The real threat to the EU is not China's "overcapacity" -- it is Europe's own lack of innovation and its closed markets. Rather than wielding the big stick of sanctions, the EU would do better to reform and enhance its own competitiveness, and to pursue a kind of "positive-sum game."

by Ding Yifan, Di Dongsheng, Xu Zhengyuan

The European Union (EU) Institute for Security Studies recently published a Chaillot Paper entitled "China -- A Fragile Power?" which comments on China's policy towards Europe and offers recommendations to the European Commission. The paper's central argument is that China's foreign policy is no longer shaped by its economic strength alone, but is increasingly constrained by domestic economic vulnerabilities, which, in turn, are pushing Beijing towards "tighter domestic control and more assertive diplomacy," posing a complex challenge to Europe.

The paper claims that the Chinese economy is slowing, and that this economic deceleration is turning into a geopolitical accelerator, making China more "aggressive," and that Europe must respond in kind if it is to survive. In reality, the paper is built on the same flawed logic, which is another illusion, misjudging the development prospects of China and Europe and inventing non-existent trends.

AN IMAGINED CHINA'S "EXISTENTIAL ANXIETY"

The paper presents what appears to be a scientific economic forecast, projecting that China's growth could fall to around 1 percent after 2035. It then claims that Beijing is turning to "crisis resilience" and "nationalism." To support this claim, the paper fabricates a narrative: China is no longer integrating itself into the world in pursuit of a better life for its people; instead, it seeks to "decouple" from the world to ensure governance security.

First, is China decoupling from the world? And who is responsible for the idea of "decoupling from China"? The truth is that the very notion of "decoupling from China" was first raised by the United States and the EU. In responding to the COVID-19 pandemic, political elites in the United States and Europe suddenly realized how greatly they depended on China. Without "Made in China," Western countries could hardly organize their pandemic response. Hence the perceived need to decouple from China. After several years of trials, decoupling failed, so they rebranded it as "de-risking" -- in effect, a euphemism to say "removing the risk posed by China." Now, the report tries to shift the blame for "decoupling" onto China.

If the United States hadn't wanted to decouple from China, why did the Trump administration in its first term sharply raise tariffs on Chinese exports? And why did it impose controls or even bans on the export of certain technologies to China? Similarly, if the EU hadn't wanted to decouple from China, why has it sharply raised tariffs on certain Chinese exports? And why has it erected various non-tariff barriers against Chinese goods? Ironically, the acceleration of China's scientific research and technological iteration has benefited from the tightened technology export controls and blockades imposed by the United States and Europe against China. Denied access to advanced technologies, China had no choice but to step up its own R&D. China's recent rapid progress in chips, semiconductor materials and related technologies is a result of Western sanctions, with chip exports now becoming China's largest export category.

Second, will a slowdown in China's economic growth repeat Europe's trajectory? The report predicts that China's growth will gradually decline to around 1 percent by 2035 -- roughly the growth rate Europe is experiencing today. In fact, such a projection is based merely on the visible slowdown in China's growth following the pandemic. Even so, a more meaningful assessment should be made by comparing the slowdown in China's economic growth with that of other major global economies. Let us look at the performance of the world's major economies from 2019 to 2023, the period covering the outbreak and aftermath of the pandemic.

Over those five years, China's GDP grew by a total of 20.1 percent. By comparison, the United States' grew by 8.1 percent, Canada's by 5.4 percent, Italy's by 3.1 percent, the United Kingdom's by 1.8 percent, France's by 1.7 percent, Japan's by 1.1 percent, and Germany's by 0.7 percent.

Once China fully emerged from the pandemic's impact, its growth rate picked up slightly. In 2024, GDP growth hit 5 percent, followed by another 5 percent in 2025. For 2026, the opening year of the 15th Five-Year Plan (2026-2030), China has set a target range of 4.5 to 5 percent.

These targets are a bit more plausible than the report's projections.

