This second analysis, preceded by an article on the current state of the Chinese economy, is divided into three parts. First, it provides a quick panorama of the political scene, aimed at assessing whether the institutional framework supports or hinders the resolution of its economic problems. Next, and in light of China’s impact on the global economy, it presents some ideas for formulating a response from the European Union. Finally, the global conclusions of this text are presented.
Political-institutional considerations and their impact on reorienting economic policy
The Chinese communist regime has managed, after decades without a clear horizon for economic policy since the founding of the People’s Republic of China, to stabilize the country and steer it with an iron hand toward the market and economic openness, while, in any case, maintaining control of institutions, businesses and society by the Communist Party. The success of this mission over the last four decades is undeniable, but the returns are already diminishing, if not negative.
Nevertheless, the degree of supervision and control by the Communist Party over the country has been rising, especially after the removal of presidential term limits, which has allowed Xi Jinping to extend his leadership. I will not detail here the problems regarding the activity of autocratic political systems, but checks and balances and the distribution of power, even in non-democratic models, can mitigate the drawbacks of power concentrated in a handful of hands.
“The Chinese Communist regime has managed to stabilize the country and drive it with an iron hand toward the market and economic openness, while, in any case, maintaining control of the institutions”
In some way, the period opened by Deng Xiaoping, even in the political realm, with a certain broadening of the decision-making space even within the exclusive confines of the Communist Party, and a greater institutionalization of power, allowed the reconstruction of what we could call a state of pseudo-rule of law with Chinese characteristics, which ultimately crystallized under the presidencies of Jiang Zemin and Hu Jintao, also imposing a rotation of leadership and limiting presidential terms to two legislatures.
However, the break with these rotations with Xi Jinping’s third presidential term reopens uncertainties about the country’s institutional framework, which seems to strengthen the more authoritarian biases of that state of pseudo-rule of law with Chinese characteristics built at the juncture of the late 20th and early 21st centuries.
In the purely economic realm, starting in 2020, the Chinese government launched a campaign to double down its control over the country’s business sphere. The Communist Party intensified its activity within Chinese companies and even within multinational firms, and various judicial or extrajudicial processes were initiated against business leaders who at some point showed disagreements with the direction of the country’s economic policy. Perhaps the best-known case in the West was the disappearance of Jack Ma, founder of Alibaba, in 2020, who was missing for three years, and this also halted Ant Group’s planned IPO. Similar operations were carried out against other tech companies, such as Tencent or Didi Global, aimed at reinforcing the Party’s control over their activities.
Likewise, state-owned enterprises (SOEs) regained prominence in the country’s industrial fabric, gaining influence in energy, banking, telecommunications, heavy industry and other sectors. Similarly, businessmen such as Bao Fan, founder of China Renaissance, disappeared from public view in 2023; Ren Zhiqiang, head of a public real estate company and known as a defender of freedom of expression, was sentenced to eighteen years in prison in 2020, and Xiao Jianhua disappeared in a hotel in Hong Kong in 2017 until 2022 when news of him emerged in mainland China, in the context of a corruption trial with a thirteen-year prison sentence. These operations have been defended by the government as anti-corruption processes, although it is difficult to separate potential corruption cases from purely political prosecutions.
“The Communist Party dramatically increased its activity within Chinese companies and various judicial or extrajudicial processes against business leaders were launched”
In this sense, the supposed anti-corruption campaigns have also unsettled the foundations of the Communist Party’s power under Xi Jinping. In 2014, Zhou Yongkang, a member of the Politburo Standing Committee, the country’s seven-member top executive body, was accused of corruption and sentenced to life imprisonment after having led state security. Bo Xilai, who seemed poised to challenge Xi for the country’s leadership, was also sentenced to life imprisonment in 2013 for similar corruption charges.
With both purges, Xi Jinping consolidated his power at the start of his first term. Later, in 2017, Sun Zhengcai, who looked like a possible successor, also ended up in prison with a life sentence for corruption. A year earlier, Ling Jihua, a close aide to Hu Jintao, also went to prison with another life sentence and identical accusations, unraveling the trust placed in the previous presidency of the State.
