China’s factories never sleep, but Europe does

Warning lights are flashing across Western markets. Europe is still hitting the snooze button.

China exported its way to record global trade surpluses last year, breaking the previous record with a month still to spare. With no meaningful domestic reform in sight, it is time to abandon the comforting fiction that Beijing will ever pivot towards a consumption-led economy. The Communist Party has made its choice. The export engine stays at full throttle, whatever the cost to Western industry.

At the centre of the imbalance sits China’s currency. The renminbi is estimated to be undervalued by roughly 30% against the euro, flooding the EU with artificially cheap imports and hollowing out local manufacturing. Europe, with fewer trade barriers than the US and a glacial response to dumping, has become the market of choice. Washington’s tariffs, by contrast, still offer a degree of shelter – for now.

Domestic policy in China reinforces the problem. Growth targets push local governments to expand manufacturing beyond sustainable demand. Tax incentives and rebate schemes for used cars, washing machines and smartphones are designed less to boost consumption than to keep factories running and exports flowing.

Chinese consumers, meanwhile, remain constrained. The Hukou system strips millions of migrant workers of rights and bargaining power, keeping wages low. Weak labour protections make dismissal easy. Around 200 million people work in the precarious gig economy, encouraging precautionary saving rather than spending.

Few sectors feel the impact more acutely than Western carmakers. The EU now sits squarely in the crosshairs of Beijing’s overproduction and dumping. European manufacturers have waited patiently for the long-promised rise of the Chinese consumer, even as buyers switch from foreign brands to domestic champions such as BYD and Geely. Yet investment continues to pour in. Between 2020 and today, Europe’s carmakers have kept throwing good money after bad.

As their Chinese market share shrinks, the trade offensive is moving west. Chinese vehicle exports into the EU have surged, squeezing profits and overwhelming traditional suppliers. Beijing is also hedging against tariffs by building inside Europe. BYD is investing €4 billion in a Hungarian factory capable of producing 200,000 vehicles a year. Chery’s Barcelona plant is expected to reach 150,000 vehicles annually by 2029. This is not mere expansion. It is tariff circumvention by design. BYD plans to localise all European EV production by 2028. Brussels, meanwhile, inches forward.

American carmakers are hardly immune. While Chinese vehicles remain largely shut out of the US market, Western brands are being pushed aside elsewhere. Mexico and Brazil, once reliable buyers of American cars, are importing record numbers of cheaper Chinese alternatives.

The supply chain is under similar pressure. Chinese suppliers, dumping vast quantities of overproduced components, are muscling into both new and aftermarket parts. Small and medium-sized firms that underpin North American automaking are being undercut by non-market competition.

The damage does not stop with incumbents. China’s monopolies and price manipulation are lethal to would-be innovators. Scaling a new idea is hard enough. Competing against state-backed dumping, market-cornering behaviour and routine IP theft makes it close to impossible.

Europe and the US face the same structural threat. That shared exposure should be the basis for a joint response. If the EU and North American trade blocs align their import rules, their leverage over Beijing would be formidable. Acting alone, both are weaker.

There is a deal to be struck. In exchange for unified tariffs and import restrictions on China, Washington should roll back most tariffs on European goods and expand access to cheap energy for European buyers.

Alongside core allies – the UK, Japan, South Korea and Australia – the west should be building a near-global economic bloc capable of setting the rules, rather than absorbing the damage.

Protecting markets from coercive, cannibalistic non-market players is not complicated. It does, however, require collective action – while there are still markets left worth protecting.

Elaine Dezenski is senior director and head of the Center on Economic and Financial Power at the Washington-based Foundation for Defense of Democracies. FDD is an independent nonpartisan think tank focused on national security and foreign policy.