Europe vs China: Competitiveness in a Changing World — Part 2: The Current Competitiveness Landscape

 


About this 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 second part, we apply the analytical framework established in Part 1 to assess the current competitiveness landscape of Europe and China. We examine the strengths and weaknesses on both sides across four pillars: productivity and innovation, industrial capability and scale, systemic competitiveness factors, and strategic autonomy. By mapping these structural features, we identify the principal asymmetries that shape today’s economic rivalry.

1. Introduction: A Shifting Competitive Landscape

Europe and China occupy very different positions in the global economy. Europe remains one of the world’s most productive, technologically sophisticated, and institutionally advanced regions. China, meanwhile, has become the world’s manufacturing centre of gravity, the largest trader in goods, and an increasingly important innovator.

The competitive balance between the two has been shifting for two decades. Europe maintains strengths in research, high-end manufacturing, and regulatory sophistication, while China continues to consolidate dominance in large-scale industrial production, energy-intensive sectors, and key clean-technology supply chains.

Understanding how these strengths and weaknesses align—and where their trajectories diverge—is essential for assessing Europe’s strategic position.

2. Pillar 1: Productivity and Innovation Power

2.1 Europe’s Strengths in Research and High-Value Innovation

Europe continues to excel in scientific output, technological research, and high-end innovation capacity:

  • European universities and research institutions remain among the world’s most productive in scientific publications and citations.
  • The EU invests around 2–2.2% of GDP in R&D (varying significantly by country), and maintains global leadership in sectors such as pharmaceuticals, chemicals, aerospace, and precision engineering.
  • Europe generates a substantial share of high-value patent families, especially in advanced manufacturing and machinery [1][2].

However, Europe often struggles to commercialise innovation at scale, a challenge linked to regulatory fragmentation and capital market limitations.

2.2 China’s Rapid Rise in Innovation Capability

China’s innovation system has undergone transformative growth:

  • R&D expenditure now exceeds 2.4% of GDP, surpassing the EU average and closing in on the US [3].
  • China leads the world in total patent filings and is strong in frontier technologies such as AI implementation, telecommunications, drones, and EV ecosystems.
  • Innovation benefits from state-directed investment, mission-driven programs, and a large domestic market that allows rapid scaling.

Yet China remains dependent on foreign technologies in certain high-end domains, notably semiconductor manufacturing equipment and advanced materials.

2.3 Comparative Diagnosis

Europe remains ahead in fundamental science and high-value innovation. China has overtaken Europe in applied innovation and scaling capacity. Europe’s challenge is not lack of ideas but lack of rapid commercialisation; China’s challenge is reliance on imported technologies in critical nodes of the global value chain.

3. Pillar 2: Industrial Capability and Scale

3.1 China as the Global Industrial Powerhouse

China now accounts for nearly 30% of global manufacturing output, making it the world’s largest industrial producer [4]. Its strengths include:

  • Deep supplier ecosystems across electronics, machinery, materials, and consumer goods
  • Unmatched economies of scale and logistics networks
  • Ability to mobilise capital rapidly into strategic sectors
  • Cost advantages in labour, land, and permitting speed

China dominates upstream and downstream segments in emerging sectors such as:

  • Solar PV (over 80% of global production)
  • Lithium-ion batteries (over 70% of global cell manufacturing capacity)
  • Electric vehicles, where Chinese producers are increasingly competitive even in foreign markets [5]

3.2 Europe’s Industrial Strengths and Erosion Risks

Europe remains strong in:

  • Advanced automotive manufacturing
  • Aerospace (a near-duopoly with the US)
  • Green technologies such as wind energy
  • Industrial machinery, robotics, and precision engineering
  • Chemicals and pharmaceuticals

However, Europe’s position is eroding in several areas:

  • A decline in energy-intensive industries after sustained high energy prices
  • Loss of mid-tier suppliers in electronics and semiconductors
  • Underinvestment in industrial capacity
  • Slower speed of large-scale manufacturing build-out compared to China and the US

3.3 Comparative Diagnosis

China has consolidated its industrial lead through scale, integration, and speed. Europe retains excellence in specialised high-value sectors but struggles to expand or defend industrial capacity in emerging strategic technologies. Industrial erosion threatens Europe’s long-term strategic and technological autonomy.

