Introduction: A New Era of Competition

For decades, the global economic landscape was characterised by a clear division of labour, with China serving as the world’s factory, producing goods across various value chains, whilst European (and US) firms largely dominated higher-value sectors. However, this paradigm has rapidly shifted over the last decade, alarming both the US and EU. 

China is no longer content with being merely a manufacturing hub; it is aggressively moving up the value chain, increasingly competing directly with European firms in sophisticated and strategically vital industries. This shift presents both challenges and opportunities for investors.

This blog post, part of a three-part series examining US-EU, US-China, and now EU-China relationships, delves into the intricate and often contentious economic ties between the European Union and China. As the global economy evolves from its 1990s/2000s era, investors with a thematic or sector-based approach can ride the shift to better profits.

 

China Moving Up the Value Chain: Direct Competition with European Firms

China’s economic strategy has shifted from a focus on domestic infrastructure and being the world’s manufacturing workshop to becoming a global leader in innovation and high-tech industries. This ambition is increasingly bringing Chinese companies into direct competition with established European firms, particularly in sectors that were once considered strongholds of European industrial prowess.

We will look at a few important sectors and how they are changing.

Pharmaceuticals: From Generics to Innovation

Historically, China’s role in the global pharmaceutical industry was largely confined to the production of active pharmaceutical ingredients (APIs) and generic drugs. However, significant government investment, a growing domestic market, and an increasing focus on research and development have propelled Chinese pharmaceutical companies into the realm of innovative drug discovery and development. This shift is creating direct competition for European pharmaceutical giants.

Chinese pharmaceutical firms are now investing heavily in R&D, building state-of-the-art research facilities, and attracting top scientific talent (especially Chinese nationals leaving Western universities and companies due to more hostility). China is increasingly developing novel drugs. This leads to direct competition not just on price for generics, but also on innovation and market share for patented, high-value drugs.

For investors, this trend presents a challenge: balancing a portfolio of established European pharma companies and their profits while watching the shift to capture high-growth opportunities in China. DCSC’s sector-relevance scores can help investors find more niche areas in Chinese companies as well as determine the importance of different sectors to European pharma companies.

 

Industrial Capacity and Tariffs: Preventing Dumping in the EU

China’s much maligned “overcapacity”, coupled with a slowdown in domestic demand, results in Chinese companies seeking to offload excess production onto international markets at prices that can be significantly lower than those of locally produced goods. With President Trump’s skyhigh tariffs on Chinese goods, a flood of cheap Chinese products could be headed for the EU. 

European policymakers are increasingly concerned about the potential for a surge in cheap Chinese imports, which could undermine domestic industries, lead to job losses, and hinder the EU’s strategic autonomy. The EU has a range of trade defence instruments at its disposal, including anti-dumping and anti-subsidy duties, to counteract such unfair trade practices. However, implementing these measures can be a complex and time-consuming process, often leading to diplomatic tensions with Beijing.

For investors, the implications are significant. European companies in vulnerable sectors may face intense price competition,while companies that can adapt, innovate, or operate in less exposed segments of the value chain might be more resilient.

 

Semiconductors: ASML, US Restrictions, and Europe’s Dilemma

The semiconductor industry is at the heart of the global technology race, and China’s ambition to achieve self-sufficiency in this critical sector has profound implications for Europe. The EU, whilst not a major player in advanced chip production, holds crucial positions in specialised areas, most notably in semiconductor manufacturing equipment.

China’s Semiconductor Ambitions and European Concerns

China is making massive investments to rapidly advance its domestic semiconductor industry, aiming to reduce its reliance on foreign technology. The Made in China 2025 initiative, the US strangling of Huawei (and its resurgence), and tensions with TSMC’s host country Taiwan all are driving this push.

As with other areas, China’s focus has historically been on mature nodes, but now the top end is their goal. This aggressive push raises concerns in Europe about competition and geopolitical levers.

ASML’s Critical Role and US-Driven Restrictions

At the forefront of Europe’s semiconductor prowess is ASML, a Dutch company that is the world’s sole producer of extreme ultraviolet (EUV) lithography machines, essential for manufacturing the most advanced semiconductors. ASML also produces deep ultraviolet (DUV) lithography systems, which is used for a wide range of chips, and an area into which Chinese companies are pushing further.

Under pressure from the United States, the Dutch government has imposed export restrictions on ASML, limiting its ability to sell its most advanced EUV and, more recently, certain DUV equipment to China. These restrictions are part of a broader US strategy to curb China’s technological advancement and prevent it from acquiring capabilities that could be used for military modernisation.

