This follow-up analysis, preceded by an article examining the current state of the Chinese economy, unfolds in three parts. It opens with a concise survey of the political landscape to judge whether China’s institutional framework facilitates the resolution of its economic challenges. It then considers China’s impact on the global economy and offers several ideas for how the European Union might respond. Finally, it draws some broad conclusions.
Political and institutional considerations and their effect on steering economic policy
Long after the founding of the People’s Republic of China and after decades marked by an unclear approach to economic policy, the governing regime ultimately managed to stabilize the country and guide it with a firm hand toward market mechanisms and openness, all while the Communist Party retained control over institutions, firms, and society. The success of that project over the previous four decades is indisputable, yet the returns appear to be diminishing and, in places, turning negative.
At the same time, the extent of Party oversight and control over China has grown, particularly since the abolition of presidential term limits, which allowed Xi Jinping to extend his leadership. I do not intend to enumerate all the difficulties of economic activity under autocratic systems, but I will argue that even in non-democratic models, checks and balances and a relative distribution of power can lessen the downsides of power concentrated in a very small number of hands.
The regime’s capacity to stabilize the country and steer it toward markets and openness persisted, even as the Party maintained command over institutions, companies, and society. In some sense, the era inaugurated by Deng Xiaoping made it possible to construct what might be called a State of pseudo-rights with Chinese characteristics, by expanding decision-making space (though still within the Communist Party) and by institutionalizing the exercise of power more robustly. These changes were solidified during the administrations of Jiang Zemin and Hu Jintao, who also implemented leadership rotation and restricted presidents to two terms. Yet the break in rotation under Xi Jinping’s third term revived uncertainties about the country’s institutional framework, and it appears to be strengthening the regime’s most authoritarian tendencies within the State of pseudo-rights with Chinese characteristics that took shape at the end of the twentieth century and into the twenty-first.
In the purely economic sphere, in 2020 the Chinese government launched a campaign to tighten its grip on the domestic business landscape. The Communist Party expanded its activity within Chinese firms and even multinationals, and a number of proceedings—judicial or extrajudicial—were opened against business leaders who had, at one point, shown deviations from the country’s economic policy. Perhaps the best-known Western case was the 2020 disappearance of Jack Ma, the founder of Alibaba, who disappeared for three years, stalling the planned IPO of his Ant Group conglomerate. Similar operations were carried out against other tech companies, including Tencent and Didi Global, with the aim of tightening Party control over their activities.
In the same line, state-owned enterprises (SOEs) regained prominence in China’s industrial fabric, exerting influence in energy, banking, telecommunications, heavy industry, and other sectors. Some well-known entrepreneurs vanished from public view, such as Bao Fan, founder of China Renaissance, in 2023. Ren Zhiqiang, head of a state-owned real estate company and a defender of freedom of expression, was sentenced in 2020 to 18 years in prison; Xiao Jianhua disappeared from a Hong Kong hotel in 2017 and did not reappear until 2022 in mainland China, at a corruption trial that yielded a 13-year sentence. The government described these actions as anti-corruption operations, but distinguishing cases of corruption from political persecution remains difficult.
“The Communist Party dramatically increased its activity within Chinese companies and even multinationals, and various proceedings (judicial or extrajudicial) were initiated against business leaders.” In the same manner, alleged anti-corruption campaigns under Xi Jinping have also unsettled the foundations of the Communist Party’s own power. In 2014, Zhou Yongkang—responsible for State security and one of seven members of the Politburo Standing Committee—was charged with corruption and given a life sentence. Bo Xilai, who might have rivaled Xi for leadership, was likewise sentenced in 2013 to life imprisonment on similar corruption charges. With those two purges, Xi consolidated his power at the start of his first term. Later, in 2017, a potential successor, Sun Zhengcai, also ended up in prison for life on corruption charges. A year earlier, Ling Jihua, a close associate of Hu Jintao, was arrested on identical charges and also received a life sentence, undermining trust in the prior presidential regime. Similarly, between 2014 and 2016, two members of the Central Military Commission (Xu Caihou and Guo Boxiong) faced corruption allegations. Their departure from the military’s upper ranks allowed Xi Jinping to extend control over the armed forces. More recently, foreign minister Qin Gang disappeared in 2023, with no news since; and defense minister Li Shangfu was dismissed in 2024, expelled from the Communist Party and charged with corruption. This condensed list of political, business, and military indictments and purges, as reported in the West, suggests that such actions could be occurring at other levels as well, within the government and the military.
