Europe vs China: Competitiveness in a Changing World — Part 1: How to Compare Competitiveness

 


About the Upcoming Series

This article is part of a multi-part series examining how Europe’s competitiveness compares with China, what structural imbalances have emerged, how these shape geopolitical realities, and what priority agenda Europe must pursue to restore strategic strength. The series concludes by assessing Europe’s actual priorities and policy actions, comparing them with the ideal agenda identified earlier. Each instalment builds on the previous one to form a coherent and comprehensive framework for understanding Europe’s competitive position in the world economy.

About This Part

In this first part, we establish the analytical foundations for comparing the competitiveness of Europe and China. Because “competitiveness” is a contested and multidimensional concept, this part clarifies what it means, which indicators matter, and how different measurement approaches reflect different economic philosophies. Establishing this framework is necessary before assessing current realities in later parts.

1. Why Comparing Competitiveness Matters

“Competitiveness” is a term frequently invoked yet rarely defined. In public discourse it may refer to innovation performance, industrial capability, or trade outcomes. In policy circles, however, competitiveness refers to an economy’s ability to generate high and rising levels of productivity, sustain attractive wages, maintain strong positions in global markets, and preserve strategic autonomy.

In the Europe–China comparison, competitiveness becomes not only economic but geostrategic. Europe’s socio-economic model, technological sovereignty, and global influence rely on maintaining or regaining competitive strength. China’s rapid industrial ascendance and its distinctive model of state-directed capitalism force Europe to reassess its own capabilities and vulnerabilities.

Understanding competitiveness rigorously therefore requires a structured analytical framework. Without it, comparisons risk reflecting ideology more than reality.

2. Defining Competitiveness: Multiple Perspectives

Competitiveness can be interpreted through several conceptual lenses, each illuminating different aspects of economic performance. A comparative analysis must recognise these perspectives and their limitations.

2.1 The Productivity Lens

Economists traditionally understand competitiveness as productivity growth achieved through efficient allocation of resources and technological progress. Metrics such as GDP per hour worked, total factor productivity, and innovation output are central to this view.

This approach offers clarity but overlooks industrial capabilities, scale, and strategic vulnerabilities.

2.2 The Market Performance Lens

A pragmatic measure of competitiveness is global market share, export performance, and sectoral specialisation. China’s dominance in solar PV, batteries, and electronics exemplifies this interpretation.

Yet market share can also reflect subsidies, state investment, energy pricing, and industrial policy, complicating comparison with Europe’s more market-oriented model.

2.3 The Strategic Autonomy Lens

Increasingly relevant for Europe, this lens evaluates competitiveness by the degree of technological and supply-chain sovereignty. Key concerns include dependence on critical raw materials, access to strategic technologies, and resilience against geopolitical shocks.

While less traditional, this perspective captures risks that other lenses understate—especially in the EU–China relationship.

3. Key Parameters for Comparing Competitiveness

A robust comparison requires combining multiple quantitative and qualitative indicators across four main categories.

3.1 Productivity and Innovation Capacity

Indicators include:

  • GDP per hour worked
  • R&D expenditure as a share of GDP
  • High-value patent families
  • STEM graduate output and research excellence

These metrics highlight long-term potential but may not capture the ability to scale innovations commercially.

3.2 Industrial and Manufacturing Strength

Important measures include:

  • Manufacturing value-added
  • Share of global output in strategic sectors
  • Investment rates in industrial capacity
  • Depth of supplier ecosystems

This dimension reveals China’s marked advantage in scale and rapid capability build-out.

3.3 Cost Structures and Operating Conditions

Key variables:

  • Labour costs and productivity-adjusted competitiveness
  • Energy prices
  • Logistics efficiency and infrastructure
  • Land availability and permitting speed

Persistent cost disadvantages—especially in energy—shape Europe's industrial outcomes.

3.4 Market Scale and Integration

Domestic market size influences innovation diffusion and investment incentives. China benefits from a unified and vast internal market. Europe’s single market provides scale on paper, but regulatory divergence and administrative complexity dilute its effectiveness.

3.5 Supply-Chain Position and Critical Dependencies

Indicators include:

  • Import dependency ratios
  • Concentration of supply by foreign country
  • Domestic capacity in upstream and midstream segments

China’s dominance in critical minerals and battery materials reflects a structural advantage with direct geopolitical implications.

