China’s Double Threat to Europe

As Russian President Vladimir Putin continues his brutal war in Ukraine, China’s support for Russia’s war machine has alarmed the United States and NATO. Not only is Beijing helping Moscow evade Western sanctions. It is also, through its supply of dual-use goods such as computer chips and machine parts, providing a huge portion of the inputs Putin needs to sustain his forces. At a time when Ukraine is struggling to build its own military resources, this trade poses a growing threat to the European countries that sit on Ukraine’s doorstep.

In fact, propping up Russia’s war in Ukraine is only one of several ways in which China has become a major challenge to Europe. In 2024, Beijing is far more than just a competitor or rival, as the EU has described its relationship with China since 2019. By flooding European countries with cheap solar panels and, most important, inexpensive electric vehicles (EVs), Beijing also threatens the existence of core domestic industries on which the continent depends. Combined with the economic and military lifeline it is providing Russia, China’s industrial overcapacity—that is, its practice of subsidizing the production of more goods than needed and then dumping them in foreign markets—poses a significant threat to Europe’s security and its economy, especially in the automotive sector.

Yet despite these concerns, Europe’s response has been muted. On the Russia question, the European Union has placed only ten companies from mainland China on its sanctions list, in addition to companies based in Hong Kong. This step is so marginal that, as of the end of August, Beijing had not bothered to retaliate. During their spring trips to Beijing, German Chancellor Olaf Scholz and French President Emmanuel Macron asked Chinese leader Xi Jinping to prohibit dual-use exports. Yet shortly thereafter, Putin had his own meeting with Xi, in which he concluded numerous Chinese-Russian business and defense agreements, including expanded military drills. As for industrial policy, Europe’s current tariffs on Chinese imports are not nearly sufficient to stem the tidal wave of cheap Chinese EVs now flooding the continent, to give sufficient breathing room for Europe’s automotive industry to catch up and survive.

Until now, many of the strongest economic measures against Beijing have come from Washington. But Europe can no longer leave the issue to the United States. The war in Ukraine cannot end on Kyiv’s terms if Russia remains an open floodgate for Chinese supplies, and Europe cannot remain prosperous if China has almost free rein to hollow out Europe’s industrial economy. Fortunately, Europe has multiple tools it can use to confront this challenge—but it needs to start using them now. It is essential for Brussels and EU member states to demonstrate that they are ready to impose costs of their own on China.

RUSSIA’S MADE-IN-CHINA MILITARY

China’s impact on the war in Ukraine may be one of the most overlooked current threats to European security. Europeans need to abandon the illusion that Beijing is a fence sitter on the war; China has clearly chosen sides. Consider the size of Russia’s armed forces. In April, NATO officials estimated that the Russian military had grown by 15 percent since its 2022 invasion of Ukraine. According to the recent U.S. estimates, much of this growth is owed to Beijing’s support. In May, a report by the Carnegie Endowment for International Peace estimated that in 2023, approximately 90 percent of the imports that the G-7 has highlighted as technologies Russia seeks to sustain its war came from China.

Beijing has also stepped up its military ties with Moscow and its close allies. In July, China’s People’s Liberation Army took part in training exercises with Belarusian soldiers in Belarus, putting Chinese soldiers for the first time on NATO’s European borders. Also in July, Russia’s and China’s air forces flew strategic bombers in a joint exercise near Alaska, causing the United States and Canada to scramble fighter jets in response. Meanwhile, Beijing has changed its diplomatic stance on Ukraine, declining to participate in the summit on peace held in Switzerland in June because Russia was not present. Instead, Chinese officials have pushed, together with the Brazilian government, for their own six-point peace plan that does not mention Ukraine’s sovereignty and territorial integrity and that calls for freezing the conflict along lines that would allow Russia to hold on to occupied territory.