Similarly, between 2014 and 2016, Xu Caihou and Guo Boxiong, both members of the Central Military Commission, were accused of corruption. Their exit from the highest military leadership allowed Xi Jinping to expand his control over the armed forces. More recently, Qin Gang, the Foreign Minister, disappeared in 2023, with no news of him since, and in 2024 Li Shangfu, the Defense Minister, was dismissed, expelled from the Communist Party and accused of corruption.
All this summarized list of political, business and military accusations and purges, known in the West, suggests that these kinds of actions may be replicated at other levels of administration and territorial power in the country.
“Qin Gang, Foreign Minister, disappeared in 2023, with no news of him since, and in 2024 Li Shangfu, Defense Minister, was dismissed and accused of corruption”
From Europe it is impossible to discern whether the corruption accusations are merely instrumental pretexts for eliminating targets or whether there is any truth behind these disappearances or judicial sentences under an inconceivable and exquisite disposition of Chinese courts. Probably, both things are true to the extent that corruption is the natural result of an environment with no press freedom and no independence of powers, but the concretion of such cases solely against Xi Jinping’s competitors or obstacles to expanding his space of power points in one direction: the autocratic hardening of the regime.
Moreover, and taking advantage of the new developments in digital technologies and artificial intelligence, the increase in Communist Party control is no longer limited to purging potential rivals or political, military or business critics, but has led to mass surveillance practices of citizens. Controls over the internet, social credit systems in digital environments, the development of facial recognition programs, AI programs for crime prediction, and new laws of racial and social uniformity point to an increasingly omnipotent state.
Thus, there is a sense of a retreat in the institutionalization of power in China. Power seems to be centralized absolutely in the president. The state of pseudolaw with Chinese characteristics built after Mao Zedong’s death is fading, giving way to a certain return of imperial power.
This broader political reflection ties into the debate over the plausibility of implementing the current economic policy plans to boost consumption, balance the current account, develop a denser social policy fabric and maintain the commitment to industrial policies of the past decades. As noted, to achieve these objectives, the Government must increase public spending, which is difficult if the budgetary bets of the dirigist industrial policy are maintained, which in turn signal renewed problems of involution in other sectors of the economy. Moreover, the development of institutional reforms aimed at strengthening and expanding social security systems to reduce the saving rate does not seem to have ideological or cultural backing within the Government. And finally, the liberalization of financial flows and the facilitation of foreign direct investment are not on the current agenda and seem even more difficult under this autocratic reinforcement framework of the regime.
“The development of reforms aimed at strengthening and expanding social security systems does not appear to have ideological or cultural backing within the government”
PThus, that framework of objectives and means, in a social and political environment marked by increasing authoritarianism, is even more unlikely. Thus, and regardless of other effects of that institutional and political drift of the country that I will not dwell on further, it is evident that such a retreat is incompatible with greater space for individual responsibility and freedom, at least in the economic and business sphere, which the Government’s stated objectives require.
The European Parliament delegation, headed by Jonás Fernández, which visited China last May. Photo: European Parliament
What should Europe do?
The rise of China on the international political and economic stage, the retreat and unpredictable behaviors of the Trump administration in the United States, and Vladimir Putin’s war of aggression in Ukraine are forcing a reassessment of the European Union’s role in the world and also of its internal policies.
In the strictly economic realm, the COVID-19 impacts during 2020-2022 and the immediately following war consolidated a new consensus on trade relations and globalization. The maximalist stance in favor of free trade of the Community institutions softened in the face of supply problems during the most difficult months of the pandemic, which forced a slowdown in mobility and social interaction. As activity in Europe recovered, disruptions in trade flows also impacted inflation, and shortages of basic goods, especially medical supplies, led to a reflection on the need to recover some local production of certain externally sourced goods for economic efficiency.
