China's Next-Generation Industrial Policy: What an 'Industrial Policy of Everything' Means for European Competitiveness

Beijing is widening industrial policy beyond a defined set of strategic sectors to cover mature industries, foundational supply-chain nodes and frontier technologies — a shift with direct consequences for European manufacturing, investment and trade.

Executive Summary

China's industrial strategy is changing shape. According to a new Rhodium Group assessment published alongside a preface from the U.S. Chamber of Commerce, the policy framework is becoming broader and more systemic, extending from upstream inputs and industrial equipment through to downstream applications, services and frontier technologies. The report describes this as a shift from targeted sectoral intervention towards an "industrial policy of everything".

Two conclusions carry particular weight for Europe. First, domestic state intervention is expanding rather than contracting, even as China's macroeconomic environment tightens. Second, the external consequences are accelerating: manufacturing trade surpluses have grown sharply, foreign dependence on Chinese supply chains has deepened, and Chinese firms are expanding internationally at pace.

The report also notes that the outcome of earlier policy was not uniform. China made substantial progress in reducing import dependencies, displacing foreign firms in its domestic market and building competitive positions in sectors such as new energy vehicles, while remaining dependent in high-end semiconductors, advanced aerospace and biomedicine.

For European industry, the strategic question is less about China's intentions than about Europe's own capacity to respond through investment, innovation and policy coordination.

Introduction

A decade after the launch of Made in China 2025, the analytical groundwork for understanding Chinese industrial policy is well established. The U.S. Chamber of Commerce translated the foundational planning document — commonly referred to as the "Green Book" — in late 2015. Assessments followed from MERICS in 2016, the European Union Chamber of Commerce in China in 2017 and the U.S. Chamber of Commerce in 2017, each reaching broadly consistent conclusions about market distortion, competitive pressure and the risk of crowding out foreign suppliers.

A widely cited MERICS heat map from 2016 illustrated the exposure of major manufacturing economies, with Germany identified among the most affected, alongside South Korea and Japan. The Rhodium Group assessment published in 2025, titled Was Made in China 2025 Successful?, found that outcomes tracked the original ambitions closely in many areas, while falling short in some of the most technologically demanding segments.

The current report extends that analysis into a new phase. Its argument is not that Europe lacked information, but that the window for effective response is finite — and that the competitive dynamics forecast years ago have now become structural features of the global industrial landscape.

Main Analysis

From sectoral targeting to systemic intervention

The defining characteristic of China's next-generation approach is scope. Where Made in China 2025 focused on a defined set of strategic emerging industries, current frameworks cut across mature sectors, foundational supply-chain nodes and frontier technologies simultaneously. In several upstream segments — critical minerals, wafers and magnets among them — China already holds dominant positions, and policymakers are seeking to extend that position across a wider range of industrial products.

This matters for European manufacturers because competitive pressure is no longer confined to finished goods. It increasingly operates at the level of inputs, equipment and intermediate products, where substitution is slower and switching costs are higher.

Support rather than consolidation in mature industries

Even in mature industries facing overcapacity and severe price pressure, the report finds that Beijing continues to support firms and pushes them to upgrade production technologies in order to gain market share and lower costs, rather than cutting capacity. Authorities have acknowledged imbalances, but policy responses have so far fallen short of the structural reforms that would be required to shift China's growth model. Measures to boost domestic consumption also remain limited, leaving underlying demand weakness largely unaddressed.

This combination — sustained supply-side support against weak domestic demand — is central to the external pressure that European producers experience in export markets and, increasingly, in their home markets.

Services and frontier technologies move up the agenda

Services, relatively neglected in earlier rounds of industrial policy, are receiving more attention, with visible gains in software, data processing and drug development. Policymakers also treat the current period as an opportunity to move ahead in disruptive technologies such as artificial intelligence, quantum computing and future energy systems.

A notable shift is the treatment of these technologies as commercialisation challenges rather than purely research questions. Public procurement and state-owned enterprises are being used to generate demand and drive adoption at scale. Artificial intelligence has emerged as a central pillar, and the broader pivot towards demand creation represents a change in the willingness to fund the commercialisation of cutting-edge technology.