3.6 Institutional and Strategic Factors

These encompass:

  • Policy agility and state capacity
  • Coherence of industrial strategy
  • Political stability and alliances
  • Regulatory certainty

Europe and China operate under fundamentally different institutions, which shape competitiveness outcomes as much as economic fundamentals.

4. Competitiveness Indices and Their Limitations

Several international indices attempt to summarise competitiveness holistically. Though useful, they must be interpreted with caution.

4.1 World Economic Forum Global Competitiveness Index

This index evaluates institutions, infrastructure, skills, innovation, and market dynamism. Europe scores strongly on institutional quality; China scores highly on infrastructure and market size.

However, the index tends to underweight industrial scale and strategic resource control.

4.2 IMD World Competitiveness Ranking

Focuses on business efficiency, labour markets, and regulatory frameworks. Europe performs well on institutional depth but often lags on adaptability and cost competitiveness. China has steadily improved.

4.3 OECD and World Bank Indicators

These provide additional insights on innovation, logistics, and business conditions but do not fully account for state intervention or geopolitical leverage.

4.4 Why Indices Alone Are Insufficient

Few indices capture:

  • Structural subsidies
  • State-led industrial mobilisation
  • Control of upstream resources
  • Geopolitical leverage
  • Permitting speed
  • Supply-chain resilience

Thus, while indices show Europe performing well in several categories, they can mask emerging vulnerabilities and underestimate China’s structural strengths.

5. Methodological Caveats in Comparing Europe and China

Any comparison between Europe and China must account for fundamental systemic differences.

5.1 A Multi-State Union vs a Unified State

The EU comprises 27 sovereign states, each with distinct industrial bases, energy mixes, and regulatory cultures. China operates as a unified state with a coherent industrial strategy and long-term planning horizons. Differences in governance shape competitive outcomes directly.

5.2 Divergent Economic Models

China blends state planning, industrial policy, and market mechanisms in a hybrid model designed to build national champions. Europe emphasises market competition, regulatory balance, and consumer protection. Indicators may reflect these structural choices rather than pure competitive performance.

5.3 Scale Effects

China’s population and market scale allow for rapid commercialisation, extensive experimentation, and cost amortisation. Europe’s potential scale is under-utilised due to fragmentation, diverse regulatory practices, and uneven implementation.

5.4 Data Transparency and Comparability

Variations in statistical methodologies and data reliability, especially in certain Chinese industrial datasets, complicate direct comparison.

6. A Structured Framework for the Series

To guide the subsequent parts of this series, we adopt a four-pillar framework enabling consistent comparison:

Pillar 1 — Productivity and Innovation Power

Captures scientific capabilities, research output, and long-term technological potential.

Pillar 2 — Industrial Capability and Scale

Measures production capacity, technology diffusion, investment intensity, and supply-chain depth.

Pillar 3 — Systemic Competitiveness Factors

Assesses cost structures, regulatory conditions, infrastructure quality, labour markets, and energy competitiveness.

Pillar 4 — Strategic Autonomy and Geopolitical Leverage

Examines dependencies, control of critical inputs, technological sovereignty, and resilience against disruptions.

These pillars will be applied throughout Parts 2 to 6, ensuring analytical continuity as the series moves from measurement to diagnosis and finally to Europe’s policy response.

Conclusion

Competitiveness is not a single number but a complex interplay of productivity, industrial capability, strategic independence, and institutional strength. Comparing Europe and China requires a multidimensional framework that accounts for economic fundamentals and strategic considerations.

By clarifying the analytical tools and parameters in this first instalment, we lay the foundation for a rigorous and coherent assessment. In Part 2, we apply this framework to evaluate the current competitiveness landscape, highlighting Europe’s strengths, China’s accelerating advantages, and the key imbalances shaping the global economy.

References

  1. Porter, M. (1990). The Competitive Advantage of Nations.
  2. World Economic Forum. Global Competitiveness Report.
  3. IMD. World Competitiveness Ranking.
  4. OECD. Science, Technology and Industry Scoreboard.
  5. European Commission. European Competitiveness Reports.
  6. Naughton, B. (2021). The Rise of China’s Industrial Policy.
  7. Rodrik, D. (2004). Industrial Policy for the Twenty-First Century.
  8. European Court of Auditors. Reports on competitiveness and strategic dependencies

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