Why Europe and the United States Must Pivot From Defensive Trade Measures to Strategic Industrial Reconstruction

Brad Setser’s observation on Robin Harding’s recent FT analysis captures the essence of China’s trade model: excluding iron ore and oil, China’s vision of trade is one-way — all exports, almost no imports. This is not merely a statistical pattern; it is a reflection of a deliberate national strategy to reinforce industrial self-sufficiency while deepening global export dominance. Setser’s conclusion is blunt: “Beijing isn’t leaving Brussels or Berlin with much of a choice.”

If Europe and the United States wish to preserve a viable industrial base, they must abandon illusions about “managing” China through diplomatic signaling, WTO cases, or draconian tariffs. China now possesses the technological autonomy, material independence, scale and cost advantage to withstand Western pressure — and Western economies are the ones most vulnerable to escalation.

Understanding the Challenge: China’s Asymmetric Trade Model

China now imports primarily energy, food, raw materials, and selected high-tech components, while exporting increasingly competitive mid-tech and industrial goods under its own brands. This technological shift—both in production methods and industrial organization—has enabled China to outperform and displace Western firms in their home markets and globally.

This structural shift leaves Western industrial bases exposed. The EU and U.S. face declining trade balances / rising trade deficits, declining manufacturing capacity, completely exposed supply chains, and shrinking technological leadership in several sectors. Traditional policy tools — tariffs, export controls, WTO litigation — have yielded negligible results.

The key question is therefore not how to stop China, but how to rebuild ourselves.

What Will Not Work

1. A Trump-style all-out trade war

A frontal trade confrontation — as attempted by the Trump administration — will fail. China controls bottleneck inputs such as rare earths, graphite, critical chemical precursors, and battery materials. It can cripple Western production with a single countermeasure. The Nexperia episode in the Netherlands demonstrated the same vulnerability: coercion triggers retaliation, not compliance.

2. Pressuring China into “voluntary export restraints”

This approach failed with Japan in the 1970s and will fail with China today. When Washington forced Japan to limit automobile exports, Japanese firms simply shifted production to the U.S. and continued displacing Detroit — only now from inside the American market.

China is vastly larger, more autonomous, and far more geopolitically diversified than Japan ever was. It will not bow to Western pressure nor collapse under a trade embargo.

Coercion is therefore not a viable strategy.

What Can Realistically Be Done

1. Enforce domestic-production conditions for market access

The EU and U.S. should require that Chinese companies exporting to their markets:

• manufacture within the EU/U.S.,
• meet minimum domestic value-added thresholds,
• comply with local labor standards, and
• operate through joint ventures with at least 50% EU/U.S. equity participation.

This mirrors the strategy China itself used successfully between 1980 and 2010 to acquire technology, build supply chains, and upgrade industrial capabilities. The West can apply the same model in reverse — and it is the only model that ensures technology transfer, supply-chain access, and reciprocal benefits.

Such a framework would:

• support Western employment,
• anchor supply chains locally,
• facilitate technology transfer,
• reduce external vulnerabilities.

2. Systematically rebuild Western supply chains for critical materials — with a rational energy policy

Reconstructing supply chains for critical materials is not optional; it is existential. But it will be dirty, energy-intensive, and politically contentious — just as China’s industrial rise was.

This requires abandoning energy policies that artificially raise production costs. The EU’s current climate regulatory framework — unrealistic CO₂ targets, exclusion of nuclear energy, reliance on volatile renewables without baseload support — has made European electricity up to four times more expensive than in the U.S. or China. Likewise, the ban on cheap Russian gas imports forced a switch to U.S. LNG at two to three times the cost, directly undermining the competitiveness of EU manufacturing.

If Europe wants smelters, battery plants, microchip facilities, or metal processing, it needs affordable, stable energy. That means a pragmatic reassessment of:

• nuclear power,
• long-term LNG contracts,
• and energy partnerships, including a realistic approach to Russian gas.

Critical-material industries cannot operate on fluctuating wind and solar output.

Rebuilding Western supply chains will require:

• coordinated EU–U.S. corporate partnerships,
• shared risk-spreading mechanisms,
• large-scale public financing, guarantees, and subsidies across the value chain.

This is not a green exercise. It is a strategic industrial survival mission.

China spent 20–30 years building similar capabilities; the West must replicate that effort.

3. The EU must abandon its self-inflicted distractions and refocus on development and industry

Europe must radically reprioritize. It must suspend political projects that sap resources and weaken competitiveness, including:

• ideological climate targets detached from economic reality,
• unlimited commitments to Ukraine without a strategic endgame,
• a militarization agenda focused on purchasing U.S. weapons rather than building European capabilities,
• regulatory obsessions (GDPR rigidity, packaging rules, micro-regulation of production).

Instead, the EU must channel all available political, financial, and intellectual capital into an industrial renaissance.

This requires:

• a major EU-level budget for industrial policy,
• trillions in research, innovation, and workforce development,
• investment incentives on a scale comparable to China or the U.S. IRA,
• and most critically: cheap, abundant energy as the foundation for any industrial revival.

Europe does not need more EU in the current ideological sense — it needs a different EU, one focused on production, competitiveness, and prosperity.

Conclusion

China’s rise is not a temporary shock but a structural transformation. The West cannot stop it with tariffs or diplomatic pressure. But it can rebuild its own industrial base by combining fair market-access rules, strategic investment in supply chains, and a radical refocusing of EU priorities toward competitiveness rather than ideology.

If Europe and the U.S. act decisively, they can remain industrial powers. If they continue on the current path, they will become consumers of Chinese goods, dependent on Chinese technology, and irrelevant as industrial nations.

This is the choice — and the window for action is rapidly closing.