For now, Beijing continues to observe limits on the nature of its military support to Russia and is not sending lethal military aid. But it has increasingly diluted the meaning of this constraint by providing Russia with a huge quantity of dual-use goods, as well as critical parts and components that Moscow needs for its war in Ukraine. The United States has slowed down the transit of some of these goods—which China is orchestrating in large part via Hong Kong—through the use of sanctions. In late July, after the Biden administration publicly floated that it was considering sanctions on Chinese banks, Beijing announced that it was imposing export controls on dual-use drones. Even so, as Bloomberg has reported, China and Russia are jointly developing a new attack drone similar to the Iranian Shahed drone, a project that brings Beijing even closer to crossing the lethal aid threshold. China is not a neutral actor in this war.

For the first time, Chinese soldiers took part in exercises on NATO’s European borders.

To convince Beijing to meaningfully scale back its support for Russia, Europe needs a concerted plan of action. First, in lockstep with the United States, European leaders need to agree on new and tougher sanctions that target a broad array of Chinese companies and financial institutions and that can be expanded as needed. Agreed to in advance, such a collective approach will signal to Beijing that Europe is prepared to respond and ready to ratchet up penalties if China’s support for Russia continues. It would also make clear that the Ukrainian issue is important enough for European governments to act despite the threat of Chinese retaliation.

In implementing these measures, European leaders should communicate them in direct conversations to Beijing. Internally, European governments should also plan for Beijing’s likely response, including sharing the economic costs of any fallout among member states. In doing so, they can draw on Europe’s preparations for Russia’s 2022 invasion of Ukraine, when the European Commission identified the European countries that would be hit hardest by sanctions on Russia and presented possible pathways to mitigate and share the burden.

Second, Europeans need to get their own export restrictions in order. In June 2023, analysts from the Kyiv School of Economics found that out of the 385 goods that they determined were critical components for military production, less than half were on the EU’s control list of dual-use goods. This means that many dual-use goods that can be exploited for the war in Ukraine are still reaching Russia. In February, the EU updated its list of Common High Priority Items—dual-use and advanced technology items that are subject to sanctions—in cooperation with Japan, the United Kingdom, and the United States. But Russia’s supply of battlefield technology is constantly evolving, and to maintain effective sanctions, Europe needs to continually update its definition of dual-use goods in close coordination with the United States.

The EU also should step up its enforcement efforts to prevent indirect trade with Russia. This is especially important for EU goods that are exported to Central Asia and the South Caucasus, where they can be shipped on to Russia. Since the West imposed sanctions on Russia in 2022, many EU countries have recorded significant surges in exports to Kyrgyzstan, Georgia, and other countries, which may be offsetting as much as a third of lost direct EU exports to Russia, according to the Brookings Institution.

Finally, European leaders need to recognize that China’s support for Russia follows a strategic and not merely commercial or economic logic. By helping sustain Russia’s war in Ukraine, China is undermining European security, preventing a Ukrainian victory that favors the West, and weakening the Western-led world order. At the same time, by propping up Moscow’s expansionism, Beijing is keeping NATO in check and distracting the United States from paying attention to the Indo-Pacific and Taiwan. Imposing costs on China for its support for Russia’s military is therefore not only an important political step but imperative for European and Western security, as well.

DRIVING EUROPE DOWN

Even as China’s supply of dual-use goods helps sustain Russia’s war effort, Beijing is also threatening European prosperity through its industrial policies. The overcapacity in China’s car industry currently poses the greatest risk to Europe, given the crucial role that the European auto industry plays in European growth and employment. Nonetheless, Europe’s response to an influx of cheap Chinese EVs has been moderate compared with that of other countries such as Canada and the United States. Historically, insufficient U.S. and European response to the first China shock—the surge in Chinese manufacturing exports that began in the 1990s—resulted in decimated industries and the hollowing out of business sectors, along with associated jobs and innovation ecosystems. More recently, the solar panel industry serves as a cautionary tale. Although Europe had begun to establish a significant industry of its own, technological and intellectual property theft, combined with massive subsidies, allowed China to overproduce and undermine market-based competition in Europe and the rest of the world. Similarly, Chinese overcapacity in the steel and aluminum sectors led to massive declines in economically viable production globally and continues to do so today.

