China Shock 2.0: China's Export Offensive of Overproduction and the Risk of Deindustrialization in EU Manufacturing

Executive Summary

China's export offensive towards Europe is a structural consequence of domestic sluggishness triggered by a real estate downturn, representing a trend that will persist for several years rather than a short-term economic cycle. The EU-China trade deficit reached 360 billion euros in 2025, and despite Germany's exports to China plummeting from second to ninth place, the trade deficit paradoxically continues to expand. Chinese state media refute the very frame of overproduction and respond with a discourse of industrial upgrading, indicating a low likelihood of voluntary export adjustments that the EU hopes for. The most likely scenario for future developments is that the EU will gradually expand the scope of the Carbon Border Adjustment Mechanism (CBAM) and anti-dumping tariffs sequentially from steel to electric vehicles (EVs), batteries, and robots (with a probability of 50-55%), during which the policy preference divide between Germany and France/Italy will act as a variable. In response, China is likely to diversify its emerging markets and engage in public opinion warfare, leveraging fractures within Europe.

I. Issue Situation Analysis

Analysis of China-EU Economic Relations: 'China Shock 2.0' and the Deindustrialization of European Manufacturing

1. Background and Progress of the Issue

China's export offensive towards Europe began in the early 2020s in the fields of electric vehicles and batteries. Subsequently, the scope of exports expanded to include steel, chemicals, machinery, and more recently, industrial robots[13]. The fundamental cause of this trend lies within China's domestic structure. The prolonged downturn in China's real estate market has led to a contraction in domestic consumption[8]. The structure of production capacity that cannot be absorbed domestically has become entrenched in the export of goods to overseas markets.

China's current account surplus expanded from 0.7% of GDP in 2019 to 3.7% in 2025[8]. According to customs data, a much larger trade surplus is confirmed[8]. Although this does not reach the levels seen around the 2008 global financial crisis, the absolute scale is substantial[8].

The economic entanglement between Europe and China has already undergone structural changes since the Eurozone crisis. China maintained a trend of renminbi appreciation after 2010, but shifted to managing the exchange rate in a stable direction to expand exports following the Eurozone crisis[2][6]. At the same time, it pursued a diversification strategy to reduce dependence on advanced markets such as the EU. The share of the EU in China's total exports, which accounted for 20% in 2008, has since fallen to around 17%[2][6]. Since this period, China has been pursuing a national strategy of exploring emerging markets in Southeast Asia, South America, the Middle East, and Africa while transitioning to domestic consumption[2][6]. The current export offensive of overproduction can be seen as a result of these long-standing restructuring attempts combined with the new shock of the real estate downturn.

2. Current Situation

The EU-China trade deficit reached 360 billion euros in 2025[9]. In Brussels, strong measures are being prepared in response to anti-dumping, overproduction, and supply chain dependence[9]. Indian media diagnosed this situation as "the EU heading towards a trade war with China"[9].

Germany's exports to China decreased by more than 12% in the first half of 2026 compared to the previous year, falling below 37 billion euros[5]. This is a result of Chinese companies reducing their dependence on European imports[5]. Until 2021, China was Germany's second-largest export market, but it has now dropped to ninth place[5]. A paradoxical structure is emerging where Germany's trade deficit with China is actually expanding[5].

Interpretations of this situation are sharply divided between Chinese and European media. The People's Daily stated that "large exports and a high trade surplus do not necessarily mean overproduction"[1]. It argues that some economic blocs are shifting their domestic structural problems of weakening industrial competitiveness onto China[1]. The Global Times also characterized the decline in Germany's exports to China as a "deepened restructuring of trade structure triggered by China's industrial upgrading"[15]. It was also argued that the importance of China to German companies has not diminished[15].

In contrast, the Brookings Institution has raised the question of whether "Europe can survive China Shock 2.0" through a podcast series[4]. It diagnosed that a significant portion of China's overproduction capacity is being redirected to Europe, leading to the hollowing out of the industrial base on the European continent[4]. The Eurasia Group identified this issue as the top geopolitical risk for 2026, predicting that "Beijing will not escape the deflationary trap this year"[3]. It analyzed that China will continue to attempt to escape through exports by pushing cheap goods into the global market[3].

In the electric vehicle sector, despite the EU imposing tariffs, sales of Chinese brands in Western Europe have reached record highs[12]. Companies like BYD, XPeng, AVATR, and JAC Motors are expanding their market share by circumventing tariff barriers[12]. The Financial Times reported that China is strengthening its grip on Europe's automotive supply chain[16].

3. Key Actors and Positions

Chinese Government and State Mediareject the very frame of overproduction. The Global Times and People's Daily define the expansion of exports and trade surpluses as a natural result of industrial competitiveness, characterizing the Western perspective that raises concerns as a "unilateral claim" to justify protectionism[1]. From the perspective of the Chinese industrial sector, it is merely a realization of the comparative advantage secured in advanced manufacturing sectors such as EVs, batteries, and robots according to market principles.