“As activity in Europe recovered, disruptions in trade flows also impacted inflation, and shortages of basic goods”
In the same sense, the start of the war in Ukraine and the corresponding sanctions on Russia also showed Europe’s dependencies on third countries, in this case Ukraine, paralyzed by war, and Russia, in this case by sanctions. Also, environmental policies, especially stringent during the 2019-2024 term, advised new security measures for imports that did not internalize the environmental costs that Community law began to impose on firms and households. Thus, Europe tempered its defense of free trade by announcing new industrial policies that reduced excessive dependencies and contributed to ensuring that the green transition could have safeguards mitigating localization risks.
This reorientation of industrial and trade policy is very present in the Draghi report, which the Commission requested at the end of the last legislature and whose presentation, in September 2024, announced a new economic policy agenda. In addition, the impact of United States tariff policies forced a shift from reflection to concrete decisions, while the growing trade deficit with China has reached astronomical figures — more than €300 billion in 2025 — with a positive effect on the prices of many inputs, but threatening the continent’s industrial vitality, just as European authorities aimed to promote industrial policies that would raise the level of supply security in the wake of the negative impacts of COVID-19 and the war in Ukraine.
Europe, then, must find its own path and articulate a space for dialogue with China. In this sense, and following the prior description of the challenges facing the Chinese economy, we can rework some economic policy recommendations, without pretending to be exhaustive.
“The impact of U.S. tariff policies forced a move from reflection to concrete decisions, while the growing trade deficit with China has reached astronomical figures”
First, Chinese authorities are right to differentiate supposed problems of excess capacity from the involution of their industrial policy, although they err in identifying the causes, which opens questions about future corrections. This differentiation should enable designing a trade policy that allows the functioning of the competitive advantages of each jurisdiction, while protecting against the harmful effects of China’s involution. From an extremely liberal stance one could argue that any trade safeguard would reduce consumer welfare by raising import prices. Yet Chinese exports from sectors where firms do not manage to profit from installed capacity pose a double-edged advantage for European consumers and a real threat to the development of local production, not to mention social and political stability problems in particular regions.
In any case, Europe should not also adopt a protectionist trade policy for any negative trade balance in each of the trade lines. Indeed, information on the sectoral situation of the Chinese economy is difficult to obtain in an information-obscure country. Thus, universal trade threats could be useful only to the extent that they reveal information that surgically delineates the degree of protectionism of European trade policy.
This approach to reviewing our trade relationship with China would also help align interests within the Union. At present, there are business sectors in which value chains are fully intertwined with companies that operate here and there at different production stages. In this sense, we are witnessing debates and public positions among Member States due to their interrelation with the Chinese economy, which leads governments to advocate aggressive trade policies and others to more lenient stances, depending on local interests, and occasionally opening ad hoc exceptions. That debate framework can only lead to a trade policy that creates more problems than solutions.
Therefore, I consider a reordering of the debate in Europe necessary, not accusing China of dumping for each sectoral trade deficit, but focusing discussion on the negative externalities of China’s aggressive industrial policies behind its involution, which, as previously explained, does not seem to be efficiently corrected under its new five-year plan. And there, yes, adopt protectionist policies that minimize the risks of a potential destabilization of the Chinese economy.
“I consider a reordering of the debate in Europe necessary that centers discussion on the negative externalities of China’s aggressive industrial policies”
On the other hand, Europe enjoys a surplus, albeit a rather modest one, in the services account. And here lies a clear competitive advantage for European companies. In this sense, it would be opportune to convey to Chinese authorities the problems identified for the reorientation of their economic policy, at least the notable obstacles they will face in achieving the objectives they claim to pursue with the new five-year plan. Thus, there is ample space for broad cooperation that allows an opening of services markets and that feeds a mutual benefit process from trade flows between the two jurisdictions.
In another vein, Europe also needs to adopt a position on financial and capital flows with respect to China. Beyond economic considerations, the authoritarian decline of the Chinese regime raises questions about dependencies arising from direct investment. It is therefore appropriate to take a prudent stance that mitigates the risks of high political dependencies on a country whose political institutions operate with logics quite different from those of pluralist societies and that can jeopardize the Union’s own margin of action in times of geopolitical stress.
