at four sectors – pharmaceuticals, electric vehicles (EVs), wind power and machine tools – to demonstrate how Chinese competition is impacting important European industries.
In a shift from even as recently as a decade ago, China’s rise up the technology ladder now derives significant impetus from a panoply of structural advantages. These include an increasingly world class university sector, an industrial supply chain of unrivalled scale and price competitiveness, technology companies such as Huawei and CATL that are global leaders in corporate patent applications, a regime of generous industrial subsidies, and a state-led policy that elevates the importance of high-end manufacturing.
According to the UN World Intellectual Property Organization, Chinese residents filed 1.8 million patent applications in 2024, compared to just over 500,000 filed by US residents.
It should be noted that allegations of intellectual property (IP) theft, mainly made by US official bodies, have persisted. Such allegations are routinely denied by China, as in the case of a recent statement by Beijing’s Ministry of Commerce on US allegations related to IP theft of AI capabilities. Such allegations notwithstanding, it is beyond doubt that China is pushing the boundaries of global innovation. According to the UN World Intellectual Property Organization, Chinese residents filed 1.8 million patent applications in 2024, compared to just over 500,000 filed by US residents. China is also producing more STEM PhDs than the US. European countries lag behind both China and the US in the above metrics.
The technological advances of Chinese companies have been backed by a long-running and comprehensive programme of state support. Estimates on the size of this assistance vary considerably, but an OECD report published in June 2026 valued it at ‘three to eight times more government support’ than firms based in the OECD received between 2005 and 2024 in 15 sectors covered by the study. The types of Chinese state support highlighted by the OECD included direct subsidies, tax breaks and loans from banks on favourable terms. China’s response criticized the OECD for using ‘loose definitions’, ‘biased sampling’ and ‘one-sided and arbitrary findings’.
This paper recommends that policymakers in Europe recognize the historic nature of the challenge that China’s rise to technological pre-eminence presents. First, it suggests that governments, industry executives and experts discuss and debate this challenge with full and unsparing transparency. Second, it proposes a hybrid response. Governments should strive to identify and protect their core security interests with regard to Chinese technology as a priority. Once this is done, they should welcome and promote engagement with advanced Chinese technology in all areas that are not circumscribed. Third, European governments should engage with the US – their leading security partner – to produce a predictable framework that clears the way for European countries, companies and institutions to engage with Chinese technology unless it is explicitly forbidden.
One aim of such a system would be clarity. If European countries decide to block a Chinese investment, then companies and the public should get to know why it was blocked and where the relevant national security boundaries lie. Without clarity, Europe (including the UK) risks hastening the onset of a Cold War dynamic in which shadows, suspicion and confusion derail mutually beneficial engagement and repel investment from Chinese technology leaders that could boost European economies.
Methodology
The research for this paper was conducted over a period of around eight months, with the aim to first define the nature of China’s competitive challenge to Europe and then to consider responses that Europe (including the UK) could enact. Interviews in Beijing, Hong Kong, Shenzhen and Tianjin with executives from Chinese technology companies, government officials and think-tank researchers were conducted in April and May 2026. Interviews with European officials and corporate executives took place over several months to May 2026 in Berlin, Brussels, Eindhoven, London and Paris. This original research informs and supplements the published material referenced in the analysis here. In addition, the author has submitted written testimony to the UK parliament, participated in hearings for parliamentary sub-committees, briefed UK government officials, and took part in various roundtables in Brussels and Berlin.
