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For years, Europe was told that the future of the car industry would be electric. European manufacturers were expected to adapt, invest billions, abandon technologies in which they had built a global competitive advantage and prepare for the end of the internal combustion engine. They did. The problem is that Europe pushed its automotive industry towards the battlefield on which China was already strongest.
Germany is now beginning to confront the consequences. On August 28, the parliamentary groups supporting Chancellor Friedrich Merz’s government called for stronger EU action against unfair international competition, including faster anti-dumping and anti-subsidy measures and local-content requirements for electric-vehicle incentives. The document did not explicitly name China, but German parliamentary sources left little doubt about its principal target: Chinese industrial overcapacity. German industry itself is pressing Merz to take a tougher position towards Beijing.
The change is significant. Few countries benefited more from economic integration with China than Germany. Its manufacturers sold cars, chemicals and machinery to a rapidly expanding Chinese middle class. Volkswagen became deeply embedded in the Chinese market. That model is collapsing. Germany’s trade deficit with China reached €89.3 billion in 2025. German exports to China have fallen sharply, while Chinese products increasingly compete with German ones both abroad and inside Europe. Volkswagen, meanwhile, is preparing another major restructuring amid falling Chinese sales and growing pressure from competitors, with potential factory closures and tens of thousands of job cuts under discussion. China has changed. It is no longer simply Europe’s factory or one of its most attractive export markets. It has become a technological and industrial competitor. And not one operating under remotely identical conditions.
The OECD found this year that Chinese industrial firms received, on average, between three and eight times more government support relative to revenue than companies located in OECD economies between 2005 and 2024. The European Commission reached a similarly important conclusion in its investigation into Chinese battery electric vehicles: the Chinese EV value chain benefited from unfair subsidies that threatened economic injury to European producers. That investigation eventually led Brussels to impose countervailing duties, including rates of 17% on BYD, 18.8% on Geely and 35.3% on SAIC. China did not conquer the electric-vehicle market by subsidies alone. Its companies innovated, achieved enormous scale, integrated battery supply chains and produced cars increasingly capable of competing on quality as well as price. Europe would learn nothing by denying that achievement. But it would learn even less by ignoring its own mistake. In 2023, the EU established a 100% reduction target for CO₂ emissions from new cars and vans from 2035. In practice, under the current legislation, that means new cars registered from that point must have zero tailpipe emissions. European manufacturers therefore faced an extraordinarily clear political signal: redirect investment away from the internal combustion engine and towards electrification.
The industrial consequences were entirely predictable. European manufacturers possessed decades of expertise, supply chains and competitive advantage in combustion-engine technology. China, by contrast, had spent years building dominance across the emerging EV ecosystem — from battery manufacturing and processing of critical materials to increasingly competitive electric vehicles. Europe forced its car industry to compete on China’s strongest battlefield before ensuring that European companies were equipped to win there. That was not inevitable decarbonisation. It was a political choice about the speed and technological direction of the transition.
Brussels has already begun retreating from its original rigidity. In 2025, manufacturers were allowed to calculate compliance with CO₂ targets over the 2025–2027 period rather than year by year. Then, in December, the Commission proposed replacing the 100% reduction requirement from 2035 with a 90% tailpipe-emissions target, allowing plug-in hybrids, range extenders and even combustion-engine vehicles using certain low-carbon fuels to retain a role after 2035.
The direction of travel is revealing. Flexibility is being introduced after manufacturers have already spent years reorganising investment around rules that Brussels itself now considers too rigid. Volkswagen’s problems cannot all be blamed on the European Union. The company has its own cost problem. Its management is considering a dramatic restructuring, and Chinese competition is only one factor alongside tariffs, weak demand and structural inefficiencies. Europe should resist the temptation to turn every badly performing manufacturer into a victim deserving permanent protection. But neither should regulatory policy be absolved. European carmakers were simultaneously asked to finance an expensive technological transition, comply with increasingly demanding environmental targets and compete against companies benefiting from an industrial ecosystem heavily supported by the Chinese state.
Brussels eventually responded with tariffs. By then, it was trying to protect European manufacturers from a competitive imbalance that its own industrial strategy had helped make more dangerous. The answer cannot simply be higher trade barriers. Europe needs reciprocity towards China, including anti-subsidy measures where distortions are demonstrated and local-content requirements where public money is being used to support strategic production. But it also needs a fundamentally different philosophy at home.
Climate objectives should define the destination, not dictate a single industrial route towards it. Technological neutrality matters. Nuclear-generated electricity, batteries, hybrids, e-fuels and other low-carbon technologies should compete according to their capacity to reduce emissions without destroying industrial capacity. Above all, Europe must stop confusing regulation with industrial policy. China first built supply chains, production capacity, technological expertise and scale. Europe first imposed targets and expected industry to build everything required to meet them afterwards.
Germany’s change of direction suggests that the consequences of that sequence are becoming impossible to ignore. The choice is not between surrendering to Chinese competition and closing Europe behind tariff walls. It is between an industrial policy designed around European strength and one that continues to impose ambitions without considering who will manufacture the technologies required to achieve them. Europe’s automotive crisis was not made exclusively in Beijing. Part of it was made in Brussels.