China: From Systemic Rival to Systemic Threat

For the United States and Europe, dealing with the People’s Republic of China (PRC) is now a challenge of such wide-ranging nature that it will cut across almost the entire transatlantic agenda of the incoming Trump administration. From addressing Beijing’s role as the “decisive enabler” for Russia’s war of aggression to rethinking the way that US-EU trade and technology ties need to be organized, China policy no longer occupies a separate silo but conditions every element of the security and economic landscape. 

Under the Biden administration, Europe and the United States undertook an unprecedented effort not only to coordinate their approaches to the PRC itself, but also to advance on other fronts where the China challenge was the main motivating factor, such as EU-US efforts to negotiate agreements on steel, aluminum, and critical minerals. The two sides’ analysis has grown much closer, and in some areas, this translated into tangible results—whether conveying common red lines to Beijing on the delivery of lethal aid to Moscow and the use of force against Taiwan or tightening controls on advanced semiconductor equipment exports. 

Overall, however, progress still fell short of the high stakes. Some EU member states treated the Biden administration’s partner-friendly approach as a holiday from difficult strategic choices on China rather than an optimal window in which to make them. EU-level efforts to build more effective approaches on economic security, trade defense, and cyber security were often slow-rolled or undercut by major capitals. 

There were also areas in which the Biden administration allowed domestic political considerations to undermine efforts to build a common strategic economic approach among US partners—particularly the use of national security tools against US allies, whether the blocking of Nippon’s takeover of US Steel or the initial retention (and suspension rather than lifting) of Section 232 tariffs against the EU. 

While the two sides are certainly more closely aligned and better coordinated, moving in the right direction is no longer enough. If Europe and the United States are unable to achieve results in several critical areas in the next few years, it will come at a growing cost to their security and economic interests, as well as to the broader transatlantic relationship. Success, on the other hand, would put a new set of foundations under it. 

Three issues are likely to loom over the agenda for the incoming Trump administration: the threat of the “Second China Shock” to US and European industry; Beijing’s deepening coordination with Russia and other authoritarian states; and intensifying PRC pressure on Taiwan. 

China Shock 2.0

Economic and technology concerns will be at the top of the list. The first “China Shock”, after China’s accession to the WTO, left a social and political legacy that transcended its economic consequences, fueling populist movements on both sides of the Atlantic. The effect accounted for just under 60% of the manufacturing job losses in the United States between 2001 and 2019, but it was the speed and concentration of the impact on specific industrial sectors and geographies that had the starkest effects. Europe and the United States now face a shock of even greater breadth. Where the first China shock hit legacy industries, the second iteration is also hitting advanced sectors that were supposed to provide the foundation for the West’s future industrial strength. 

The proximate cause of the shock is the stagnant Chinese economy and the doubling down of support from Beijing for many of the industries in question. Recent analysis of Chinese production in sectors ranging from construction machinery to lithium batteries finds capacity levels that exceed the entire global demand pool. Unprecedented PRC export surpluses (nearly $1 trillion in 2024), brutal price-cutting, and weak demand in the Chinese market translate into a threefold hit for western companies, which see their market share in China falling and intensifying competition from Chinese firms in their home markets and third markets. 

This is not a problem that will be resolved when excess capacity levels diminish. They are a byproduct of Beijing’s long-term push to dominate manufacturing at every level of the value chain, substitute Chinese for Western products, and build greater dependence of the rest of the world on China, all while strengthening China’s own self-reliance. For US and EU policy responses, the effect is to further blur the distinction between trade and economic security, as highly competitive sectors of western economies face being wiped out, reliance on Chinese supply chains continues to grow, and allied industrial capabilities are diminished. 

Uncoordinated EU and US measures to address the shock are likely to be inadequate, ineffective, or even mutually harmful. Unilateral US trade defense efforts risk significant diversion of Chinese export surpluses to the EU. US export control, investment, and research security restrictions will fail if the PRC can obtain the same benefits from European economies. Separate efforts to set high, China-focused standards on cybersecurity, data, and labor rights, or to tighten rules of origin to deal with lengthening China-dependent supply chains, risk fracturing transatlantic trade and investment ties if they are not aligned. And none of these steps will address either the competitive hit to western firms in third markets, or the increasing levels of circumvention as Chinese suppliers seek to maneuver around the rising wall of trade restrictions. 

Adversarial Axis

Challenges in the traditional security sphere are equally pronounced. The PRC has played the principal enabling role behind Russia’s ability to sustain the largest-scale war on the European continent since World War II. While some of this takes the form of diplomatic and political support, it is the economic backing that has been most crucial, as Beijing ensures that Russia has the material means it needs to wage war. The overwhelming majority of dual-use battlefield items arriving in Russia from foreign countries came from China, either by production or by trade, as did 70% of the sensitive high-tech products reaching the Russian military. 

