China Shock 2.0 and Risks to Europe's Steel and Metal Industries: On-the-Ground Diagnosis and Response Strategy

Executive Summary

China's export offensive toward Europe stems from structural overproduction triggered by the real estate downturn, and is unlikely to reverse in the short term. The EU is expected to gradually expand CBAM (Carbon Border Adjustment Mechanism) and anti-dumping tariffs in the sequence of steel → EVs → batteries → robots, with this pathway assessed as the most likely scenario at a probability of 50-55%. Given that steel is the first target, the urgency of response for the Korean steel industry is higher than for other sectors. The asymmetric structure observed in the German case—declining exports to China alongside a widening trade deficit—continues to function as a factor sustaining protectionist sentiment within the EU. Korean companies need to prioritize establishing a CBAM carbon-intensity data system, while simultaneously expanding EU-based production and strengthening supply chain partnerships with German-affiliated companies.

I. Situation Analysis

China Shock 2.0: An On-the-Ground Diagnosis of the Crisis in Europe's Steel and Automotive Industries

1. Background and Development of the Issue

China's export offensive toward Europe began in the electric vehicle and battery sectors in the early 2020s[2]. Since then, the scope of products in the export offensive has expanded to steel, chemicals, and machinery[2]. Most recently, the scope has broadened to include industrial robots[2]. The fundamental cause of this trend lies not in external factors but in China's domestic structure[2].

As the downturn in China's real estate market has become prolonged, domestic consumption has contracted[2]. A structure has become entrenched in which production capacity that cannot be absorbed domestically is discharged into overseas markets[2]. The Peterson Institute for International Economics (PIIE) analyzed this under the title "China's property bust is spilling across its borders"[8]. China's current account surplus expanded from 0.7% of GDP in 2019 to 3.7% in 2025[8][2]. Based on customs data, an export surplus of a much larger scale is confirmed[8].

The Singaporean outlet Business Times distinguishes this phenomenon from the first China Shock that occurred in the early 2000s at the time of China's WTO accession[1]. Whereas the first shock was a manufacturing shift driven by low-wage labor and inflows of foreign investment, this shock is driven by a structure of excess savings[1]. The view is that subsidies are a factor that channels exports into specific industries, but are not themselves the cause of the export surge[1].

2. Current Situation

The EU-China trade deficit reached €360 billion in 2025[2][12]. Citing this, the Indian outlet Mint assesses that the EU is already heading toward a "trade war" with China[12]. Warning signals have continued in Brussels for a considerable period, and the 27 member states are said to have entered a stage of preparing intensive measures to respond to dumping, overproduction, and supply chain dependence[12].

A paradoxical phenomenon is clearly evident in Germany. Germany's exports to China fell more than 12% year-on-year in the first half of 2026, dropping to around €37 billion[15]. While China maintains its status as Germany's largest trading partner, China's ranking among Germany's export markets has fallen from 2nd place in 2021 to 9th place[15][2]. Germany's state agency GTAI (Germany Trade & Invest) explains this as the result of Chinese companies themselves reducing their dependence on European imports[15]. The structure in which exports decline while the trade deficit expands instead is deepening concerns within German industry[2][15].

In the EV sector, despite EU tariff measures, sales of Chinese brands in Western Europe hit an all-time high, according to a report by China's state media outlet Global Times[9]. Brands such as BYD, XPeng, AVATR, and JAC Motors have also displayed new models at the Tbilisi Expo in Georgia, simultaneously pursuing a diversification strategy toward emerging markets[9]. In a separate article, Global Times cited the People's Daily in raising the question of "whether large exports and a big surplus equal overcapacity," pushing back against the notion, arguing that certain economies are shifting the blame for their own declining industrial competitiveness onto China to justify protectionist measures[5]. The official Chinese position is that determining overproduction based solely on export volume and surplus is a one-sided assertion that fosters inter-industry conflict and disrupts global supply chains[5].

3. Key Actors and Positions

The European Commission and Member States. The EU is cited as most likely to gradually expand the CBAM (Carbon Border Adjustment Mechanism) and anti-dumping tariffs in the sequence of steel, EVs, batteries, and robots. This probability is assessed at 50-55%[2]. However, policy preferences among member states are divided. Germany is understood to be cautious about direct confrontation due to its automotive industry's dependence on the Chinese market, whereas France and Italy are seen as favoring relatively hardline protectionist measures[2]. This division is a management variable that determines the speed and intensity of the EU's response[2].

German Industry. Germany is a country where the automotive industry accounts for 14% of GDP, and the weight of the automotive industry across political, economic, and security dimensions is greater than in any other member state[10]. The current situation, in which declining exports to China and an expanding trade deficit are occurring simultaneously, could deal a direct blow to Germany's manufacturing base[15][2].

The Chinese Government and State Media. China has adopted a discursive strategy of directly rebutting the overproduction frame itself. Global Times and the People's Daily characterize export expansion as the result of industrial upgrading[5]. This suggests that the voluntary export restraint the EU hopes for is unlikely to be realized[2]. At the same time, China is likely to exploit divisions within Europe while pursuing emerging market diversification and public opinion campaigns in parallel[2][9].

US-based Think Tanks and Regional Observers. The Brookings Institution addresses this issue under the framing of "whether Europe can survive China Shock 2.0," assessing that China has concentrated the burden on Europe in the process of seeking markets to absorb its excess export volume[4]. Eurasia Group identifies this issue as the top geopolitical risk for 2026, forecasting that China, unable to escape deflation, will continue attempting to export its way out, with the cost being shared by other countries including Brazil, Canada, Europe, and Japan[11].

4. Key Points of Contention

The first point of contention concerns how to characterize this phenomenon. While the EU and US-based research institutions characterize it as structural overproduction and export dumping driven by industrial policy, Chinese state media characterize it as a natural result of industrial competitiveness[5][2][4]. This difference in characterization directly translates into a debate over the legitimacy of response measures.

The second point of contention is duration. The prevailing assessment is that this trend, being derived from structural problems in China's real estate market rather than a short-term business cycle, is likely to persist for several years[2][8].

The third point of contention is internal EU cohesion. Differences in interests between Germany and France/Italy are functioning as a constraint on a consistent EU-level response[2]. Several analyses have already noted the possibility that China could exploit this division as part of its strategy toward Europe[2][9].