Refining the playbook under tighter constraints

Expansion is occurring in a more constrained macroeconomic environment. China faces slowing growth, weak domestic demand, rising fiscal pressures and declining efficiency in capital allocation. Rather than scaling back, Beijing is adapting through recentralisation and tighter coordination of financial resources — strengthening control over fiscal spending, bank lending, capital markets and state investment funds so that scarce resources are directed towards strategic priorities.

Government guidance funds are being consolidated and aligned more closely with national objectives. Bank lending is increasingly steered through targeted relending facilities and regulatory guidance, while redundant tax and fiscal subsidies are being culled, particularly at local level. After decades of liberalisation, non-market considerations are being reinserted into the operating logic of banks, state-owned enterprises and investment markets.

The report cautions that widening industrial policy across ever more sectors risks diluting its effectiveness, and that greater state influence over financial markets may further reduce the efficiency of resource allocation. Evidence of strain is already visible in declining corporate profitability, weakening private investment and slowing research and development growth in key sectors. Over time, these dynamics could weigh on productivity and long-term growth potential even as they support short-term industrial gains.

A new phase of global impact

The external effects have accelerated over the past three years. The combination of sustained policy support and weak domestic demand has driven a rapid expansion of China's manufacturing trade surplus — a development many observers describe as a "China Shock 2.0". Since 2019, the surplus in manufacturing goods has roughly doubled to around $2 trillion, reflecting both rising exports and successful import substitution. Beijing is also increasingly deploying policy tools intended to entrench its position in global value chains and to counter foreign diversification efforts.

Business Impact

For European companies, the implications fall into several categories.

Competitive pressure along the value chain. Import substitution in China reduces the addressable market for European suppliers of machinery, components and industrial inputs, while export capacity diverted to third markets intensifies price competition in segments where European firms have historically held margin advantages.

Supply-chain exposure. Deepening reliance on Chinese inputs in critical minerals, magnets, wafers and battery materials creates resilience risks that are difficult to unwind quickly. Diversification requires long-term offtake commitments, capital expenditure and, in some cases, state support.

Corporate strategy and location decisions. Chinese firms expanding internationally are increasingly establishing production and assembly capacity closer to end markets. For European executives, this creates a dual dynamic: direct competition in the home market and, potentially, new partnership and supplier opportunities within local industrial ecosystems.

Investment and capital markets. Consolidation of state guidance funds and tighter steering of bank credit may redirect capital towards priority sectors, potentially compressing returns in segments exposed to overcapacity. Institutional investors assessing exposure to European industrial equities must weigh both the trade channel and the technology channel.

Small and medium-sized enterprises. SMEs in industrial supply chains typically have less capacity than large corporates to absorb price pressure, to renegotiate contracts or to relocate production. The tiering of industrial ecosystems means competitive effects often reach smaller firms first and are felt longest.

Innovation and technology adoption. The demand-creation model — using public procurement and state-owned enterprises to pull new technologies into the market — is a policy design choice that European programmes have approached more cautiously. Its effectiveness in accelerating commercialisation is likely to inform European debate.

European Perspective

Europe sits at the intersection of several of the pressures described in the report. Germany was identified in the 2016 MERICS analysis as among the most exposed manufacturing economies, reflecting its concentration in automotive, machinery and chemicals. France, Italy, Spain and the Nordic countries face differentiated but related exposure through industrial equipment, pharmaceuticals, automotive supply chains and energy technology. Central and Eastern Europe has become a focal point for inbound manufacturing investment, including from Chinese firms establishing capacity inside the Single Market.

Policy responses have accumulated over the past several years. The European Union has introduced anti-subsidy duties on battery electric vehicles, adopted the Foreign Subsidies Regulation, the International Procurement Instrument, the Critical Raw Materials Act and the Net-Zero Industry Act, and launched the Carbon Border Adjustment Mechanism. The Draghi and Letta reports have framed the competitiveness debate around investment gaps, energy costs, regulatory complexity and the completion of the Single Market.

The report's implicit challenge to Europe is one of coherence. Instruments exist, but their effect depends on how quickly they are deployed, how consistently they are enforced and whether they are matched by private investment at scale. A fragmented approach across member states risks diluting the leverage that the Single Market provides.

Cross-border cooperation remains an area of comparative strength. Joint research programmes, shared infrastructure investment and coordinated procurement can extend the reach of European industrial policy beyond what any single member state could achieve alone. The same logic applies to partnerships with like-minded economies on supply-chain diversification, standards and technology governance.