The Beijing-Moscow nexus is now at the center of a wider network of authoritarian partners, from North Korea to Iran. Security cooperation among these states has drastically accelerated, bringing North Korean troops to the European theater, advanced Russian capabilities to the Indo-Pacific, and an increasing mutual flow of military and dual-use goods. The PRC provides the essential backdrop that empowers them: undercutting or dismantling the sanctions frameworks that once constrained these states and maintaining their economic lifeline, while ensuring that Beijing has “clean-hands” deniability about any of their actions. This has also elicited futile efforts to seek the PRC’s help addressing those actions, accruing additional political advantage for Beijing.

Heightened “adversary alignment” has placed considerable strain on the US ability to navigate what has become a multi-front security threat. The strain was already acute. The rapid build-up of China’s nuclear arsenal leaves the United States facing a two-nuclear-peer environment for the first time. And despite questions about whether the People’s Liberation Army (PLA) will cross the threshold that could make Taiwan a PRC “war of choice” by late in the decade—following Xi Jinping’s directive that Beijing should be capable of taking Taiwan by force by 2027—there is little question that we are entering a period in which the risks of conflict are significantly elevated. 

The net effects are a markedly increased burden on US global security commitments, heightened expectations that US partners will have to step up their own efforts, and a growing danger that war in one theater will cascade into others.

Policy Recommendations

The most promising approach to transatlantic cooperation in dealing with the China shock is likely to be sectoral:

• The first step is to pick a range of industries that are of greatest importance to Europe and the United States, where China’s push to dominate the sector poses the greatest risks, and adopt an “all of the above” approach to the instruments that the two sides deploy. 
• This would include traditional trade defense tools, “new” tools such as the EU’s potent foreign subsidies regulation (FSR) and international procurement instrument (IPI), more rigorous and complementary use of qualitative standards (labor, environmental, cyber, data and transparency), the suite of economic security tools (export controls, inbound and outbound screening, research security), third-market-directed measures (to address circumvention and transnational subsidies), development financing tools (in areas such as critical minerals partnerships and telecoms), and measures to ensure that European and US firms have a level of mutual access to each other’s subsidies and procurement markets. 
• Ideally, this would add up to an “economic security” package that allows for trade-offs across areas, much like a traditional trade deal but without the market opening, which remains politically complicated. 
• This economic agenda is also crucial for the allies’ ability to retain the industrial—and military-industrial—base and technology edge required to prevail in “systemic” rivalry with the PRC, and the means to sustain the capacity to fight and deter wars. 

While the transatlantic allies cannot expect to change the PRC’s fundamental approach to Russia or other authoritarian partners, they can disrupt China-Russia cooperation and raise the price for Beijing. There is considerable evidence from Beijing’s approach to sanctions compliance that the Chinese leadership is reluctant to accept significant burdens for its support to Moscow, preferring to find ways to provide backing at relatively low cost:

• As a result, there are strong grounds for a serious ramp-up of pressure on Chinese firms, and the reintroduction of the unpredictability that constrained their interactions with Russia in the early months after the invasion. This holds whether the objective is to undercut PRC support to Russian military industrial capabilities in the medium-term or to exert near-term pressure to help secure a more favorable settlement for Ukraine. 
• This will require Europe, in particular, to go well beyond the existing pinprick measures against small companies responsible for circumvention to instead threaten banks, large Chinese firms with interests in both Europe and Russia, and entire jurisdictions such as Hong Kong. 

The United States and Europe will have to undertake equally expansive—if often less visible—cooperation to strengthen deterrence against any PRC use of force against Taiwan:

• The United States and Europe should identify the levers they can pull in the event of a PRC attack on Taiwan, along with areas where Beijing is likely to retaliate. There should be a plan in place for punishing the PRC if it uses force that includes financial sanctions, export controls, and curtailing market access—a plan that targets Beijing’s persistent vulnerabilities notwithstanding its efforts to strengthen resistance to such actions. 
• This will require more detailed preparation work than has been possible to date, not only for the most extreme contingencies but for a range of other gray-zone scenarios. 
• While there are only limited circumstances that may see an active European military role in a Taiwan contingency, it is crucial that the two sides undertake heightened preparation for scenarios that involve simultaneity, including Russian military actions in Europe while the United States is absorbed in a conflict in East Asia. European efforts to step up the commitment to their own defense is not only a Russia question—it is an essential part of ensuring that the United States and its allies are able to deter scenarios that could resemble a world at war.