“From Europe, one can’t verify whether those accusations of corruption are merely instrumental pretexts for targeted elimination or whether these disappearances and sentences—carried out by the Chinese courts with a flair for the extraordinary—might be justified. Both explanations probably hold some truth, insofar as corruption tends to thrive in environments lacking press freedom or judicial independence. Yet the emphasis of these cases on rivals or obstacles to Xi Jinping’s ambition points in one direction: a rising autocracy within the regime.” Similarly, the regime’s growing control over digital technology and artificial intelligence is not limited to purging potential opponents in politics, business, or the military; it now encompasses mass surveillance of citizens. Internet guardrails, facial recognition programs, social credit systems, AI designed to forecast crime, and new laws promoting racial and social uniformity point to an ever more all-encompassing state.
All of this suggests a reversal in China’s institutionalization of power, now appearing to be entirely centralized in the presidency. The State of pseudo-rights with Chinese characteristics, created after Mao Zedong’s death, is fading, giving way to a resurgence of imperial-style authority.
This broad political reflection follows a debate about the economic viability of pursuing the currently proposed policies to boost consumption, balance the current account, broaden social safety nets, and maintain the industrial commitments of previous decades. As noted in the earlier article, to achieve these aims the government would need to raise public spending, which will be difficult if the budgetary priorities of China’s dirigiste industrial policy are to be preserved; such a shift could also provoke involution in other sectors of the economy. Meanwhile, efforts to reform institutions to strengthen and expand social security systems (to lower the savings rate) do not appear to have strong ideological or cultural backing within the government. Finally, the liberalization of financial flows and easier entry of foreign direct investment are conspicuously missing from the current agenda, making them seem harder to realize under a regime that strengthens autocracy. The line about strengthening social security systems not enjoying ideological support, quoted here, highlights a broader disconnect.
In a social and political setting marked by rising authoritarianism, that framework of means and ends seems even less likely. Thus, irrespective of other consequences of China’s political drift, such a reversal would be incompatible with an expansion of freedom and personal responsibility, at least in the economic and business spheres—areas the government needs to develop in order to fulfill its announced goals.
What Europe should do?
China’s rise on the global political and economic stage, the retreat and unpredictability of the Trump administration in the United States, and Vladimir Putin’s war of aggression in Ukraine are all prompting a rethinking of the European Union’s role in the world and of its internal policies.
In the economic realm, the effects of COVID-19 (2020–2022) and the subsequent conflict compelled a new consensus on trade relations and globalization. The EU’s maximalist stance in favor of free trade began to soften due to supply shortages during the pandemic’s most acute months, which dampened mobility and social interaction. As European activity recovered, disruptions in trade flows manifested as inflation, and shortages of basic goods—particularly health-related items—led to reflections on the need to rebuild some local production of goods that had been outsourced in the name of efficiency.
Likewise, the onset of the war in Ukraine and the accompanying sanctions on Russia exposed Europe’s dependence on third countries—Ukraine, devastated by war, and Russia, constrained by sanctions. Meanwhile, the ambitious environmental policies of the 2019–2024 mandate tightened import standards that did not fully internalize the environmental costs now embedded in EU rules on companies and households. Europe thus sought to temper its defense of free trade by announcing new industrial policies to curb excessive dependence and to ensure that the green transition is equipped with safeguards against localization risks. This orientation toward industrial and trade policy was prominent in the Draghi report, requested by the Commission toward the end of the last legislative period. Published in September 2024, the report laid out a new economic policy agenda. Not long after, the impact of U.S. tariff policies pushed the EU from contemplation to concrete decisions. Moreover, the growing trade deficit with China—surpassing €300 billion in 2025—had positive effects on the prices of many inputs but threatened the continent’s industrial vitality, precisely when European authorities were seeking industrial policies that would strengthen supply security after the COVID-19 shock and the Ukraine war.
Given all of this, Europe must now chart its own course and establish a space for dialogue with China. Building on the previously described challenges facing the Chinese economy, and without claiming exhaustiveness, here are some recommendations for European economic policy.
First, Chinese authorities are right to distinguish between overcapacity problems and those arising from the involution of their industrial policy, though they have misidentified the causes, raising questions about possible future corrections. A precise distinction should enable the design of a trade policy that leverages the competitive advantages of each jurisdiction while guarding against the harmful effects of involution in China. From a purely free-trade stance, one could argue that safeguards would reduce consumer welfare by raising import prices. Yet some Chinese exports from sectors where firms are unable to profit from installed capacity represent a double-edged benefit for European consumers and a real threat to domestic production, also affecting social and political stability in certain regions. In any case, Europe should not pursue a protectionist trade policy based solely on a negative balance in any particular trade category. Sectoral data on China’s economy are hard to obtain in this opaque environment. Broad calls for protection could be useful only to the extent that they allow information to emerge that precisely calibrates the degree of protection in European trade policy.