European Commission and Member State Governmentsare adopting the CBAM (Carbon Border Adjustment Mechanism) and anti-dumping tariffs as core defensive measures. However, the phenomenon of increasing sales of Chinese electric vehicles despite tariff imposition[12] raises questions about the effectiveness of individual tariff measures. Unlike the South China Sea, the interests of the 27 EU member states are not uniform in trade policy towards China. The South China Morning Post raised concerns that the EU may struggle to maintain a united response when individual member states are under pressure, citing the example of the Ceuta migrant crisis[14]. A policy researcher from the European Council on Foreign Relations (ECFR) evaluated this as a "real-time test of what happens when one member state is under coercive pressure"[14].

German Industryis in a dual position. The automotive and machinery industries are losing their export markets to China due to the expansion of domestic procurement by Chinese companies[5], while at the same time facing pressure from the influx of Chinese EVs and low-cost manufactured goods in the domestic market. The fact that Germany still maintains China as its largest trading partner[5] indicates that severing relations with China is not a realistic option.

American Research Institutions (Brookings, PIIE, Eurasia Group)approach this issue within the framework of transatlantic supply chain restructuring. They share a common analysis that China's export-led growth model simultaneously threatens the manufacturing bases of Asia, the United States, and Europe[4][8][3]. This perspective aligns with the intention to seek cooperation between the U.S. strategy of containing China and the EU's independent response.

Third Countries such as Indiaare showing movements to leverage this conflict structure as an opportunity for themselves. Indian media have characterized the EU-China trade war phase as an opportunity to promote the India-EU free trade agreement[9].

4. Core Issues

There is a fundamental difference in perception regarding the causes of overproduction. China interprets it as a result of industrial upgrading and competitiveness, while European and American research institutions interpret it as the externalization of domestic sluggishness due to the real estate downturn[1][8][15].

The effectiveness of tariff policies is also a contentious issue. The phenomenon of increasing sales of Chinese brands in Western Europe despite the EU's imposition of tariffs[12] suggests that tariffs alone may not be sufficient to prevent market encroachment.

The issue of cohesion within the EU is also highlighted. Concerns have been raised among local experts that if individual member states are exposed to economic leverage from China or non-economic pressures such as migration issues, the unified strategy towards China among the 27 countries may be shaken[14].

Finally, the asymmetry of interdependence is deepening. Although Germany's exports to China have plummeted, the expanding trade deficit[5] indicates a gap between Europe's attempts to reduce dependence on China and the actual changes in trade structure.

II. In-Depth Analysis of the Issue

In-Depth Analysis of China-EU Economic Relations: Structural Causes and Historical Context

1. Analysis of Fundamental Causes

The trigger point of this situation is China's real estate market. The downturn in the real estate sector has suppressed household consumption[8]. The weakened domestic demand has failed to absorb the excess manufacturing capacity. As a result, a structure has emerged where unabsorbed production is pushed overseas[8].

This structure is not a simple economic cycle. China's current account surplus surged from 0.7% of GDP in 2019 to 3.7% in 2025, more than fivefold[8]. The trade surplus based on customs statistics is even larger[8]. In absolute terms, it does not reach the levels seen around the 2008 financial crisis, but the shocks felt by industry are much more concrete than at that time[8]. This is why the offensive that began in steel and automobiles has spread to industrial robots[13].

The Eurasia Group has identified one of the top geopolitical risks for 2026 as "Beijing will not escape the deflationary trap this year"[3]. Instead, it predicts that China will continue to attempt to escape through exports by flooding the global market with cheap goods[3]. This interpretation suggests that China's export offensive is not a temporary adjustment but a structural choice to externalize domestic policy failures.

Chinese state media provide a different explanation. The People's Daily has clearly stated that "large exports and a high trade surplus are not the same as overproduction"[1]. This is a rebuttal that attempts to shift the domestic structural problem of weakening industrial competitiveness onto China[1]. The Global Times characterized the decline in Germany's exports to China as a "deepened restructuring of trade structure triggered by China's industrial upgrading"[15]. This perspective seeks to find the cause not in China's overproduction but in the rise of China's industrial competitiveness itself. The gap in this interpretation is likely to act as a significant perceptual divide that will be difficult to narrow in future negotiations.

2. Structural Context

Economic Structure: Absence of Alternative Markets

China's strategy of diversifying its export markets has been underway for over a decade. After the Eurozone crisis, China abandoned its trend of renminbi appreciation and began managing the exchange rate in a stable direction[2][6]. At the same time, it diversified exports to Southeast Asia, South America, the Middle East, and Africa to reduce dependence on advanced markets[2][6]. The share of the EU in China's exports, which accounted for 20% in 2008, has since fallen to 17%[2][6]. This change occurred within 3-4 years, which is relatively fast in terms of the pace of trade structure transformation[2][6].