Finally, in this area, and given the degree of entropy that the Trump administration has introduced into international trade flows, the European Union is right to pursue new trade agreements that also reduce our dependencies on the American economy and open new markets for our companies, avoiding protectionist preconceptions, while at the same time internalizing the environmental costs of our policies on imports aimed at protecting a global public good, such as our shared atmosphere, but avoiding tariff campaigns of shared impoverishment.
Regarding the renewed industrial policy, Europe cannot consider China’s industrial strategies as a model to follow. Europe would do well to keep in mind the problems of such dirigist policies that are already playing out in the Chinese economy under that banner of involution, and that marked the seventies and eighties of our continent.
“The European Union is right to pursue new trade agreements that also reduce our dependencies with respect to the American economy”
Thus, Europe should maintain a horizontal approach to industrial policy that addresses the real bottlenecks choking our economy. The shadow tariffs identified by the IMF in our single market, estimated at 42% in goods trade and 100% in services, which the ECB recently recalibrated to 60% for goods and 110% for services, constitute the real obstacle to raising our potential growth and enabling a sustainable future for our industry. There will be no better growth strategy than removing such internal barriers to intra-European trade, also investing in energy interconnections that allow exploiting the lower costs of clean energies in our green transition.
Similarly, it is vital to improve digital and telecommunications interconnections, and to exploit a single market with a common regulatory framework for deploying artificial intelligence, in the face of the regulatory fragmentation of other jurisdictions.
This overhaul of the single market must also entail the Europeanization of a large part of the social protection framework that European countries have built through their welfare states, which must adapt to greater geographic mobility of labor.
Beyond these horizontal policies, in some cases vertical policies will also be appropriate where the security and stability of our societies are at stake. Undoubtedly, in areas such as defense, space, the green transition itself and some other area, Europe must accelerate its policies aimed at strengthening our strategic autonomy, but it must be aware that all pressure groups in any sector will want to define themselves as strategic to receive public protection at the expense of the public good. We must be prudent and remember the problems of involution of the Chinese economy.
“The reform of the single market must also entail the Europeanization of much of the social protection framework that European countries have built”
On the other hand, every industrial policy requires public resources whose ends compete with other policies whose impact on growth can be much higher. In this sense, the EU budget is extremely weak for such ventures and the cost of diverting resources from cohesion policies, education or other policies will have a very negative effect on true European public goods. Conversely, it will barely affect boosting industrial policies, which, if universal, will require the participation of national budgets and a thorough revision of the rules regulating state aid, which will end up undermining the true asset of our strategic autonomy: the single market, which is what we must strengthen.
Moreover, industrial policies aimed at creating European champions that require a review of competition policies will destroy value for the European economy, boosting the market power of local and sectoral oligopolies. The only way for the emergence of companies that compete more efficiently in global markets also passes through the removal of national barriers that fragment the market and, therefore, reduce the efficient size of firms.
Europe should not deepen the softening of state aid nor artificially promote cross-border mergers in domestic markets. Let us strengthen the single market as the exclusive path to facilitate the growth of our companies and improve the profitability of our industrial sector, without national biases that lead to intracommunity relocations, a consequence of the greater fiscal capacity of one country over another. Let us not be dazzled by the growth of Chinese companies that, under a dirigist industrial policy, will end up paralyzing the Chinese economy, as happened in Europe not long ago.
The S&D coordinator in the European Parliament’s Economic Affairs Committee in Beijing. Photo: European Parliament
Some conclusions
China’s emergence has opened a new global framework of international relations with political implications, but obviously also economic. Added to this are the entropy of the United States administration and Russia’s growing aggression, along with instability in the Middle East, the challenges arising from migratory flows, the implications of technological advances for the nature of human society, and the deep problems of climate change. The world is undergoing intense change that demands a response from the Union.
“Do not let yourself be dazzled by the growth of Chinese companies that, under a dirigist industrial policy, will end up paralyzing the Chinese economy”
With regard to the questions being raised by China’s integration into the global sphere, the focus of this text, Europe must bear in mind, first and foremost, the autocratic nature of Xi Jinping’s administration, which has continued to intensify in recent years. Certainly, and in view of the reckless behavior of the United States, China is contributing a degree of stability that should be welcomed. Now, the expansion of its influence is not without risks and geopolitical constraints that go beyond its borders, even though, up to now, China has played a moderating and stabilizing role in many areas that must be recognized.