The impact on ASML’s China business has been significant, with the company facing reduced sales to the region. China, in turn, has voiced strong opposition to these restrictions, viewing them as an attempt to stifle its technological development. Beijing is also accelerating its efforts to develop indigenous lithography capabilities to circumvent these export controls.

All this means that European companies are threatened from two sides (the US politically and China economically), leading to potential squeezes. While ASML holds a monopoly on the EUV machines, this can be managed, but if China’s R&D investments pay off, it could mean rapid deterioration of ASML’s situation.

 

Artificial Intelligence: The New Frontier of Competition

The artificial intelligence (AI) sector represents one of the most dynamic and strategically important areas of competition between the EU and China. Both regions recognise AI as a transformative technology that will shape economic competitiveness, national security, and societal development.

China has emerged as a formidable force in AI development, with huge research output and rapid commercialisation, supported by massive state investment, a focus on industrial automation, and a collaborative ecosystem that emphasises open-source development.

The European Union, meanwhile, has taken a distinctly different approach, prioritising regulation and ethical standards through its landmark AI Act. Whilst the EU’s regulatory framework aims to ensure trustworthy and human-centric AI development, critics argue that Europe’s focus on regulation may be hampering its ability to compete. The EU has recognised this challenge and launched initiatives such as the €200 billion “InvestAI” programme and the AI Continent Action Plan to boost homegrown capabilities.

For investors, Chinese AI companies benefit from substantial government support and access to vast datasets, making them attractive investment targets for those seeking exposure to rapid growth. However, European AI firms operating within the EU’s regulatory framework may offer more sustainable and ethically sound investment opportunities, particularly as global demand for responsible AI solutions increases. The divergent approaches to AI development between the EU and China could create distinct market segments, each with its star investments.

 

Electric Vehicles (EVs): Tariffs, Battery Tech, and German Disagreement

The electric vehicle (EV) market is a critical battleground in the EU-China economic relationship. China has emerged as a global leader in EV production, driven by substantial government subsidies, a robust domestic supply chain, and aggressive market expansion strategies. This dominance poses a significant challenge to Europe’s traditional automotive industry, a cornerstone of its economy.

Tariffs to Bolster EU Production

European policymakers are increasingly concerned about the influx of low-cost Chinese EVs into the EU market. However, unlike the US’s strategy of a blanket high tariff, the EU has imposed tariffs over a range and specific to each automaker, determined by how much assistance each one unfairly received. 

Interestingly, Europe is not united on this front. Several prominent German manufacturers have invested in Chinese factories, and they strongly opposed a tariff scheme driven by local job interests because it meant tariffs on their imported vehicles. In the end, however, EU EV tariffs will be implemented in some form. And of course Beijing could retaliate. 

However, a more pressing issue for European carmakers is public perception in China, where shifts in consumer preferences (or grassroots campaigns) push Chinese buyers into local models. European companies who sell a lot within China could be hurt by these shifts, too, at the same time as dealing with increased competition. 

EU’s Pursuit of Chinese Battery Technology

Beyond vehicle assembly, China also holds a commanding lead in battery technology and production. The EU is actively seeking to attract Chinese battery manufacturers to establish production facilities within Europe, aiming to localise the battery supply chain, reduce dependence, and facilitate the transfer of critical battery technology and expertise. This strategy is crucial for the EU to build a competitive and sustainable EV ecosystem, especially after the high-profile failure of NorthVolt, the EU’s battery manufacturing darling. 

China has announced restrictions on tech transfer specifically within battery technology, which could hamper the EU’s attempts to gain insights and skills into battery tech. Investors could watch companies that are involved with battery manufacturing facilities to benefit from the changes.

 

New Energy: Solar, Wind, and Europe’s Ambitious Environmental Goals

The transition to clean energy is a global imperative and signed on by all major players, except possibly the United States (at the national level). Both the EU and China are major players in this transformation, though their roles differ.

China’s Dominance in New Energy Manufacturing

China has established a commanding lead in the manufacturing of renewable energy technologies, especially solar photovoltaic (PV) panels and wind turbines. In fact, over 95% of Europe’s solar panels in 2022 originated from China. This has led to concerns within the EU about an ‘existential threat’ to its homegrown solar industry, as cheap Chinese imports can flood the market and undercut European manufacturers, who initially had been at the forefront of the technology. And it is not just European consumers to worry about but also the vast Global South, which is quickly electrifying on cheap, reliable Chinese products.

