What the EU Should Learn from China’s Industrial Policy

China’s industrial policy has become one of the most debated topics in global economic governance, generating reactions ranging from outright admiration to punitive tariffs. For the European Union, navigating this debate is not merely academic – it has direct consequences for the bloc’s industrial competitiveness, its strategic autonomy and its capacity to manage an increasingly fractured global trading system. Below are some takeaways worth considering for the EU.The first and most important lesson for European policymakers is epistemic: what we think we know about China’s industrial policy is largely incomplete. The visible part – subsidies and state support directed at cutting-edge sectors like electric vehicles, semiconductors and green hydrogen – captures the imagination and drives the political response. It is the narrative of a state masterfully picking winners and deploying capital to leapfrog technological stages. But Garcia Herrero and Krystyanczuk’s analysis (2024) reveals this to be the tip of the iceberg. Beneath the surface lies the more consequential portion of Chinese state support: subsidies flowing to mature, declining and inefficient sectors, the bulk of which are channelled to state-owned enterprises (SOEs). This is where the structural inefficiencies of China’s model are concentrated, and where the real fiscal cost accumulates. For the EU, this distinction matters enormously. When Brussels frames its response to Chinese competition primarily around high-tech sectors, it risks misdiagnosing the problem. The competitive threat from Chinese electric vehicles, for instance, is real – but it is partly a symptom of an economy using industrial policy to compensate for the distortions created by state capitalism itself, rather than evidence of a superior model of economic organisation.This brings us to the second lesson: context is everything. China’s industrial policy does not operate in a market economy. It operates within a model of state capitalism in which SOEs enjoy structural advantages – preferential access to credit, land, regulatory forbearance and implicit government guarantees – that systematically disadvantage private firms. In this environment, industrial policy directed at private companies in new sectors serves a paradoxical function: it is an attempt to level a playing field that the state itself has tilted. Garcia Herrero and Schindowski’s framing (2024) is instructive here. China’s support for private champions in sectors like renewables or consumer electronics is, in a sense, a second-best substitute for a genuine transition to a market economy – politically unfeasible given the centrality of the Communist Party’s control over SOEs, but economically necessary to generate dynamism. The EU, operating within a genuine single market, faces none of these structural constraints. European industrial policy does not need to compensate for state capitalism because the EU is not a state capitalist economy. This means that importing Chinese-style industrial policy would not only be unnecessary but potentially counterproductive, distorting a market structure that is already broadly functional. The EU’s lesson here is to resist the temptation of policy mimicry. When European leaders call for an “industrial policy response” to China, they should be clear about what problem they are actually solving. If the answer is geopolitical resilience and strategic autonomy in critical supply chains, the toolkit looks different from what China employs. Targeted public investment, regulatory coordination and demand-side instruments within a competitive market framework are likely to be far more effective than attempting to replicate a model designed to paper over the cracks of authoritarian state capitalism.The third lesson concerns what China has genuinely done well. Garcia Herrero and Schindowski (2024) consistently highlight that the real driver of China’s ascent up the industrial and technological ladder is not invention, but commercialisation. China has demonstrated a remarkable capacity to take technologies developed elsewhere – or in domestic laboratories – and rapidly scale them into globally competitive industries. The combination of massive domestic market size, supply chain integration, patient state financing and competitive domestic rivalry among private firms has produced a commercialisation machine with few historical parallels. This is where the EU has the most to learn in a constructive sense. Europe remains a strong generator of fundamental research and technological innovation, yet its record on commercialisation is weak. The continent consistently produces ideas that are scaled and monetised elsewhere, particularly in the United States. If China’s industrial policy offers any positive model for Europe, it is in the architecture of bridging research and market – through instruments such as public procurement, pilot programmes and co-investment mechanisms that de-risk the critical valley of death between laboratory and factory floor. However, Europe must also absorb the cautionary dimension of this lesson. China’s commercialisation-heavy model is now facing mounting headwinds. The fiscal cost of sustaining it is rising steeply. Resources absorbed by industrial policy come at the direct expense of household consumption – an imbalance that has left the Chinese economy structurally dependent on external demand and dangerously under-resilient to shocks. The EU should not replicate a model that sacrifices the rebalancing of domestic demand at the altar of industrial ambition.The fourth and perhaps most urgent lesson is geopolitical. Whether China’s industrial policy continues to succeed will depend substantially on the response of the US. Garcia Herrero and Schindowski (2024) note that Washington’s reaction has, until recently, been more measured than political rhetoric suggested – export controls have been selectively and inconsistently applied. But this could change rapidly and the implications for Europe would be profound. The EU sits in a uniquely exposed position. It faces competitive pressure from China in sectors central to its green and digital transitions, while simultaneously depending on Washington’s security umbrella and, until recently, its technological leadership. If the US escalates its technological decoupling from China, European firms will be forced to choose sides in ways that are commercially costly. If, on the other hand, the US accommodates Chinese technological ascent, Europe risks being squeezed between two industrial superpowers with more aggressive state support frameworks than its own. The appropriate European response is neither to replicate Chinese industrial policy nor to subordinate its approach to Washington’s trade politics. Instead, the EU should use this moment to build genuine strategic clarity: identifying the sectors in which European industrial capability is truly non-negotiable for security and prosperity, and concentrating resources there, rather than dispersing them across a sprawling industrial agenda that cannot realistically be fully funded.Finally, there is a macroeconomic warning embedded in Garcia Herrero’s analysis that European policymakers would be unwise to ignore (2021). China’s continued push up the industrial and technological ladder, if unaccompanied by a meaningful shift towards domestic consumption-led growth, will deepen global imbalances. In the event of a major external shock – and the current conflict in Iran illustrates how rapidly geopolitical shocks can materialise – a global economy already strained by overcapacity and suppressed demand could face severe disruption. For the EU, this is not a peripheral concern. Europe’s own growth model, increasingly reliant on external demand and investment-led recovery, is not immune to the consequences of a global demand shortfall. Understanding China’s industrial policy in its full complexity – its dark subsidies, its structural inefficiencies, its commercialisation strengths and its rebalancing failures – is therefore not an academic exercise for European think tanks. It is the essential foundation for a coherent EU economic strategy in an era of intensifying geopolitical and economic uncertainty. The EU does not need to become China. But it does need to understand it, clearly and completely. *This is a reprint. This article was also published in the journal Intereconomics.