China cut off Europe for certain microchips.

How Europe got hooked

This outcome didn’t happen by chance. For two decades European factories sold a lot to China. After China joined the World Trade Organization in 2001, demand from Chinese industry and consumers opened a huge market for European manufacturers — especially in Germany. German machine makers, parts suppliers and high-end manufacturers sold into growing Chinese supply chains and saw profits climb. That export boom helped mask domestic weaknesses and made reforms easier to sell politically.

To put it simply, The result was a close economic tie: Europe supplied goods, China supplied scale. Over time European firms relied more on Chinese demand and Chinese hubs for parts and components. That made supply chains efficient. It also left Europe exposed, as recent events show.

What's different this time

In the early 2000s the so-called China shock felt mostly like an export windfall for many European manufacturers. The economist David Autor and colleagues later showed a similar shock hit U.S. Manufacturing after China’s WTO accession, costing jobs in exposed regions. Europe enjoyed the upside for a long stretch. But since about the early 2020s the relationship flipped. China isn't just a buyer anymore. It’s a global competitor and a producer of higher-end technology.

Beijing announced its industrial plan, "Made in China 2025," in 2018 to push Chinese companies into higher-value industries. Those targets weren’t empty rhetoric. Over the last few years Chinese firms have become more competitive in strategic goods that once were European strongholds.

And when trade tensions between major players rose, the flows shifted.

Finally, the share of European imports of Chinese manufactured goods compared to European manufacturing output grew from 2001 to 2010, leveled off in the 2010s, and has increased again since the pandemic. That trend shows Europe’s exposure has been creeping back up.

Microchips, leverage and the new risk

China cutting off certain microchips for Europe is the clearest recent example of leverage. When a supplier can limit access to components, it can squeeze downstream production and political options. And microchips are only one node in a web where dependence can mean vulnerability.

This raises questions about Europe’s investment policies. There are two separate but related issues: direct investment into Europe by Chinese firms, and European dependence on Chinese supply chains. They’re linked, but they’re not the same.

Arguments for tighter controls

Proponents of stricter screening say Europe needs to stop being passive. They point out that preferential market access paired with state-directed industrial policy can let some Chinese firms gain market share quickly. When that happens in sectors tied to national security or critical infrastructure, the argument goes, it's sensible to limit ownership or technology transfer. Europe’s factories can lose strategic depth fast if the factories or core technologies end up outside domestic control.

And there's the competition angle. If cheap or subsidized imports undercut European firms, investment that looks attractive today could hollow out industries tomorrow. That's what made some governments uneasy when Chinese competition started to show up across global markets.

Arguments against blanket repulsion

But a reflex to repel all Chinese investment carries costs. Europe still needs capital for green transition, factory modernisation and digitalisation. Closing the door risks slowing projects where Chinese financing or partnerships were filling gaps. Foreign direct investment has also helped some European firms scale or access markets. A blunt ban would likely prompt retaliation and could accelerate the very decoupling that hurts exporters.

The reality is that there are real trade-offs. Screening can protect strategic assets while letting benign deals proceed. But screening must be well-targeted, clear and consistent. Unpredictable barriers would hurt investor confidence and raise costs for European companies that rely on external funding.

Policy options in the toolbox

Policymakers have a few options they can mix. One is more rigorous, transparent screening for investments in defined sensitive sectors. Another is active industrial policy: subsidies, procurement and support to keep key capabilities at home. A third is diversification — building alternate supply chains with friends and allies.

And there's trade policy. If Chinese exports begin flooding the European market because of tensions elsewhere, tariffs or anti-dumping measures can buy time. But tariffs are blunt instruments and invite retaliation. So many officials prefer targeted measures that protect security without hamstringing competition.

Where Germany fits in

Germany’s experience is central to the debate. German manufacturers benefited more than most during the first China shock. That boom smoothed political support for reforms in the 2000s. It also created a bigger downside now. If Chinese demand softens or competition rises, German factories feel it quickly. That’s partly why discussions in Berlin about investment screening and industrial policy carry extra weight across the continent.

Practical steps for Europe

Right now European governments are balancing openness with caution. Steps that make sense include clearer criteria for screening foreign investment, faster procedures for strategic cases, and better coordination at the European level so rules aren’t a patchwork. Public research and standards-setting also matter — keeping cutting-edge know-how in Europe makes it harder for outside competitors to capture whole industries overnight.

No policy comes without costs. But aiming for selective protection in critical areas while preserving open markets elsewhere is a middle path many officials are exploring.

Wider implications

The China shock 2.0 isn't just about markets. It’s political. Firms adjust, and so do governments. If Europe tightens controls, global investment patterns will shift. Some projects move to other regions. Some sectors see consolidation. European consumers could pay more for certain goods. European firms might lose cheap inputs. Those are the trade-offs leaders must weigh.

Short sentence. The debate will shape who controls the next generation of technology and manufacturing capacity in Europe — and who calls the tune when supply chains break.

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David Autor’s research linked China’s 2001 WTO accession to measurable pain in U.S. Manufacturing—while Beijing’s "Made in China 2025" push, unveiled in 2018, signals why Europe’s exposure has returned.