Similarly, Chinese wind turbine manufacturers are rapidly gaining market share, which benefits from the same mixture of state support, a robust R&D ecosystem, and a strong domestic supply chain.

Europe’s Ambitious Environmental Goals and Dependencies

The European Union has set some of the world’s most ambitious environmental targets. Its flagship initiative, the European Green Deal, aims for a 55% reduction in greenhouse gas emissions by 2030 (compared to 1990 levels) and achieving climate neutrality by 2050. These aggressive goals necessitate a rapid deployment of renewable energy technologies, which, paradoxically, increases the EU’s reliance on Chinese imports for key components and finished products like solar panels, rare earth permanent magnets, and battery-grade lithium.

The EU is striving for ‘fair competition’ in green energy, emphasising the need to avoid a race to the bottom in environmental and labour standards. Whether Europe can achieve its goals is the main question at the moment.

Contrasting with the US Approach

Whilst both the EU and the US share concerns about China’s dominance in clean energy supply chains, their approaches to climate policy and industrial strategy differ. The EU has adopted a comprehensive, regulatory-driven approach with ambitious, legally binding targets. The US, whilst increasingly investing in clean energy through initiatives like the Inflation Reduction Act, has historically had a more fluctuating climate policy landscape. However, both regions are now actively seeking to build their domestic clean energy manufacturing capabilities to reduce reliance on China.

Despite trade tensions and competition, there is also an element of cooperation between the EU and China on climate change. Both are major global economies and significant carbon emitters, recognising that their collaboration is crucial for achieving global climate goals. 

 

Aerospace: The Airbus-Boeing Duopoly and COMAC’s Ascent

For decades, the global large jet airliner market has been characterised by a seemingly unshakeable duopoly between European aerospace giant Airbus and American stalwart Boeing. However, this established order is now facing a credible challenge from an ambitious newcomer: China’s Commercial Aircraft Corporation of China (COMAC).

COMAC’s Emergence and Ambition

COMAC is a state-owned Chinese aerospace manufacturer with the goal of breaking the Airbus-Boeing duopoly and establishing China as a major player in the global aviation industry. Its flagship narrow-body aircraft, the C919, is designed to compete directly with the highly successful Airbus A320 and Boeing 737 families, which form the backbone of many airline fleets globally.

COMAC’s strategy is heavily focused on the immense Chinese domestic market. Chinese airlines have placed substantial orders for the C919, and the aircraft is gradually entering commercial service within China. This captive market provides COMAC with a crucial foundation to refine its aircraft, build operational experience, and scale up production. The company is actively ramping up its C919 production, signalling China’s determination to secure a significant foothold in the global aviation sector. 

The near Global South (i.e., Southeast Asia) is likely the first stop for COMAC’s international expansion, while the US and EU regulators are likely to take a considerable amount of time to approve the newcomer’s products.

Implications for Airbus and Boeing

Both Airbus and Boeing are closely monitoring COMAC’s progress. Whilst they currently maintain a commanding lead, they acknowledge COMAC as a potential serious rival in the long term. The emergence of COMAC could transform the commercial aircraft market from a duopoly into a more competitive landscape, particularly as China’s broader aerospace industry continues to develop. The strategic importance of the Chinese market for both Airbus and Boeing means that COMAC’s growth could significantly impact their sales and market share within this critical region, necessitating adaptive strategies from the established players.

 

Defence: Commercial Competition in Third Countries

Whilst direct defence trade between the EU and China is heavily restricted due to the EU’s arms embargo, a different form of competition is emerging in third-country markets. Both European and Chinese defence industries are actively seeking to expand their global footprints, particularly in Africa, the Middle East, and parts of Asia, where they compete for market share in arms sales and military technology. 

China’s Growing Influence as an Arms Exporter 

China has steadily increased its presence as a global arms exporter, becoming the world’s fourth-largest supplier of conventional weapons between 2019 and 2023. Chinese defence companies often offer more affordable military equipment, sometimes with fewer political strings attached, making them attractive to developing nations. For instance, a significant number of countries in Sub-Saharan Africa have received major arms deliveries from China, with Chinese arms now accounting for a substantial portion of military equipment in many African armies. Similarly, China is making inroads in the Middle East, capitalising on opportunities to supply drones and missile systems, even though many nations in the region still favour Western suppliers.

