This article was translated from the original German and was first published on the Limen China Substack.
Which Industrial Capabilities Europe’s China Policy Should Secure
Protecting automakers from Chinese competition through defensive measures makes little sense when there is no clarity about what those measures are actually meant to protect. Or where they are supposed to lead. Put another way, trade defense measures have little purpose without an economic policy strategy.
Anyone seeking to protect European industry from Chinese competition must explain which industrial capabilities that protection is meant to secure over the long term. For this task, trade policy needs a strategic objective that can be assessed.
That is the argument made by the Kiel Institute in its latest policy paper.
Ensuring that Europe retains electric vehicle production over the long term may also become a political and strategic objective because the battery industry needed to sustain it supplies a foundational technology for other parts of the economy and for security applications. This would give technology protection a strategic foundation in a definition of what Europe must be able to do over the long term, independently of the goodwill of economies with which it competes in the geoeconomic arena. Protecting threatened jobs and corporate profits would become part of that broader assessment.
For corporate leaders, this idea would have significant implications. An investment in Europe would have to meet an additional political requirement, whose economic foundations would need to remain viable throughout the investment’s lifetime.
The proposal from Kiel addresses a gap in Europe’s ambitions to exercise economic power. The single market provides bargaining power, whose industrial effects depend on the precision of the objectives and the conditions for investment. The battery example makes it possible to trace the connection the authors draw between market access, demand, and technological learning.
BusinessEurope sets out the requirements under which companies might participate in such a strategy.
China’s new plan for strengthening industrial foundations shows how demanding this task is. It extends to testing new components at customer facilities and organizing their initial use. Anyone seeking a European response must follow the entire path from a political decision to an economically viable capability.
This process will also determine whether European companies gain additional options and which costs they are expected to bear.
A Hotchpotch Is Not a Strategy
In the view of the authors of Kiel Policy Brief 218, Europe’s economic security has a gap because access to the single market can so far be tied only inadequately to the establishment of local production.
“Access to the single market is [Europe’s] biggest bargaining chip. …”
“A hotchpotch of reactive measures does not a strategic trade and industrial policy make. Europe needs to define its objectives — geopolitical, economic-security or linked to the green transition — before it chooses its instruments. …”
“Europe needs a purpose-built economic-security instrument.”
The paper’s argument hinges on the distinction between the purpose of a trade policy instrument and its possible side effects. In Europe, a countervailing duty must be based on established subsidies and injury to the industry concerned. It can then increase the incentive to produce within Europe. How much technical knowledge such a relocation generates, where that knowledge remains, and which upstream production stages follow remain open questions. The legal justification for the duty does not itself contain a mandate for industrial development.
Kiel also describes an institutional problem. Common commercial policy rests with the European Union, while national security is the responsibility of the member states. The authors therefore identify a gap for measures that would start from a European security need and operate at the level of the single market.
The significance of this finding becomes clear in an example chosen by the Kiel authors themselves. Dependence on American suppliers of advanced chips for artificial intelligence could also create a risk to supply security without subsidies or dumping being involved. Economic vulnerability can arise when technological capability is concentrated among suppliers that comply with the rules.
For us, this is the paper’s central contribution. Europe needs a reasoned view of which industrial capabilities must remain available and under what conditions. That decision can establish a mandate for trade policy. The location of production thereby becomes a strategic variable whose benefits would have to be demonstrated explicitly.
Which Capabilities Warrant Strategic Protection:
Defining Strategic Assets Without Supporting Rent Seeking
The battery example makes this argument economically tangible. The Kiel authors view cell manufacturing as a foundation for applications ranging from electric vehicles and storage to military systems. European defense demand alone, they argue, could scarcely sustain a competitive cell industry. The civilian mass market is intended to provide the demand on which production experience and economic scale can develop.
This gives automotive policy an additional rationale within the proposal. Vehicle production in Europe is intended to create demand for an upstream capability whose availability is desirable for security reasons. Whether this succeeds depends on how much of the value chain is actually localized and whether the cells produced there are suitable for the intended critical applications.
Kiel identifies these conditions. Civilian and military requirements would have to be sufficiently compatible in technical terms. China’s position in intermediate inputs and materials chemistry also remains particularly strong. The authors propose developing relevant stages such as cell manufacturing, power electronics, software, and integration in Europe, while initially continuing to source certain upstream inputs from China or partner countries.
This establishes a demanding condition for achieving economic objectives by threatening to restrict access to the European single market. Any required localization of production must extend far enough to deliver greater economic security. It should localize the knowledge and capacity for a technology that will be needed over the long term to build industries with a viable future.
Its economic foundations must also support investment across several product generations. A company will build process knowledge and development capacity only if it has a credible prospect of putting them to use.
Kiel develops a proposal for substantial institutional change from its diagnosis. A new instrument is intended to connect the development of production relevant to security with market access. The authors initially discuss existing European competences and call, over the longer term, for a separate Union competence for economic security. They also warn against capture by industries with particularly strong lobbying power.
