Europe’s China dilemma is no longer whether to engage — but on what terms
Thursday, 26 February 2026
For years, Europe could treat China’s rise as a distant story: impressive, sometimes unsettling, but ultimately manageable through trade, investment and careful diplomacy. That era is giving way to something more complex. In a new episode of Future is Blue, Lourdes Casanova, Gail and Rob Cañizares Director at The Cañizares Center for Emerging Markets, Cornell University, and Raymond Torres, Funcas Europe Director, discuss how China’s economic ascent has matured into a systemic power with formidable industrial scale.
[Listen to the full episode of Future is Blue here]Success – and the limits of the “unfair practices” explanation
Over the past decade, China has strengthened its technological capabilities, consolidated an industrial base that now spans most strategic sectors, and deepened its role in global trade. Europe, by contrast, has faced slower growth, competitiveness concerns and persistent difficulties in scaling its technology sector. The central question is whether China’s performance reflects genuine policy success, or whether it is built on distortions and unfair practices.
Casanova offers a nuanced answer, beginning with context that is often missed in European debates. She argues that China’s catch-up has been powered not only by policy but by the scale of its economy, noting that comparisons with high-income economies can be misleading. Europe’s GDP per capita is already high, so growth rates naturally look lower. Still, she does not romanticise the Chinese model. As she put it, she is “in awe and also worried” — a dual reaction that captures Europe’s discomfort with a rival that is increasingly also a reference point.
Torres, for his part, argues that both elements of the puzzle are real. China’s early rise involved practices not fully aligned with international trade rules— WTO in particular, he says, pointing to the role of industrial policy and state support in building strategic sectors. Yet he also emphasises that the story has evolved. China’s edge is now driven by internal dynamism — with sustained R&D spending, training and infrastructure investment. For Torres, it would be a mistake for Europe to explain away China’s rise purely as cheating. “Its own strategy has been rewarded, and we should learn from it,” he argues.
The blind spot: Europe still doesn’t know Chinese multinationals
The implication is uncomfortable: Europe is not only facing a competitor; it is facing a competitor that has learned how to combine industrial policy, market size and an increasingly sophisticated private sector. In Casanova’s view, what makes Chinese multinationals so difficult to deal with is that Europe’s understanding of them remains remarkably thin, even as they become embedded in Europe’s economy. “We don’t know anything about them. Nothing,” a deliberate provocation grounded in concrete observations. She listed examples that often surprise European audiences: Volvo is “100 per cent” owned by the Chinese auto giant, Geely, who also holds a 10% stake in Mercedes-Benz amongst many others
That information gap has practical consequences. It shapes Europe’s ability to respond, to regulate, and to compete. Chinese companies are no longer just low-cost challengers. They are increasingly high-quality rivals that can win market share by undercutting on price and by deploying scale advantages that European firms struggle to match.
Competing on price: the energy edge and the scale advantage
Casanova notes that labour costs in China have risen, undermining the old narrative of an inexhaustible pool of cheap workers. But total cost competitiveness remains powerful because it is supported by other inputs – especially energy. The advantage, she notes, lies partly in the role of state-owned giants that drive down electricity costs at home, which in turn supports low prices in manufacturing and services. The result is a global commercial strategy built around price leadership. In sectors like telecoms equipment, she argues, this remains decisive. Huawei, she says, competes head-on with Ericsson partly because it “always, always starts with cheaper prices”.
A structural deficit – and a market that is hard to enter
Europe’s vulnerability is most visible in trade. Torres highlights the scale of the EU’s imbalance with China, citing a deficit of roughly €360bn per year. Part of this reflects cost competitiveness and shifting comparative advantages — Europe has lost ground in some sectors. But Torres also points to barriers and distortions that go beyond normal competition: subsidies, discriminatory practices and market access restrictions. The imbalance is compounded by China’s internal economic model. China’s exports are surging, Torres underscores, its domestic market remains stagnant as consumption is weak, and European exporters face structural obstacles. The trade numbers reflect it: imports from China grew sharply, while European exports “hardly increased at all”.
Europe’s response: unity, leverage and a “Plan B”
What should Europe do? Both guests converge on one core principle: unity. Casanova is blunt about the asymmetry between a fragmented Europe and continental-scale powers. In an era where, as she puts it, “big is back,” Europe’s leverage depends on acting collectively – not just to defend itself but to negotiate on equal terms.
Torres agrees and argues that Europe should strengthen its position by deepening economic partnerships with other regions. He points to the slow but strategic advance of EU trade agreements and negotiations – Mercosur, India, Indonesia, Mexico – as ways to build leverage and show “self-confidence” in a world of giants. Diversification is not only an economic strategy; it is geopolitical insurance.
Still, both guests recognise a reality of European policymaking: consensus is hard. That creates space for what Torres calls a de facto “Plan B” — member states pursuing their own arrangements when EU-wide strategy stalls. China, he warns, is adept at exploiting this by encouraging competition between countries to attract investment, notably in automotive manufacturing. Spain and Hungary, he notes, are being pushed to compete for Chinese projects.
Spain as gateway – and as stress test for European coherence
This is where the debate becomes particularly relevant for Madrid. Spain has actively sought Chinese investment, especially in the automotive and clean-tech ecosystem. Torres acknowledges the rationale, but cautions against deals that deliver limited technology transfer. He singles out data centres as an example of investment that may be environmentally costly and strategically thin — particularly for a water-scarce country — and he argues that Spain should seek “more technology in return for access to the Spanish market”.
Casanova adds a broader geopolitical layer. China often enters Europe through “peripheral countries — Spain, Portugal, Greece,” she argues, pointing to Chinese investments in Mediterranean ports and infrastructure. Spain matters not only as a market, but as a gateway — one where Europe’s strategic coherence can be tested.
Trump’s America and Europe’s autonomy question
There is a question that increasingly shapes Europe’s choices: does a more confrontational US under President Donald Trump push Europe closer to China? Casanova’s answer is not to replace one dependency with another, but to start by strengthening Europe itself. “Europe is important for Europe,” she says, stressing the scale of intra-European trade and investment. The turbulence in transatlantic ties may finally force long-delayed steps such as integrating financial markets and building more autonomy in payments — including, she suggests, the possibility of a digital euro.
Torres takes a complementary view, calling for selective cooperation with China where interests align — especially on climate — while also rebuilding the multilateral system that has been eroded in recent years. Cooperation, in his view, should not be naïve; it should be anchored in Europe’s own assets, including social cohesion and regulatory capacity. Europe’s objective should be to press China to strengthen social protection and domestic demand — not as charity, but because China’s internal balance now has global consequences.
The task ahead is to compete where it must, cooperate where it can, and above all build the scale and coherence needed to negotiate from strength — not from fragmentation.
[Listen to the full episode of Future is Blue here]Carlos Carnicero Urabayen is the host of the Future is Blue podcast.
Carlos Carnicero Urabayen