Introduction

A decade after the launch of Made in China 2025, Beijing is not retreating from state-led industrial strategy. Instead, it is doubling down, broadening the scope and depth of government intervention across nearly every layer of the economy. China’s next-generation industrial policy is no longer confined in strategic emerging sectors; it now spans mature industries, foundational supply chain nodes, services, and frontier technologies. As a new report from Rhodium Group and the U.S. Chamber of Commerce details, this expansion is accelerating China’s trade dominance and deepening foreign dependencies on Chinese production networks, with significant consequences for Europe’s industrial competitiveness and long-term economic security.

Main Analysis

From Sectoral Targets to an Industrial Policy of Everything

The first-generation policy framework, centred on strategic emerging industries, has given way to a far more expansive approach. China’s leadership views past policies as broadly successful in building domestic capabilities, and they are now pushing all sectors up the value chain. In upstream segments like critical minerals, wafers, and magnets, Chinese firms already hold dominant positions. Policymakers seek to replicate that dominance across a wider range of industrial products, including advanced materials, components, and equipment.

This evolution is visible in mature industries facing overcapacity and price pressures. Rather than cutting capacity, Beijing continues to support firms that upgrade production technologies to gain market share and lower costs. The result is an intensification of competitive pressure on European manufacturers, particularly in sectors traditionally seen as core strengths—automotive, machinery, chemicals, and electronics.

Services, which were relatively neglected in earlier policy rounds, are now receiving greater attention. Gains in software, data processing, and drug development reflect a deliberate effort to expand China’s capabilities beyond manufacturing. Moreover, frontier technologies—artificial intelligence, quantum computing, and future energy systems—are being mobilised through the full weight of the state, including public procurement and state-owned enterprises generating demand for new products at scale.

Tighter Coordination Amid Macroeconomic Constraints

China’s industrial expansion is occurring against a backdrop of slowing growth, weak domestic demand, and rising fiscal pressures. Instead of scaling back, authorities are recentralising control over financial resources. Fiscal spending, bank lending, capital markets, and state investment funds are being aligned more tightly with national strategic priorities. Government guidance funds are consolidated, targeted relending facilities steer credit to favoured sectors, and redundant local subsidies are being culled.

This shift re-inserts non-market considerations into the DNA of banks and state-owned enterprises. While it may prolong the potency of industrial policy, it risks reducing resource allocation efficiency over time. Evidence of strain is already apparent: declining corporate profitability, weakening private investment, and slowing R&D growth in key sectors. These dynamics could weigh on China’s long-term productivity, even as short-term industrial gains are realised.

A New Phase of Global Impact

The global effects of Chinese industrial policy have intensified over the past three years. Sustained policy support combined with weak domestic demand has driven a rapid expansion of China’s manufacturing trade surplus, which has roughly doubled to $2 trillion since 2019. This “China Shock 2.0” is not merely a cyclical phenomenon; it reflects structural changes in the global division of labour.

China is leveraging its manufacturing dominance to entrench its position in global value chains and counter foreign diversification strategies. Tools include export controls on critical materials, targeted investment abroad, and state support for outbound expansion. These measures are deepening dependencies on Chinese supply chains, making it harder for Europe to reduce its exposure.

Business Impact

For European companies, the strategic implications are far-reaching. First, competition pressure will mount in both Chinese and third-country markets. Chinese firms, backed by state support and scale, can undercut European rivals on cost and volume in sectors such as electric vehicles, solar panels, and industrial equipment.

Second, supply chain vulnerabilities will persist. Europe relies heavily on China for inputs like rare earths, pharmaceuticals, semiconductors, and clean technology components. Beijing’s willingness to use these dependencies as leverage has been demonstrated, and European firms must build resilience in procurement and supply chain management.

Third, market access conditions are likely to deteriorate. As China’s industrial policy becomes more pervasive, foreign firms face increasing requirements for technology transfer, localisation, and data localisation. The once-expected opening of China’s market to foreign competition is less likely, forcing European multinationals to reassess their China strategies.

Fourth, innovation dynamics are shifting. Chinese R&D spending continues to grow, and government-backed demand creation accelerates commercialisation of frontier technologies. European companies need to sustain their own innovation leadership while monitoring how Chinese competitors deploy state-supported technologies at scale.

European Perspective

The European Union faces a dual challenge: maintaining the openness of the Single Market while defending its industrial base. The next-generation Chinese industrial policy underscores the need for a coherent European industrial strategy that combines competitiveness with resilience.

The EU’s response has been evolving—through instruments like the European Chips Act, the Net-Zero Industry Act, and the Critical Raw Materials Act—but these efforts remain fragmented. A more comprehensive approach is needed, spanning investment in innovation, infrastructure, and skills, and uniting member states around common strategic goals.

For Germany and other exporting nations, the pressure is acute. Their reliance on China as both a market and a supplier leaves them exposed to Chinese industrial policy shifts. Countries in Central and Eastern Europe, which have attracted Chinese investment in manufacturing, must weigh the benefits against strategic risks.

Cross-border cooperation will be essential. A unified European position on trade defence, investment screening, and export controls can mitigate the shocks emanating from Beijing’s policies. Building partnerships with like-minded economies in Asia and North America, and channelling investment into resilient supply chains at home, will be critical.

Future Outlook

Over the next 3 to 5 years, China’s industrial policy is likely to expand further, albeit with diminishing returns. The emphasis on AI, quantum, and future energy systems will intensify, and state-directed demand creation will accelerate time-to-market for new technologies. Europe should anticipate more episodes of trade friction and supply disruptions.

The European response must be long-term. That involves:

• Strengthening the Single Market to foster innovation and scale.
• Increasing public and private investment in strategic technologies, including AI, semiconductors, and clean energy.
• Diversifying supply chains through partnership agreements and de-risking from over-concentration on China.
• Upgrading trade defence tools to address market distortions and overcapacity.
• Building a circular economy that reduces dependency on imported raw materials.

Europe’s competitive position will depend on its ability to act united and strategically. The record of the past decade shows that early warnings about Chinese industrial policy were accurate; the window for proactive adjustment is finite.

Key Takeaways

• China’s industrial policy has evolved from targeted sectoral plans to an all-encompassing state strategy, affecting nearly every industry.
• The global impact is accelerating: trade surpluses, supply chain dependencies, and Chinese firm expansion are reshaping markets.
• European companies face heightened competition, supply chain risk, and access challenges in China.
• A cohesive EU industrial strategy, combining innovation investment, supply chain diversification, and trade defence, is urgently needed.
• Over the next 3–5 years, China’s focus on AI and frontier technologies will amplify competitive pressure; Europe must respond with speed and unity.

Sources

• Boullenois, Camille; Black, Malcolm; Caruso, Alessia. “China’s Next-Generation Industrial Policy.” Rhodium Group and U.S. Chamber of Commerce. [Reference URL: https://rhg.com/research/chinas-next-generation-industrial-policy]