In this episode of The Sound of Economics, Yuyun Zhan and Alicia García-Herrero invite Philippe Le Corre to examine the growing tensions at the heart of European Union-China relations. With China reporting a record $1.2 trillion trade surplus last year, European industries face intensifying competition across a far wider range of sectors than before, from chemicals and green tech to pharmaceuticals and, most visibly, the auto industry. They explore whether the EU&#x27;s new trade instruments are up to the task, why member state fragmentation may be a bigger obstacle than Beijing itself and how the risk of Chinese retaliation constrains every move Brussels makes. Relevant research: García Bercero, I., B. McWilliams and S. Tagliapietra (2026) ‘The flaws in the European Union’s proposed Industrial Accelerator Act and how to fix them’, Policy Brief 10/2026, Bruegel This episode is part of the ZhōngHuá Mundus series of The Sound of Economics. ZhōngHuá Mundus is a newsletter by Bruegel, bringing you monthly analysis of China in the world, as seen from Europe. Sign up now to receive it in your mailbox!

Europe's China shock 2.0

The Sound of Economics

# Full Transcript

**Podcast:** The Sound of Economics

## Transcript

Welcome to The Sound of Economics, the podcast series by Bruegel, the Brussels-based economic think tank. I am Yuyun Zhang, host of our monthly podcast, Zhonghuamundus, that brings you recent updates about China's economy. As usual, I am with our senior fellow Alicia Garcia-Herrero. Hi Alicia, welcome back to the show. Hello, Yuyun. We're also glad to host today Philippe Lecoeur, senior fellow at the Asia Society Policy Institute's Center for China Analysis.

Senior Advisor on Geopolitics to Asia Society France. He's also a professor at ASSEC Business School. Nice to meet you, Philippe, and welcome to The Sound of Economics. Thank you very much, Yuyun. I'm glad to be there with you and Alicia. Thank you for joining us today. The first China shock came after the country's accession to the World Trade Organization in 2001, where it reshaped trade flows, labor markets, and industrial capacity across the world.

Now there's talk of a second one. Alicia, what is China shock 2.0, and why is it dominating conversations in Brussels right now? Let me tell you that before I even explain what China shock 2.0 is, I just came back from Shanghai and I just learned about China's shock 3.0. What I'm trying to say here is that whoever thinks this is like a temporary shock and, you know, forget it.

And that is very important to understand what it is. It is basically China's massive both upgrade of its industry, beyond its industry, the 3.0 I was referring to will go into services, digital services. You know, so we're now in the industrial 2.0, but that is extended to many more products than the 1.0 used to be, where it was mostly cement, steel, you know, like heavy industrial products. Now we're into chemicals.

We're into the so-called new production forces, basically green tech. We are even into pharmaceuticals, APIs. I mean, you name it. It's a very, very extended definition of manufacturing power. Why is it happening? Because China is certainly very innovative and more productive in certain sectors,

but also, and the OECD has amazingly shocking figures on how many subsidies China is putting on the table to get there. So it's a combination of subsidies, decreasing prices, which makes China very competitive, a stubbornly depreciated exchange rate, and of course, the good news, innovation, productivity. But that's only part of the story.

So because of that, China is gaining market share globally. Europe is by no means the largest export in the world anymore, although it was for decades. And that changed right after COVID. So since COVID, China is the largest exporter in the world, and Europe has 360 billion trade deficit with China. Most people say, who cares about the bilateral trade deficit? Then I would say, focus on the global trade share, which we have lost.

Why are we losing it? Because China is more competitive, both because of being more innovative, but also because of this deflati...

Europe's China shock 2.0

Transcript

Built for investment professionals

Every day you wait, your competitors are finding
edge in conversations you're not hearing.

Europe's China shock 2.0

Transcript

Built for investment professionals

Every day you wait, your competitors are findingedge in conversations you're not hearing.

Every day you wait, your competitors are finding
edge in conversations you're not hearing.