Trade barriers are rarely a first-best policy. They raise costs for consumers, disrupt supply chains, and invite retaliation. Yet the current dynamic between Europe and China presents an exceptional case—one where targeted, high barriers on Chinese high-tech manufactured goods are not just defensible but necessary.
The core argument rests on two pillars: protecting Europe's nascent modern defense industry, and nudging Beijing away from a mercantilist model that harms both its own citizens and global trading partners. The usual economic objections to tariffs lose force when the opponent is not a market economy but a state-directed export machine.
China's Subsidy Tsunami
For several years, Beijing has unleashed an unprecedented wave of subsidies for high-tech manufacturing. The result is a rapid gain in global market share across autos, pharmaceuticals, shipbuilding, and more. According to the OECD, government subsidies explain roughly 60 percent of the increase in Chinese firms' global market share over the past two decades. Chinese industrial firms receive three to eight times more state support than their competitors elsewhere.
The Rhodium Group describes this as an “industrial policy of everything”—no longer targeting a few strategic sectors, but extending across all layers of production, from upstream inputs to frontier technologies. Even in mature industries plagued by overcapacity, Beijing continues to push firms to upgrade and cut costs rather than reduce capacity. Services, previously neglected, are now receiving similar attention.
This is not comparative advantage in the classical sense. It is a deliberate strategy to dominate all tradable industries, forcing other countries to pay for Chinese goods with debt rather than trade. The motives are twofold: pure mercantilism to export away the housing bust, and geopolitical leverage—control over key supply chain nodes gives Beijing the ability to threaten export controls.
What Europe Should Do
The United States has responded with tariffs, which have had limited but measurable effect. China's share of U.S. imports has edged down since 2021, even when transshipment via Vietnam and Mexico is accounted for. But Washington's approach remains haphazard. Europe, with its more rational policymaking tradition, can do better.
One proposal, favored by Germany so far, is to do nothing—to let China manufacture everything while Europe focuses on services. This misreads the theory of comparative advantage, which applies to traded goods, not to a situation where one state aims to capture every industry. As Tej Parikh has argued, trying to compete with China's industrial policy may seem futile, but the alternative is strategic dependency.
Europe should erect both tariff and non-tariff barriers on Chinese high-tech exports, particularly those linked to defense and critical infrastructure. This is not protectionism for its own sake; it is a necessary shield for industries that underpin European security. The recent tightening of EU rules on Chinese goods shows Brussels is waking up to the threat, but more is needed.
Blocking Chinese exports may also push Beijing to rebalance its economy toward domestic consumption—a shift that would benefit ordinary Chinese citizens. In the long run, that would be good for China and for the world. But Europe cannot wait for that transformation. It must act now to preserve its own industrial base and strategic autonomy.
The choice is clear: either Europe builds high, hard trade barriers against China's state-subsidized export machine, or it accepts a future where its defense and high-tech sectors are hollowed out. For an independent Europe, the answer should be obvious.