This approach to revising our trade relationship with China would also help align interests across the European Union. Many sectors have deeply interwoven value chains, with firms operating on both sides of the border across different stages of production. Public debates in some Member States reflect their varying exposure to the Chinese economy, prompting some governments to pursue aggressive trade policies while others take a softer stance, sometimes yielding ad hoc exceptions. Such a debate framework is unlikely to produce a trade policy that solves more than it creates problems. Therefore, the European debate should be reorganized so as not to accuse China of dumping for every sectoral deficit, but to focus discussions on the negative externalities of China’s aggressive industrial policies. As explained in the previous article, those policies lie behind China’s involution and are unlikely to be effectively corrected under the new Five-Year Plan. At the same time, protection measures should be adopted to minimize risks of potential destabilization of the Chinese economy.
On the other hand, Europe still enjoys a modest but meaningful services surplus, which constitutes a clear competitive advantage for European firms. It would therefore be reasonable to convey to Chinese authorities some concerns about the reorientation of their economic policy—at least the notable drawbacks they are likely to encounter when pursuing the goals announced in the new Five-Year Plan. This could create a space for broad cooperation that might open services markets, feeding back into mutually beneficial trade flows between the two sides.
Separately, Europe needs to define a stance on financial and capital flows with respect to China. Beyond economic considerations, the authoritarian regression of the Chinese regime raises questions about dependencies created by direct investment. It would be prudent to adopt a cautious stance that mitigates the risks of strong dependencies on a country whose political institutions operate under a logic very different from pluralistic societies, which could constrain the Union’s latitude in scenarios of geopolitical stress. Finally, in this same area, and in light of the degree of upheaval introduced by the Trump administration into international trade, the EU is justified in pursuing new trade agreements that reduce dependence on the U.S. economy and open new markets for European firms, moving away from blanket protectionism and internalizing the costs of our environmental policies on imports aimed at safeguarding global public goods like the atmosphere, while avoiding tariff campaigns that lead to shared impoverishment.
With regard to the revised industrial policy, Europe cannot look to China’s strategies as a model to imitate. It would be wise for Europe to remember the effects of state-directed policies that have, in China, contributed to involution—just as Europe experienced in the 1970s and 1980s. The EU is justified in pursuing new trade agreements that reduce its dependence on the U.S. economy.
In this light, Europe should maintain a broad, horizontal approach to industrial policy that targets the real constraints choking the economy. The so-called “shadow tariffs” identified by the IMF within the single market—estimated at 42% for goods trade and 100% for services, later adjusted by the ECB to around 60% and 110% respectively—pose a real barrier to boosting growth potential and to a sustainable future for European industry. There is no superior growth strategy than removing these internal barriers to intra-EU trade, alongside investments in energy interconnections to exploit cheaper clean energy during the green transition.
Along similar lines, it is vital to upgrade our digital and telecommunications links and to harness the single market with a common regulatory framework for deploying artificial intelligence, avoiding regulatory fragmentation seen in other jurisdictions. The reform of the single market must go hand in hand with Europeanizing a substantial portion of the social protection systems that EU Member States have built, adapting to greater geographic mobility of labor.
Beyond these horizontal policies, targeted vertical policies will be appropriate when the security and stability of our societies are at stake. In areas such as defense, the green transition, space capabilities, and others, Europe must speed up policies that bolster strategic autonomy. Yet we must remain aware that every lobby will seek to label itself as strategic to obtain public protection at the expense of the general welfare. We must stay prudent and keep in mind China’s involution challenges.
The reform of the single market must proceed together with a stronger European alignment of a significant portion of social insurance schemes across member states, designed to adapt to higher labor mobility. In addition, any industrial policy will require public funds whose aims compete with other policy areas where the impact on growth could be greater. In this respect, the EU budget is not robust enough for such ventures, and diverting resources away from cohesion, education, or other priorities would severely affect truly European public goods. By contrast, such policies could proceed with limited impact if they rely on national budgets and a thorough review of State aid rules, which, in turn, would undermine the single market—Europe’s greatest asset for strategic autonomy. An acceleration of competition policy reforms cannot be pursued in isolation if we wish to foster European champions. The only viable route to develop firms capable of competing in global markets is to dismantle the national barriers that fragment the market and reduce the efficient scale of companies.