Arguably, mass production of cheap Chinese solar panels has been good for the global clean energy transition, and the same argument can be made today regarding cheap Chinese EVs and plug-in hybrids, especially given Europe’s mandatory transition to zero-emission vehicles by 2035. But Europe’s car makers constitute a far more strategic commercial sector than its solar panel manufacturers. The industry directly accounts for more than ten percent of manufacturing jobs in six EU member countries, amounting to some seven percent of EU GDP and 8.5 percent of manufacturing employment. Germany, with its major manufacturers BMW, Mercedes, and Volkswagen, is most acutely at risk.

At the same time, there is no precedent for the scale of China’s production threat. The amount of Chinese overcapacity, its control of related supply chains and critical materials, and its opaque subsidies dwarf prior examples such as Japan and Korea in the late twentieth century. Without thoughtful defensive and offensive strategies, as well as a sophisticated response to German companies’ dependence on the Chinese market—it is the largest market for all of the “big three” German car makers—Europe could find its domestic auto manufacturing decimated. German auto manufacturers, which have shared prized engineering know-how with Chinese joint-venture partners over the years, are pushing back hard against European policy intervention in the hopes of maintaining dominance, especially in China’s luxury car market. Beyond market share, they rely on China’s EV technology, including in software, electronics, and batteries. But German firms are fighting a losing battle. Volkswagen already deeply discounts its cars in China to compete with Chinese brands, and the German share of China’s luxury car market, particularly in EVs, seems likely to give way to Chinese brands as well.

In August, the European Commission amended and lowered preliminary June tariffs on several leading Chinese car manufacturers, with tariffs varying by manufacturer and a top level of 46.3 percent to apply only for Chinese companies that do not cooperate with the EU’s subsidies investigation. Although they are lower than many analysts had expected, these tariffs will likely be confirmed by European leaders in November. Experts worry that they will not be sufficient to stem the tsunami of cheap Chinese imports and Chinese investments in European production, to give Europe’s own automotive industry a chance to catch up and survive. There is little time to waste. By 2023, Chinese EVs and hybrids already accounted for 37 percent of all such imports to Europe, and leading Chinese brands are now vying to supplant Europe’s top automotive companies. European regulators must also remain vigilant of Chinese attempts to skirt EU or member state rules by setting up European EV “kit car” assembly lines for cars manufactured in China. Beyond the market for new-energy vehicles, China has also ramped up its global exports of traditional combustion-engine cars. When China became the world’s largest auto exporter last year, around three-quarters of the cars it exported were gasoline powered.

BRAKING BEIJING

Given the enormous stakes, Europe should approach the overcapacity threat with the same strategic logic it needs to address China’s support for Russia’s war machine. Europe is more exposed to the effects of Chinese economic retaliation than is the United States, but it should not underestimate the strength of its hand when devising an effective response to China’s car exports. China badly needs the European market because other large markets, such as the United States and Canada, are fast closing, while still others in the developing world lack the infrastructure or energy systems to support a large EV market any time soon. In its ongoing investigation into Chinese subsidies for its new-energy vehicle industry, the European Commission has far more leverage than European officials may realize. They should use it.

First, the EU should consider raising tariffs beyond 46.3 percent. The current tariff actions are a step in the right direction and adhere to a rules-based approach. But they are likely not nearly high enough to counteract the comprehensive subsidies that China offers its industry and will therefore be insufficient as a defensive strategy. More severe action by Washington and Ottawa to protect their domestic auto industries means that even more Chinese exports will shift to Europe, where some officials are willing to sacrifice the European auto sector to climate goals and some companies are willing to scale back European operations to succeed in China. The United States took the view that defense against this scale of overcapacity or dumping is not protectionist or anti-trade but is instead an attempt to safeguard firms and workers from massive non-market distortions in another economy at scale with significant negative economic spillovers. Although by hiking tariffs more, the EU could risk a near-term trade war with China and challenges at the WTO, ultimately China’s EV exports will depend on access to Europe. Given Beijing’s propensity to play one EU member against another and to weaponize its supply chains, Europe should also consider establishing a mechanism to share the burden of any fallout from such a trade war.