Therefore, the European Union must find a space for dialogue and deliberation with Chinese authorities in some areas that affect global public goods. In this sense, the fight against climate change, the search for shared frameworks for the development of new technologies linked to artificial intelligence or biotechnology, where it is essential to establish universal ethical frameworks, as well as space exploration or the principle of free navigation, are areas where a sincere conversation should develop, given that in the United States there is currently no interlocutor in the White House.
“The European Union must find a space for dialogue and deliberation with Chinese authorities in some areas that affect global public goods”
Likewise, global multilateral institutions created after World War II must accommodate China’s presence, at the risk of disappearing into another diametrically opposed global order that seems to be forming, where norms are replaced by others with which we do not recognize ourselves or by the use of force. For now, China insists on the need for a rules-based world, even if these rules have to be adapted, but its revision will leave us with a substantially better global framework than the jungle that Trump, Putin or Netanyahu are leading. That said, and returning to the growing autocratic nature of China, such a mission will not be easy, but Europe has no choice.
Economically, China’s presence in global markets offers opportunities and risks. The entry of an economy with more than one billion people into the global market can only be welcomed. However, industrial policies are disrupting international trade outside of market logic. Such policies could be a minor inconvenience for global imbalances, but China’s size is sufficiently relevant to drive these imbalances toward very serious problems.
As I have stated before, the problem of involution, following the terminology of Chinese authorities, is not something Europeans are unaware of. The 1980s industrial reconversions in our continent are a good example of the result of indiscriminate vertical policies, and the Chinese economy has begun to suffer exactly the same problems.
Moreover, the existence of that new term in the Chinese dictionary, involution, to differentiate the reality of sectors oriented to export with excess capacity over local demand for the marketing of other goods at below-cost prices, where capacity doubles global demand, facing unavoidable reconversion processes with direct impact on financial and fiscal stability, tells us that this problem is already very present among Chinese authorities and entrepreneurs.
Now, the necessary reorientation to address this grave problem does not lie in the design of the new 15th Five-Year Plan, where the measures to correct this evolution do not appear credible and the proposals that could worsen the causes of the malaise multiply. Moreover, it is necessary to keep in mind the growing assertiveness of Chinese authorities who, at least in the economic sphere, do not anticipate improvements in addressing the pathologies of their economy, whose handling requires a more pluralistic society, more space for business innovation and a more open financial framework.
Against all this, Europe must allow trade that is justified by competitive advantages, without imposing universal protectionist measures. And, on the other hand, identify the goods whose Chinese production is undergoing that involution to protect itself from future impacts that will destabilize international trade flows, beyond the problems it is already causing to the Chinese economy. Regarding foreign direct investment, Europe must maintain its political autonomy, which could be compromised by dependencies of its local industrial fabric in the hands of companies subject to extraordinary political influence by the Chinese authorities, outside any market logic.
“We must bear in mind the growing assertiveness of Chinese authorities, who, at least in the economic domain, do not anticipate improvements in addressing the pathologies of their economy”
Moreover, we should not replicate China’s industrial policies, despite how spectacularly they are sometimes presented in public debate. Our own experience and the problems they are already facing in China should serve as a warning to avoid similar ventures. In addition, the European institutional framework can contribute to creating greater difficulties. Vertical decisions in Brussels funded by national budgets, relaxing the rules on state aid and revising competition norms, without the pending consolidation of the single market, will undermine the true asset of our strategic autonomy that we want to achieve: the single market. Therefore, we should remove national obstacles to the consolidation of the market and surgically decide which sectors to develop vertical policies on, such as space, security or the climate transition, and fund the effort collectively, without diverting resources from horizontal policies essential for a successful industrial policy: education, research, innovation, infrastructures or interconnections.
This is the second part of a comprehensive analysis of the Chinese economy. The first installment is available here.