Third, the report argues that China is exporting its industrial overcapacity to Europe. It claims that exporting overcapacity is a sign of China's economic weakness and that without such exports, China would be unable to "absorb" this capacity and face a crisis.

In fact, the notion that China's development depends heavily on exports is something of an illusion. According to World Bank data, China's exports accounted for only about 19 percent of its GDP in 2023 -- a share far lower than that of Germany (43 percent) or France (34 percent). Similarly, the claim that China is exporting industrial overcapacity is highly questionable. In 2024, China produced over 12 million new energy vehicles but exported only around 2 million of them -- about one-sixth of its total output. By contrast, Germany exports about 80 percent of the cars it produces. Moreover, China remains a critical market for the German automotive industry, aviation and other strategic sectors. So, by the ratio of output to exports, Europe appears to be exporting more overcapacity to the rest of the world than China does. Comparing the degree to which Chinese and European industrial production depends on international markets, it is difficult to conclude that China is more vulnerable.

Finally, the report offers the following recommendation for EU policy towards China: adopt "leverage-based diplomacy." In other words, Europe should not just defend itself but go on the "offensive." For example, the report claims that China remains heavily dependent on Europe's high-income market, particularly for exports of high-end manufactured goods. Therefore, the EU should not be afraid to strike back, because "the cost of inaction is higher than the cost of retaliation." The report also recommends that the EU stop focusing only on its own weaknesses, and instead protect and create technological "chokepoints" that China depends on -- such as advanced semiconductor equipment, biotechnology or specialized industrial software.

In reality, some Europeans tend to overestimate their own capabilities while underestimating those of others. The classical British economist David Ricardo famously explained that both parties benefit from international trade, and the importing side can obtain goods at a lower cost than it would take to produce them at home. The relationship between China and Europe in electric vehicles is a case in point. If European consumers are denied access to Chinese-made EVs, it is European consumers who lose out -- Chinese manufacturers still have access to larger global markets. When Europeans realize that consumers elsewhere in the world can buy high-quality Chinese-made EVs while they themselves cannot -- simply because of arbitrary rules imposed by their own rulers -- one can imagine how they might react. Similarly, if some Europeans fantasize about strangling China's technology development by controlling exports of advanced technologies, what will those European companies survive on once China is forced to develop those products itself -- and succeeds?

ILLUSION OF "FRAGILITY" AND REALITY OF "RESILIENCE"

The report commits a classic "Western-centric" error: It views China through a linear lens based on past growth momentum, while viewing the EU through a static, status-quo lens.

The report pathologizes China's growth rate shift as structural fragility, yet selectively ignores the deeper crises facing the EU itself: deindustrialization, political fragmentation, and a lack of strategic autonomy. In fact, the resilience of the Chinese economy stems precisely from its vast market and complete supply chains, whereas the EU's fragility derives from the fragmentation of its internal market and its strategic dependence on external powers -- most notably the United States.

The report identifies China's ageing population, real-estate adjustment and local debt as fatal weaknesses. Yet these challenges are fundamentally different in nature from those facing the EU.

First, China is an ultra-large-scale market with 1.4 billion people. While ageing is a challenge, China also boasts the world's largest pool of engineers and the largest middle-income group (around 400 million and growing). What some call "fragility" is in fact a byproduct of increasing prosperity, supported by enormous internal room for policy maneuvering.

European scholars would do well to study China's rural revitalization and regional coordination policies to understand how China is coping with the pressures of slowing growth. In contrast, many major EU member states have even more severe demographic challenges than China and lack internal strategic depth. The EU's single market is nearing saturation and lacks the capacity to create new demand in the way China can through initiatives such as "new-type urbanization" or the strategy of developing vast western regions of China.