European Defence Industry’s Niche and Challenges 

European defence manufacturers, whilst facing intense competition from the US, also encounter China in these third markets. European firms typically excel in more advanced, high-technology systems, offering sophisticated platforms and integrated solutions. However, they often face challenges related to cost and export regulations, which can make them less competitive against Chinese offerings, particularly for less technologically advanced or budget-constrained buyers. 

Conversely, companies that can navigate the complexities of emerging markets and compete on price and accessibility, potentially through partnerships or localised production, might find success. The increasing global demand for defence capabilities, driven by regional instabilities, suggests continued growth in this sector, but the competitive landscape, particularly with China’s growing influence, requires careful consideration.

Investment Implications and Market Dynamics

For investors, European defence companies may benefit from increased government spending on domestic capabilities as the EU seeks greater strategic autonomy. This trend could boost valuations for European defence contractors focused on critical technologies and pump cash into R&D areas, including production efficiency and cutting-edge weapons.

Conversely, investors should be aware of the reputational and regulatory risks associated with any defence-related business activities. The increasing scrutiny of dual-use technology exports means that companies even tangentially related to defense, like ASML (for chips for weapons), can face unexpected risks.

 

Shipbuilding and Steel

The shipbuilding and steel industries offer stark examples of China’s overwhelming industrial capacity and its impact on traditional European manufacturing sectors. These industries, once cornerstones of European industrial might, have largely shifted to East Asia (namely China, Korea, and Japan).

Shipbuilding: China’s Unrivalled Supremacy

China has rapidly ascended to become the world’s dominant shipbuilding power, far surpassing traditional leaders like South Korea and Japan. Chinese shipyards now command over half of global shipbuilding completions, new orders, and total order backlogs. 

While European yards still maintain a strong presence in niche, high-value segments such as cruise ships and specialised vessels, the vast majority of commercial shipbuilding has migrated to Asia. Many European shipowners now routinely place orders with Chinese shipyards.

The EU views China as a strategic vulnerability, raising concerns about dependence on Chinese shipyards for critical maritime infrastructure and potential geopolitical leverage. Efforts are underway within the EU to revive its shipbuilding sector and reduce this reliance, but the scale of China’s capacity and cost advantage presents a formidable challenge.

Steel: Overcapacity and Dumping Concerns

China’s steel industry is another sector characterised by immense production capacity, bolstered by domestic demand and international customers. This structural overcapacity has led to China becoming the world’s largest steel exporter, and global steel overcapacity is estimated to be several times the EU’s total annual steel consumption.

The influx of cheap Chinese steel has placed immense pressure on the European steel industry. European steelmakers, already grappling with high energy costs, stringent environmental regulations, and the significant investments required for decarbonisation, find it increasingly difficult to compete on price. This has led to plant closures, job losses, and calls for stronger trade defence measures from European industry associations.

In response, the EU has implemented various anti-dumping and anti-subsidy duties on Chinese steel products and is actively monitoring imports. The concern is exacerbated by the fact that as the US imposes its own tariffs on Chinese steel, more of China’s excess capacity could be diverted to the European market, further intensifying competition.

 

Future Speculation: Navigating an Evolving Investment Landscape

The EU-China economic relationship is in a constant state of flux, shaped by domestic priorities, technological advancements, and market dynamics. Speculating on its future requires considering various scenarios, each with distinct implications for investors seeking to position their portfolios strategically.

Continued Competition and Strategic De-risking

One likely scenario is a continuation, and even intensification, of the current trend of strategic de-risking by the EU. This involves reducing critical dependencies on China, diversifying supply chains, and strengthening domestic industrial capabilities in key sectors. For investors, this means increased opportunities in European industries benefiting from reshoring or nearshoring initiatives, as well as in companies providing alternative supply chain solutions. Investment themes around European industrial autonomy, particularly in semiconductors, batteries, and critical materials, are likely to receive substantial government support and private capital flows. However, this could also lead to higher costs and reduced efficiency in some sectors due to less reliance on cost-effective Chinese production, potentially impacting profit margins for companies heavily dependent on Chinese supply chains.

Selective Engagement and Cooperation

Despite growing competition, complete decoupling between the EU and China is highly improbable due to their deep economic interdependence. A more nuanced scenario involves selective engagement and cooperation on global challenges such as climate change and sustainable finance. For investors, this could translate into opportunities in green technologies and sustainable finance, where joint initiatives or shared goals might foster a more stable environment for investment. Companies that can bridge the gap between European and Chinese standards and practices in these areas may find competitive advantages, particularly in sectors like renewable energy technology transfer and carbon trading mechanisms.

