Europe and the UK face a challenge in balancing the need to take urgent action to boost competitiveness against Chinese companies, while actively courting Chinese investment in non-sensitive areas.
Europe and the UK stand at a crucial point in history. China has already arrived as a technological superpower and its progress up the value chain is both rapid and broad based.
The stark warnings issued by politicians and businesspeople – as well as the evidence presented in the case studies in Chapter 3 – should be taken seriously. There is a real possibility that over the next five years, Europe will lose much of its industrial base to Chinese competition. In some sectors, this has already happened. Not only will this result in the further loss of jobs and expertise; it may also mean the loss of companies with long histories of technological excellence and contributions to local communities. Europe is in a battle for its industrial future – one that it is currently on a trajectory to lose.
In the recommendations below, Europe is used to denote a geographical concept that includes the UK. The EU is used when an issue pertains specifically to EU competency. The author acknowledges that, in many cases, there is a lack of European unity on the topics raised.
This paper recommends a hybrid strategy to meet a complex challenge.
- Europe, including the UK, needs to recognize at the highest levels of government the nature of the challenge that China poses. High-level national and EU-level debates should be had over the detailed implications of this challenge, sector by sector. The continent should neither shrink from the hard truths that help illuminate how Europe is slipping into the technological slow lane, nor resist learning lessons from China’s success. Europe should guard against a temptation to demonize China but also be clear-sighted about the state subsidies, industrial policy and currency controls that have contributed to China’s progress and to the huge trade surplus it has with Europe and the world.
- Europe, including the UK, should accelerate efforts to improve productivity and industrial competitiveness. In particular, it needs to lower the regulatory burden that its companies face; build modern infrastructure to support efficiency; train talent relevant to the needs of an industrial base increasingly animated by automation, robotics and AI; slash bureaucratic inefficiencies; and incentivize governments to speed up the process of decision-making, while making licensing systems faster and more transparent. The Antici Group on Simplification, set up in early 2025 by the Council of the European Union to cut red tape and reduce administrative burdens, is moving too slowly. The group’s staff numbers and resources should be bolstered and more technical experts appointed to improve the speed and precision of its work.
- The EU should accelerate progress to deliver on the recommendations of the 2024 Draghi report on boosting European competitiveness. In spite of a commitment to implement the recommendations in the report by the European Commission, progress has been slow. Of the report’s 383 recommendations, only 15.7 per cent have been fully delivered. Inclusive of recommendations on which there has been partial progress, the EU is tackling just 41.3 per cent of the Draghi agenda. The majority of the recommendations in the Draghi report are still ‘in progress’ or untouched.
- European countries, including the UK, should work at a national level to define and delineate their economic security priorities and identify ‘red lines’ beyond which Chinese investment is blocked or circumscribed. These guidelines should be published – just as China’s own investment code stipulating the limits on foreign participation in the country’s economy, sector by sector, is broadly circulated. The EU should also consider setting up a special body dedicated to economic security that would help member states and others define the security challenges that China presents and advise on compliance with forthcoming legislation, such as the Industrial Accelerator Act and the EU Cybersecurity Act. One function of such a body would be to block, restrict or closely monitor Chinese investments and economic activities in proscribed areas. The body would seek to coordinate between different EU departments such as law, trade and security to find unified positions.
- Once sensitive areas of the economy are identified and cordoned off from Chinese investment, Europe, including the UK, should actively court inward investment from China’s leading technology companies, provided that such companies are compliant with all relevant standards and screening processes. The active courting of Chinese technology corporations and investors should help to raise the competitiveness of European counterparts in a relatively controlled environment and to seed advanced supply chains in Europe.
- As part of the process of welcoming Chinese investment, the EU and UK should formulate a framework to require Chinese companies in key sectors to meet local content targets and work towards technology transfer goals with European partners. This initiative aims to mirror Chinese regulations that have long required European companies to share technology for market access in China. The European Commission’s formal proposal of the Industrial Accelerator Act, announced in March 2026, makes clear a number of ‘Made in EU’ requirements for specific industries.
- EU and UK investment screening processes should be made as transparent as possible (allowing for confidentiality related to national security). More granular explanations on why certain investment applications by Chinese companies were disallowed should be provided. This would include the 2026 ruling against a large, proposed wind turbine project by Ming Yang in Scotland. Such transparency will help local authorities and Chinese companies understand what is possible and what is not, thereby upgrading levels of trust in the process.
- The EU and UK should publish the main criteria they use for investment screening in critical and sensitive industries. Currently, the UK’s National Security and Investment Act 2021 (NSIA), which came into force in January 2022, mandates a mostly opaque process. The EU’s Foreign Direct Investment (FDI) Regulation, and its 2026 revision, should also be as transparent as possible about why proposed investments were rejected.
- With the aim of persuading Beijing to curb market-distorting state aid, the EU should maintain robust discussions with China on the full range of state subsidies and other assistance that the country provides at the local and central government levels. In addition, the undervalued renminbi should also form part of formal, broad-based EU–China talks on fair competition and the prospect of Beijing allowing the renminbi to gradually appreciate over time. IMF research on the renminbi’s undervaluation may be used as a reference in such discussions.
- The EU should establish new ‘Section 301’-like powers to launch swift defensive action against Chinese exporters to protect European industries from potential collapse precipitated by competitive shocks. Such powers, which could be engaged only after clear and transparent criteria have been met, would be designed to provide alternatives to the chronic delays inherent in WTO trade dispute processes. This tool would be modelled on the US ‘Section 301’ safeguards but modified to take account of EU realities. Such safeguards, if invoked, could result in the rapid imposition of restrictions, duties or retaliatory tariffs on Chinese exports to Europe. The aim of such a tool would be to provide temporary respite for European sectors while self-strengthening reforms are pushed through as a priority.