Europe must not further weaken State aid or artificially favor corporate mergers in national markets. Instead, we should strengthen the single market as the sole path to promote growth and improve the profitability of Europe’s industrial sector, free from national biases that spur intra-EU relocations based on the fiscal strengths of one country over another. Let us not be dazzled by the expansion of Chinese companies that, under a dirigiste industrial policy, could end up paralyzing themselves, as Europe experienced not long ago.
The S&D coordinator at the European Parliament’s Committee on Economic Affairs, in Beijing. Photo: European Parliament
Some conclusions
China’s emergence has opened a new global framework for international relations, with political as well as economic implications. On top of this major development are the entropy of the U.S. administration, Russia’s increasing aggression, Middle East instability, migration-related crises, the effects of technological progress on the fabric of society, and the profound challenges posed by climate change. The world is undergoing a period of intense transformation that demands responses from the Union.
With regard to the questions raised by China’s position on the world stage—the central concern of this essay—Europe should keep several considerations in mind. First, the autocratic character of the Xi administration, which has intensified in recent years. In light of the United States’ unpredictable behavior, China has helped stabilize a degree of global order that is welcome in many respects. China’s expanding influence is not without conditions or geopolitical risks that extend beyond its borders, but to date the country has played a moderating and stabilizing role in many areas, and this should be recognized.
The European Union must therefore carve out space for dialogue and deliberation with Chinese authorities in areas that affect global public goods. The fight against climate change, the need for shared frameworks for developing technologies related to artificial intelligence and biotechnology—where universal ethical standards remain essential—as well as space exploration and freedom of navigation, are among the domains where genuine conversations must occur, especially since there is currently no reliable interlocutor in the U.S. government.
Likewise, the global multilateral institutions established after World War II must accommodate China or risk being displaced by a new global order that seems to be forming, one that rejects old rules in favor of new arrangements, whether by force or through reforming ourselves. For now, China insists on a rules-based world, even if those rules require adaptation; such a revision would leave us with a framework far better than the lawless environment exemplified by Trump, Netanyahu, and Putin. That said, given China’s autocratic tendencies, the path ahead will be difficult, but Europe has no real alternative.
Economically, China’s role in global markets brings both opportunities and risks. The arrival of a billion-plus economy on the world stage is, in principle, a positive development. Yet its industrial policies disrupt international trade beyond market logic. These policies might present a modest drawback for global imbalances, but China’s sheer size means such imbalances can trigger severe dysfunctions. As noted earlier, involution is not a foreign concept to Europeans. Europe’s own experience with industrial restructuring in the 1980s offers a clear lesson about where indiscriminate vertical policies can lead—and the Chinese economy is now facing those exact challenges.
Moreover, the term involution appearing in Chinese discourse signals that the problem is already pressing for authorities and businesses. The term is used to distinguish export-oriented sectors with capacity above local demand from goods sold at below-cost, and when installed capacity exceeds global demand—thereby impacting financial and fiscal stability—restructuring cannot be postponed. Yet the reorientation required to address this serious problem is not evident in China’s current Fifteenth Five-Year Plan, which contains few credible measures to rectify these developments and several proposals that could worsen the crisis’s root causes. We must also consider the growing assertiveness of Chinese authorities, which bodes ill for improvements in addressing the economy’s pathologies, which would benefit from a more pluralistic society, more space for business innovation, and a relatively open financial framework.
Facing all of this, Europe should permit ordinary trade grounded in genuine competitive advantages, without imposing universal protectionist measures. At the same time, we must identify those goods for which Chinese production is undergoing involution in order to shield against future shocks that could destabilize international trade flows, beyond the harm already inflicted on the Chinese economy. As for foreign direct investment, Europe must protect its own political autonomy, which could be compromised if its domestic industrial base becomes dependent on Chinese firms subject to extraordinary political influence by the Chinese authorities, outside any logical market framework.
Thus we should refrain from copying China’s industrial policies, despite the striking ways in which they are sometimes portrayed. Our own experience and the difficulties already faced by China should serve as a warning to avoid further misadventures. Moreover, if we are not careful, Europe’s institutional framework could aggravate those challenges. Vertical decisions (made in Brussels and funded by national budgets) that relax State aid rules and revise competition rules without first strengthening the single market could shatter Europe’s most valuable asset: strategic autonomy. Therefore, we must remove national barriers to market consolidation and selectively determine which sectors to develop through vertical policies (such as space, security, or the climate transition) and then finance those efforts in solidarity, without sacrificing the horizontal policies essential to a successful industrial policy: education, research, innovation, infrastructure, and interconnection.
This is the second part of a comprehensive analysis of the Chinese economy. The first installment is available here.