Second, European officials should consider borrowing some of China’s own tactics to deal with Beijing. The EU wants to welcome investment, including from Chinese car and battery manufacturers. Why not look to China’s strategy for managing investments in this strategic industry? For the past few decades, China has attracted inbound investment by promising access to the world’s largest commercial and passenger vehicle market. In doing so, China could set the rules of engagement, including joint-venture requirements, ownership restrictions, technology transfer, localization requirements, and the use of a host of other non-market mechanisms that benefited China tremendously. Europe need not go this far, but it should use the promise of access to the European market to impose demands and restrictions.

European officials should consider borrowing some of China’s own tactics to deal with Beijing.

Going further, a related approach could use a panoply of EU tools—such as inbound investment screening—to restrict and manage Chinese foreign direct investment (FDI) in the European EV sector. Such controls could be based on specific criteria related to national security, environmental protection, and health and safety concerns, as well as on imperatives to reduce supply chain dependence and avoid cybersecurity risks built in IT hardware and software.

As a third step, Europe should use the opportunity of Chinese EV investments in Europe to build more resilience into its own battery supply chains. For example, the EU could require Chinese EV companies to build battery-recycling facilities near new car manufacturing sites to source critical minerals and metals necessary for future battery production. EVs are obviously battery dependent, providing an additional hurdle to European auto manufacturers, which must depend on China for critical battery raw materials. Notably, China has near-complete dominance in the sourcing and refining of cobalt, nickel, and lithium. Over time, requiring the siting of battery-recycling facilities in Europe will enhance European access to battery materials in the future while decreasing China’s control over the raw materials needed for the clean energy transition. New innovations in battery technology may well render dependence on existing materials obsolete, but they could be many years in the making.

In the meantime, China is doubling down on harsh non-market tactics to flood global commodity markets with critical minerals and metals to the point of putting many market-dependent non-Chinese ventures out of business. The only possible motive for doing so is to lock up global supply chains for China. By marrying carefully designed FDI policies with supply chain resilience and decarbonization, Europe can push back on Beijing’s hegemonic strategy.

NO TIME TO WASTE

With its twin strategies of decisive support for Russia and rapid conquest of Europe’s car market, China now poses a greater threat to Europe’s prosperity and security than at any previous point. Brussels’ new leadership team, under the new European Commission currently in formation after the EU’s parliamentary elections in June, is uniquely positioned to sharpen Europe’s response to these twin risks. European Commission President Ursula von der Leyen has been leading Europe’s China policy and the subsidies investigation against China. The incoming EU High Representative Kaja Kallas is clear-eyed about the threat posed by China’s support for Russia. The new team must form a unified front to push member states toward a stronger response to Beijing.

Europe does not have the time for a slow and incremental approach. In contrast with the China shock that began in the 1990s, when the United States bore the brunt of a huge loss of market share and jobs in the manufacturing sector, the coming version will hit Europe hardest. If Beijing gets its way, Europe could be reduced to little more than a deindustrialized export market for Chinese goods and industries, even as it is threatened by a resurgent Russian military at its borders. And the possibility that former U.S. President Donald Trump could return to the White House should encourage Europeans to act now and not use China as a hedge against potential aggressive U.S. trade actions toward Europe. Europeans will find it very difficult to explain to a second Trump administration why the United States should support Ukraine and European security if they themselves are unable to mount a strong response to China’s efforts to undermine both. It is in Europe’s deepest self-interest to act now.