Not All Trade With China Carries the Same Risk: Clearly Distinguishing Security Interests From Competitiveness
The current position paper from BusinessEurope, the European confederation of national business and employers’ federations, brings necessary precision to this strategy. It calls for explicit criteria for security risks and competitive challenges, systematic assessment, and business participation. Dependencies should be assessed according to their actual significance. This includes available European capacity and the capabilities of trusted partners.
“The EU must build explicit criteria in dialogue with business to separate security-sensitive trade from ordinary competitive challenges and implement its toolbox accordingly. …”
“The EU must be transparent about where costs fall and be prepared to bear them. A credible European response to the current challenges will not be cost-free.”
The loss of a European market position can be economically painful. Establishing that such a loss is relevant to security would additionally require explaining which critical application would be put at risk and why a timely replacement might be unavailable. Anyone making such a claim for protection would also have to identify the minimum capability that should be retained or developed.
Manufacturers and their customers have different economic interests in this process. A European component producer may benefit from an import restriction. A machinery manufacturer that buys the component and competes globally may face higher costs. BusinessEurope explicitly calls for the effects on downstream industries and consumers to be weighed against the benefits achieved. The costs of possible Chinese responses should also be included in the assessment.
Identifying and Addressing Weaknesses Together: How China Plans to Build New Foundational Industrial Capabilities
In this context, China’s new Five Year Plan to Strengthen Industrial Foundations is particularly interesting. Published on October 22, the document connects technological development with industrial application.
The plan aims to bring China’s industrial foundations to an advanced international level overall by 2030. Its priorities include addressing technological weaknesses, increasing technological autonomy, and improving the supply of high quality foundational industrial products. Research, development, and practical application are to be connected more closely for this purpose.
Its central objective is
系统解决产业基础薄弱问题，实现产业基础向“强创新、高自主、优质量”全面升级。
“Systematically address weaknesses in industrial foundations and comprehensively upgrade them toward stronger innovation, greater autonomy, and higher quality.”
The following paragraph, which sets out the objectives for 2030, makes the international ambition explicit.
产业基础能力总体进入国际先进行列
“The capabilities underpinning industry should reach an advanced international level overall.”
Manufacturers and users are to lead development projects jointly. Pilot platforms and coordinated testing procedures are intended to support the transition to operational use. The plan also envisages mechanisms for selecting, adapting, and validating new foundational industrial products at customer facilities.
Our analytical conclusion is that this policy addresses a central hurdle in industrial development. A user must be willing to test a new product in an operationally relevant setting. The resulting experience can help the manufacturer improve reliability and win further customers. Political intent acquires economic effect through such decisions.
For European industrial policy, the connection between demand and development is significant. A domestic production facility can build technical expertise when its products are used, failures are analyzed, and improvements are brought back to market.
The success of an industrial investment should therefore also be evident in whether the next product generation can be developed locally and qualified with customers.
When Corporate Investment Becomes an Economic Policy Commitment
The Kiel proposal deserves attention because it requires Europe to decide what industrial return its trade policy should deliver. BusinessEurope calls for the economic and institutional discipline that could make this ambition credible. China’s plan for strengthening industrial foundations illustrates how deeply such a task reaches into the organization of industrial learning.
For corporate leaders, this also changes how they prepare for discussions with policymakers. Anyone identifying a capability as strategically relevant should be able to explain its contribution to critical applications, disclose its remaining dependencies, and quantify the resources required for its further development. The political claim for protection would thereby be tied to a verifiable investment commitment.
Such an assessment concerns a company’s own business in China, its home market in Germany, Austria, and Switzerland, and competition in third markets. Chinese customers can qualify local alternatives. The same capabilities can become embedded in exported machinery and change international competitive conditions. European measures must therefore also be assessed according to whether they strengthen the capacity for innovation and the export prospects of the affected value chain.
Our benchmark would be an agreement with a clear time horizon. A company identifies the capability it can build, the demand required to sustain it, and the progress against which development should be assessed. Policymakers explain which conditions they can commit to providing and when support will be reviewed. This can produce an economically justified project whose benefits extend beyond the next trade policy dispute.
Europe possesses a substantial bargaining resource in its single market. Its industrial value emerges from the ability to turn it into viable investment and continued technological development.
Anyone seeking to put market access on the negotiating table must be able to describe the return so precisely that a company will commit capital and a customer will confirm its quality in operational use.
Putting Your China Strategy for 2027 to the Test
On December 16, we invite you to join us and 365 Sherpas BPI at the China Strategy Lab in Berlin. From nine in the morning until two thirty in the afternoon, we will assess the implications of developments in recent months and insights from the China Dialog for your own strategy.
We will focus on your business in China, your competitive position in the home market in Germany, Austria, and Switzerland, and competition in third markets. You will leave with an outline of the strategic adjustments required and a prioritized action list for your company.
The workshop will be conducted in German, in a confidential group of no more than twelve participants under the Chatham House Rule. The venue is 365 Sherpas BPI at Schlesische Straße 26 in Berlin. Further information and registration are available in our invitation.