Second, while both China and the EU face the task of reducing huge debt, a closer look at the structure of that debt suggests that China's resilience is greater than that of the EU. China's debt, for example, is largely "domestic debt" and "productive debt." On the asset side, it corresponds to the fact that China has the world's largest infrastructure networks in several key sectors, including high-speed rail, electricity transmission, and 5G telecommunications deployment, and leads globally in industrial capacity. China also has one of the highest national savings rates in the world and vast state-owned assets, giving it strong resource-mobilization and debt-restructuring capabilities. In contrast, EU member states are trapped in a "welfare trap." Fiscal space is locked up by high social welfare and pension spending, leaving little room for strategic industrial investment. In times of crisis, the EU relies more on external borrowing than on internal resource mobilization.

Third, which is the more attractive market -- China or Europe? The report argues that the Chinese economy is losing its appeal, that foreign firms are leaving China, and that as China's growth slows, Chinese consumption is declining, and so on. But the facts tell a different story: European companies are increasing their investment in China because the investment environment there is far better than that of Europe. Since 2025, China-EU trade and investment have grown steadily and healthily, and European investment in China continues to surge. According to China's Ministry of Commerce, in 2025, UK investment in China grew by 15.9 percent, and Swiss investment by 66.8 percent. A report by the German Economic Institute shows that Germany's new investment in China in 2025 totaled around 7 billion euros (8.13 billion U.S. dollars), an increase of more than 55 percent over 2024 -- the highest level since 2021.

From the chemical industry to precision manufacturing, from the automotive sector to biotechnology, European industry is doubling down on the Chinese market, expanding production lines, setting up R&D centers and increasing investment. Recently, France's Air Liquide announced a 25 million-euro investment to upgrade an air separation unit in Yulin, Shaanxi Province, a project expected to deliver both emissions reductions and increased output. As noted even by some Western media, the combination of a complete industrial ecosystem, continuously upgrading manufacturing capabilities, and an ultra-large market constitutes a powerful gravitational pull for European companies in China. An increasing number of European firms are looking east with a more pragmatic attitude.

In terms of investment sectors, high-end manufacturing and technology-intensive industries have become the main areas of European investment in China. According to the European Chamber of Commerce in China, 80 percent of its member pharmaceutical companies operating in China have chosen to expand their local production footprint, while the figures for machinery manufacturing and medical equipment are 46 percent and 40 percent, respectively. Analysts argue that these sectors place extremely high demands on supply chain stability, large-scale production capacity and quality control systems. The collective choices of European companies reflect not only a strong recognition of China's manufacturing strength, but also China's rising position in the global division of labor.

In the field of technology and R&D, the Chinese market has also become an indispensable part of European companies' global R&D networks. Joerg Wuttke, former president of the European Chamber of Commerce in China, cited the automotive industry as an example, noting that the Chinese market is critical to helping European carmakers transition from internal combustion engines to new energy vehicles. Martin Hofmann, chairman of the Board of the German Chamber of Commerce in North China, said: "Mature partnerships with Chinese companies and a third wave of localization focused on R&D and rapid industrialization have become key for German companies to consolidate their position in the Chinese market and drive innovation at home and globally." Research by the U.S.-based Rhodium Group shows that EU manufacturing foreign direct investment in China has continued to grow since 2021, with EU manufacturing greenfield investment in China reaching 3.6 billion euros in the second quarter of 2024 -- an all-time high. According to China's Ministry of Commerce, by the end of 2024, cumulative actual investment by EU companies in China had exceeded 150 billion U.S. dollars. A survey published in December 2025 by the German Chamber of Commerce in China found that 93 percent of German companies in China plan to continue deepening their presence in the Chinese market, and 53 percent explicitly intend to increase investment. These figures reflect the strong pull that the Chinese market continues to exert on European companies.