The problem is that emerging markets cannot absorb the current scale of overproduction. It is difficult to resolve a current account surplus that reaches 3.7% of GDP solely through emerging markets[8]. Ultimately, the EU, with its purchasing power and market size, is repeatedly identified as the final absorption point. The case of Germany exemplifies this. Germany's exports to China decreased by more than 12% in the first half of 2026, falling below 37 billion euros[5]. At the same time, China's exports to Germany remained robust, leading to an expanding trade deficit[5]. The fact that China, which was Germany's second-largest export market in 2021, has now dropped to ninth place signals that Chinese companies are reducing their dependence on European imports[5]. This indicates a shift in the nature of the relationship from interdependence to unilateral dependence.

Political Structure: Discrepancies in Interests Among 27 Member States

The EU's response is predicated on political consensus among the 27 member states. This consensus is structurally fragile. The responses of Southern European countries illustrate this[14]. During the Ceuta migrant crisis, when Spain was under pressure, other member states quickly rallied in solidarity[14]. Alberto Rich, a researcher at the European Council on Foreign Relations (ECFR), evaluated this as a "real-time test of what happens when one member state is under pressure"[14]. However, it is uncertain whether this solidarity will operate similarly in matters where industrial interests are sharply divided, such as trade policy towards China. The interests of Germany, which has a significant automotive industry, differ from those of consumer goods-oriented member states that rely on low-cost imports.

Security Structure: Linkage Between Industrial Base and Defense Production

The automotive industry is not merely a manufacturing sector. It constitutes 3.0-3.5% of U.S. GDP, 14% of German GDP, and approximately 13% of South Korean GDP[10]. It creates numerous jobs and has a direct impact on regional politics[10]. It also possesses a security dimension as it can be converted into military production facilities in times of war[10]. Charles Wilson, who was the U.S. Secretary of Defense during the Eisenhower administration, symbolically illustrated this industry's political and security status with his statement, "What is good for GM is good for America"[10]. Therefore, the hollowing out of the European automotive industry could lead to a weakening of the defense industrial base, making it not just a trade issue.

3. Comparison of Historical Precedents

China Shock 1.0: The Deindustrialization of American Manufacturing

'China Shock' as a term originated from the concept that referred to the collapse of American manufacturing following China's accession to the WTO in the early 2000s. The Brookings Institution's designation of the current European situation as "China Shock 2.0" intentionally invokes this historical analogy[4]. While the first shock began in low-wage labor-intensive industries and hit the U.S. Rust Belt, the second shock is occurring in high-tech manufacturing sectors such as electric vehicles, batteries, and robots, indicating that the sectors being targeted in Europe are of much higher added value than those in the past in the U.S.

China's Response Patterns During the Eurozone Crisis

The most similar precedent to the current situation is China's behavior during the Eurozone crisis from 2010 to 2012. At that time, China provided limited support by purchasing Greek and Portuguese government bonds[2][6]. However, this was not aimed at stabilizing the EU itself. The priority was to manage China's own burdens regarding foreign exchange reserves and risks, as well as to block the spillover effects of the EU crisis on the Chinese economy[2][6]. The pattern of China's foreign economic policy prioritizing its own risk management over the recovery of the counterpart's economy is likely to be repeated in this case. In other words, the structural incentive for China to engage in substantial export restraint in response to EU concerns about industrial hollowing is weak.

The Possibility of Repeating the Solar Panel Dispute

The dispute in the early 2010s when the EU imposed anti-dumping tariffs on Chinese solar panels serves as a miniature precedent for this situation. At that time, three elements emerged simultaneously: the encroachment of low-cost Chinese products into the European market, discussions on anti-dumping measures within the EU, and discrepancies in interests among member states. The current electric vehicle and steel phase is manifesting this structure on a much larger scale and across a wider range of products.

4. Key Variables in the Development of the Issue

Variable 1: The Speed and Scale of Recovery in China's Domestic Market

The recovery of the real estate sector in China is the most fundamental variable[8]. If domestic demand recovers and absorbs overproduction naturally, the intensity of the export offensive may ease. However, if the downturn triggered by real estate persists, export dependence is likely to become structurally entrenched.

Variable 2: Political Cohesion Among EU Member States

For the CBAM and anti-dumping tariffs to be effective, cohesion among the 27 member states must be maintained. Whether the solidarity pattern confirmed in response to the migration crisis will be replicated in trade policy will be a point of observation[14]. The adjustment of interests between Germany, an exporting country, and member states that rely on low-cost imports will be crucial.

Variable 3: The Speed of China's Shift to Local Production in Europe

Chinese electric vehicle companies are already showing trends of shifting to local production in Europe to evade tariffs[12]. As BYD, XPeng, and others set new sales records in Western Europe[12], if this trend shifts from simple exports to local production and investment, the EU's tariff policies could be rendered ineffective. This indicates a structural change where encroachment on supply chains shifts from exports to capital[16].

Variable 4: Absorption Capacity of Emerging Markets

The possibility of third countries such as India emerging as alternative partners through strengthening relations with the EU is also a variable[9]. Indian media interpret this situation as an opportunity to enhance India-EU relations[9]. This could serve as a factor constraining China's negotiating power and act as an alternative route for the EU to reduce dependence on China.