4. Pillar 3: Systemic Competitiveness Factors

4.1 Europe’s Institutional Advantages and Structural Constraints

Europe’s strengths include:

  • Strong rule of law and regulatory predictability
  • High-quality education systems (though uneven across countries)
  • Robust social safety nets and worker protections
  • High environmental standards

Yet these come with systemic constraints:

  • High energy prices, especially post-2021, which undermine energy-intensive industries
  • Regulatory complexity and slow permitting, slowing industrial deployment
  • Fragmented capital markets, leading to weaker funding for scale-ups
  • Demographic decline, affecting labour supply and productivity potential [6]

4.2 China’s Systemic Advantages and Trade-offs

China benefits from:

  • A unified market and centralised decision-making
  • Aggressive industrial policy with decisive state support
  • Rapid infrastructure development
  • Large, flexible labour markets

But faces systemic risks:

  • High local-government debt
  • Demographic contraction
  • Regional inequalities
  • Environmental and resource constraints
  • Overcapacity in several sectors

4.3 Comparative Diagnosis

Europe’s systemic environment excels in stability but lags in speed and cost competitiveness. China’s system enables rapid mobilisation and industrial expansion but carries increasing structural risks. Europe’s challenge is agility; China’s is rebalancing without undermining its industrial base.

5. Pillar 4: Strategic Autonomy and Geopolitical Leverage

5.1 China’s Dominance in Critical Supply Chains

China holds commanding positions in:

  • Rare earth extraction and processing
  • Battery materials and components
  • Solar module production
  • Permanent magnets and specialty metals

In many of these upstream materials, China controls between 60% and 90% of global supply and processing capacity [7].

This grants Beijing significant geo-economic leverage, even without active coercion.

5.2 Europe’s Dependency Exposure

Europe faces dependencies in:

  • Critical raw materials
  • Battery components
  • Semiconductor manufacturing equipment supply chains
  • Active pharmaceutical ingredients
Solar technology manufacturing

These dependencies constrain Europe’s strategic autonomy and complicate its ability to respond to geopolitical shocks, such as disruptions in East Asia.

5.3 Counter-Dependencies Affecting China

China, in turn, depends on Europe (and its partners) in high-end areas such as:

  • Semiconductor lithography equipment
  • Advanced materials and precision components
  • Aerospace technology
  • Certain machine tools

These asymmetries define a mutual dependency relationship, but one that is asymmetrically favourable to China in many emerging technologies.

6. Overall Diagnosis: A Growing Structural Imbalance

Across the four pillars, the competitive landscape can be summarised as follows:

  • Europe leads in scientific research, high-value innovation, and specialised advanced manufacturing.
  • China leads in scale, industrial development, cost competitiveness, and clean-technology supply chains.
  • Europe’s systemic constraints—energy prices, regulatory burden, capital market fragmentation—erode its strengths.
  • China’s geopolitical leverage increases as its upstream and midstream dominance expands.
  • Mutual dependencies remain, but China’s position is structurally more favourable in fast-growing sectors.

These imbalances shape not only economic outcomes but also strategic behaviour, which we will explore in Part 3.

Conclusion

The competitive landscape between Europe and China is shaped by deep structural differences in capabilities, institutions, and systems. Europe retains strong scientific and industrial foundations, yet faces mounting pressures from China’s scale, speed, and targeted industrial development. Structural dependencies expose Europe to geopolitical risk, while China remains reliant on Europe for specialised technologies.

This diagnosis forms the basis for the next instalment. In Part 3, we examine how these competitive imbalances translate into geopolitical influence, vulnerability, and strategic manoeuvring in an increasingly contested global environment.

References

  1. European Commission. European Competitiveness Report.
  2. OECD. Science, Technology and Industry Scoreboard.
  3. Naughton, B. (2021). The Rise of China’s Industrial Policy.
  4. World Bank. World Development Indicators: Manufacturing Output.
  5. IEA. Global EV Outlook.
  6. European Court of Auditors. Reports on demographic and labour challenges.
  7. USGS and European Commission. Critical Raw Materials Assessments.

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