Fourth, the report recommends that the EU adopt a tough diplomatic stance towards China, which could result in the EU "breaking its own chains." For example, the report suggests that the EU use its "leverage" to restrict technology exports to China. This would be an act of "self-sabotage." China has a complete industrial system covering all major categories in the UN's industrial classification framework. Meanwhile, Europe's high-end industries (such as automobiles, chemicals and luxury goods) are heavily dependent on final consumption in the Chinese market. If the EU were to pursue a hard decoupling policy, Europe's high-end manufacturing companies operating in China would surely bear the brunt of trade disputes between the two sides.

GEOPOLITICAL MANEUVERING: WHO HAS MORE ROOM TO MANEUVER?

The report argues that China, under economic pressure, will become more dependent on the EU. This completely overlooks the rise of the Global South. The EU and the United States were once China's largest exporting markets, but China's international trade structure has long since been fundamentally transformed since it launched the Belt and Road Initiative (BRI). Through the BRI, the BRICS mechanism, and the Shanghai Cooperation Organization, China has built an extensive network of global partnerships. Data from 2025 show that China's trade growth with the Association of Southeast Asian Nations, the Middle East, Africa, and Latin America far outstrips its trade growth with Europe, and trade with BRI partner countries now accounts for more than 50 percent of China's total trade.

In contrast, the EU's export markets are very rigid. The EU relies primarily on internal circulation and the North American market. If the EU were indeed to decouple from China, it would be unable to quickly find alternative markets of comparable scale in the Global South.

The report recommends that the EU adopt "leverage-based diplomacy" towards China. But in practice, this is highly unlikely to work. If the EU imposes tariffs on Chinese goods, China is fully capable of absorbing its production capacity by pivoting to developing-country markets. Conversely, if Europe loses access to key materials from China, European industry would face the threat of a shutdown. It is true that Europe needs to accelerate the development of more self-reliant supply chains. However, building such supply chain systems takes time; even taking 5 to 10 years to establish a reliable supply chain is considered a relatively fast timeline. Can Europe survive such a difficult period? During that time, would EU companies see their production costs soar and their competitiveness decline, only to be replaced by Chinese competitors in global markets, including emerging markets? Would the EU, through protectionism, accelerate its own de-industrialization, while China, through openness and cooperation, strengthen its ties with global markets and ultimately emerge as the biggest beneficiary of a new era of economic globalization?

What Europe needs to recognize is that China's economic "fragility" is a challenge of transition -- not systemic collapse. The foundation of the Chinese economy is far more solid than the report suggests.

The real threat to the EU is not China's "overcapacity" -- it is Europe's own lack of innovation and its closed markets. Rather than wielding the big stick of sanctions, the EU would do better to reform and enhance its own competitiveness, and to pursue a kind of "positive-sum game." The Chinese and European economies are, in some ways, complementary. China can provide high-value-for-money industrial goods and complete supply chains; Europe can provide high-end technology, design capabilities, and brand management expertise. If Europe strengthens cooperation with China, both sides will benefit enormously. But if Europe forcibly decouples from China, it will hurt both sides, with Europe probably losing more than China.

History will show that this 2026 Chaillot Paper is a projection of the anxieties of the old mindset onto new realities. True strength does not mean having no weaknesses -- it means turning weaknesses into drivers of momentum. The transformation and upgrading that the Chinese economy is undergoing is precisely the embodiment of that resilience. If the EU insists on following this report's recommendations, trying to use its so-called "leverage" to suppress China, it will eventually discover that the fulcrum point of that leverage is not, in fact, in Europe's hands.

Editor's note: Ding Yifan is a senior research fellow at the School of Global and Area Studies, Renmin University of China. Ding has authored ten books on globalization, the euro, international financial crises, as well as other topics, and has published extensively in English and French in newspapers and academic journals. He can be emailed at [email protected].

Di Dongsheng is dean of the School of Global and Area Studies, Renmin University of China.

Xu Zhengyuan is a research fellow at the School of Global and Area Studies, Renmin University of China.

The views expressed in this article are those of the authors and do not necessarily reflect those of Xinhua News Agency.