Future Outlook

Over the next three to five years, several developments appear likely to shape the competitive landscape.

Artificial intelligence. China's use of procurement and state enterprises to drive AI adoption at scale suggests that diffusion, not only model development, will be a key battleground. European competitiveness will depend on adoption rates across manufacturing, logistics and public services, not solely on research output.

Industrial policy. Continued expansion of Chinese intervention across sectors increases the probability of further European trade defence activity and of subsidy-based competition in third markets. Fiscal constraints in China may not reduce the strategic focus of policy, but could affect its execution.

Green transition and energy. Europe's decarbonisation agenda and China's position in solar, battery and critical mineral supply chains are increasingly intertwined. European industrial policy in clean technology will be judged on whether it builds durable domestic capacity or substitutes one dependency for another.

Infrastructure and manufacturing. Investment in electricity networks, digital infrastructure and industrial parks will determine how quickly European capacity can scale. Grid connection timelines and permitting are frequently cited constraints.

Trade and capital markets. Trade diversification will continue, but at a measured pace given cost and capability constraints. Capital markets will need to finance both resilience and innovation, at a time when public balance sheets are more constrained than during the previous decade.

Foreign direct investment. The composition of FDI is likely to shift, with more emphasis on projects that embed technology and employment within Europe, and greater scrutiny of ownership and subsidy structures.

Conclusion

The Rhodium Group assessment does not argue that China's industrial strategy has succeeded everywhere. It argues that the strategy has been unusually durable, that its scope is widening, and that its external consequences are compounding. Gaps remain in high-end semiconductors, advanced aerospace and biomedicine, and domestic efficiency costs are becoming visible.

For Europe, the practical lesson is procedural as much as industrial. The analytical warnings about Chinese industrial policy were available a decade ago; the competitive shifts they described have since become structural. The next phase will be determined less by the accuracy of forecasting than by the speed and coherence of response — in investment, in innovation commercialisation, in supply-chain diversification and in the coordination of policy across the Single Market.

Key Takeaways

• China's industrial policy has moved from targeted sectoral support towards a broader framework spanning mature industries, upstream supply-chain nodes and frontier technologies.
• Support for mature sectors has prioritised technological upgrading and market share over capacity reduction, sustaining external competitive pressure.
• Services and frontier technologies such as artificial intelligence, quantum and future energy systems are receiving more attention, with public procurement and state-owned enterprises used to create demand.
• Greater state steering of credit, fiscal spending and investment funds may extend the durability of industrial policy while reducing allocative efficiency.
• Signs of strain include declining corporate profitability, weaker private investment and slower R&D growth in some sectors.
• China's manufacturing goods surplus has roughly doubled since 2019 to around $2 trillion, intensifying trade pressure on European producers.
• European exposure is concentrated in automotive, machinery, chemicals and clean technology supply chains, with Germany identified as particularly exposed in earlier analyses.
• Europe's response depends on the pace and coherence of existing instruments, private investment at scale and continued cross-border cooperation.
• The principal long-term risk for Europe is not a lack of information but a delayed and fragmented response.

SEO Keywords

China industrial policy, Made in China 2025, European competitiveness, European economy, European Union, Single Market, foreign direct investment, industrial policy, manufacturing, supply chain, artificial intelligence, digital economy, Green Deal, energy transition, infrastructure, business strategy, capital markets, corporate investment, technology, economic growth, trade diversification

Suggested URL Slug

china-next-generation-industrial-policy-europe-competitiveness

Sources

• Rhodium Group, China's Next-Generation Industrial Policy (Camille Boullenois, Malcolm Black, Alessia Caruso), with preface by the U.S. Chamber of Commerce — https://rhg.com/research/chinas-next-generation-industrial-policy
• U.S. Chamber of Commerce / Rhodium Group, Was Made in China 2025 Successful? (May 2025) — https://www.uschamber.com/international/report-was-made-in-china-2025-successful
• MERICS (2016), assessment of Made in China 2025 including the Made in China 2025 heat map — cited in the Rhodium Group report above.
• European Union Chamber of Commerce in China (2017), assessment of China Manufacturing 2025 — cited in the Rhodium Group report above.
• U.S. Chamber of Commerce (2017), assessment of Made in China 2025 — cited in the Rhodium Group report above.