China’s Internal Economic Evolution and Market Implications

China’s own economic trajectory will significantly influence investment opportunities. As China shifts its growth model from export-led manufacturing to domestic consumption and high-tech innovation, demand patterns for European goods and services will evolve. If China successfully addresses its internal economic challenges, such as debt and demographic shifts, it could become an even more formidable competitor in advanced industries, potentially pressuring European companies’ market shares. Conversely, if these challenges persist, China might intensify its export drive, further exacerbating overcapacity issues and creating deflationary pressures in global markets. Investors should closely monitor China’s domestic economic reforms, particularly in areas like property market stabilisation and consumption stimulus, as these will directly impact global trade flows and commodity demand.

Currency Competition: The Renminbi and Euro Challenge to Dollar Dominance

An emerging theme in the EU-China relationship is the potential for both the renminbi and euro to challenge the US dollar’s dominance in international trade and finance. This development ties directly to the broader themes explored in our companion articles on US-EU and US-China relations, where American monetary policy and sanctions usage have created incentives for alternative payment systems.

China has been steadily promoting the international use of the renminbi through initiatives such as the Belt and Road Initiative and bilateral currency swap agreements. Meanwhile, the EU has been developing mechanisms to reduce dependence on dollar-denominated transactions, particularly in energy trade and in response to US extraterritorial sanctions. For investors, this currency diversification trend presents both opportunities and risks. Companies facilitating cross-border payments in alternative currencies, European banks developing renminbi trading capabilities, and firms positioned to benefit from reduced dollar transaction costs could see significant growth. However, the transition away from dollar dominance will likely be gradual and could create periods of currency volatility that impact international investment returns.

Technology Sector Bifurcation and Investment Opportunities

The technology sector is likely to experience continued bifurcation, with distinct European and Chinese ecosystems emerging in areas like AI, semiconductors, and digital infrastructure. This creates investment opportunities in companies that can operate effectively within specific regulatory frameworks whilst also presenting risks for those caught between competing standards. European technology companies that can establish strong positions in the EU’s regulated environment may benefit from reduced Chinese competition, whilst Chinese technology firms may find opportunities in markets where European companies face regulatory constraints.

For investors, the future of the EU-China economic relationship will be characterised by a complex interplay of competition, selective cooperation, and market fragmentation. Those who can anticipate these shifts, understand the underlying drivers, and adapt their strategies accordingly will be best positioned to navigate the evolving landscape and identify emerging opportunities across sectors and geographies.

 

Conclusion: Navigating Complexity with Strategic Insight

The economic relationship between the European Union and China is undergoing a profound transformation. What was once largely a complementary partnership, with Europe focusing on high-value goods and services and China on manufacturing, has evolved into a complex dynamic of direct competition, strategic rivalry, and selective interdependence. China’s relentless ascent up the value chain, coupled with its vast industrial capacity and state-backed economic model, is reshaping global markets and challenging established European industries.

From the intense competition in electric vehicles and semiconductors to the dominance in solar panels, wind turbines, shipbuilding, and steel, European firms are increasingly confronting formidable Chinese rivals. This competition is exacerbated by concerns over unfair trade practices, subsidies, and the potential for dumping, particularly as global trade flows are reconfigured by US protectionist measures. The emergence of artificial intelligence as a new frontier of competition adds another layer of complexity, with China’s rapid advancement challenging Europe’s more regulation-focused approach.

For investors, this evolving relationship presents both significant risks and compelling opportunities. Understanding the nuances of each sector, the impact of trade policies, and the broader market currents is paramount. Resilience will come from identifying companies that are innovating, diversifying their supply chains, and adapting to a more fragmented and competitive global economy. Opportunities may emerge in areas where Europe is strengthening its domestic capabilities, in niche high-value segments, or in companies that can navigate the complexities of cross-border collaboration and competition.

The potential for currency diversification, with both the euro and renminbi challenging dollar dominance, adds another dimension to investment considerations. As explored in our companion analyses of US-EU and US-China relations, these monetary shifts could reshape global financial flows and create new investment opportunities whilst introducing fresh risks.

In this environment of shifting sands, timely and accurate data-driven insights are more critical than ever. Our product, Dcsc.ai, provides advanced analytics and predictive modelling to help investors identify emerging trends, assess geopolitical risks, and uncover hidden opportunities within these complex global economic dynamics. With Dcsc.ai, you can gain the strategic foresight needed to make informed investment decisions and navigate the intricate currents of the EU-China economic relationship.