China and the United States have increasingly weaponised their economic policy through industrial strategies, tariffs, sanctions, and export restrictions on essential inputs such as rare earth metals.  The EU has been caught in the middle of the economic war, its response being typically ambivalent and ineffective.

The EU's trade deficit with China exploded to about €400 billion in 2025, as Chinese exports were redirected into the bloc from the USA because of Trump's tariffs.  This is not because the EU is uncompetitive worldwide: the EU holds a strong trade surplus of €164.6 billion with the rest of the world.

China's overall trade surplus surged to €1.2 trillion in 2025. Over the past 20 years, China has seen its trade more than quadruple, with its exports almost 40% higher than its imports in 2024, compared to around 15% two decades ago.   Ngozi Okonjo-Iweala, the director-general of the World Trade Organization (WTO), has said China should rebalance its economy away from export-led growth, warning that China's trade surplus is "not sustainable".

China is quietly grabbing market share around the globe despite tariffs and trade curbs. Thanks to the "Made in China 2025" programme launched in 2015, the USA and EU are now feeling the full force of the latest "China shock", increasingly known as "China shock 2.0."

The first occurred after 2008, when southern European economies, heavily dependent on their textiles, clothing and footwear sectors, began to face intense competition from cheaper Chinese imports at home and in world markets. As the euro revalued against the renminbi, these countries' trade deficits with China exploded.

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Now, the brunt of Chinese competition in cars, machinery, and green technology is being felt in France, Germany, Italy, the Benelux, and Austria.  Chinese industrial policy, with heavy subsidies, has already nearly destroyed the EU solar panel industry, which 15 years ago dominated world markets. The same scenario is playing out in electric cars and other green industries.

Price changes in the EU and China have diverged sharply.  Chinese over-investment in manufacturing has led to overcapacity and the bursting of its housing bubble. As a result, China has entered a prolonged deflationary phase. Rather than strengthening domestic demand to stimulate growth, it has relied on exports, especially in green industries.  By contrast, energy and food price shocks have battered the EU in the wake of Russia's invasion of Ukraine.

Following the devaluation of the dollar, the renminbi devalued by about 10 per cent against the euro in 2025, whereas economic logic would have dictated that the renminbi should revalue against the euro, given China's huge and rising trade surplus. Chinese exporters are therefore enjoying a decisive price advantage. Europe is risking losing its industry to China.

Xi's Communist Party has been trying to clamp down on excessive price competition in the domestic market   ̶   what economists term "anti-involution."   Because China is failing to boost consumption at home, it is basically making way more stuff than it can sell in the domestic market.  So, a lot of that is being pushed to Europe, to the United States, and to other parts of the world.

Our National Statistics Office recently reported that trade between Malta and China has been growing exponentially.  In 2025 alone, it was higher than the total for the last 10 years.  Yet, while Malta's imports from China doubled to €390.4m over the past decade, our exports have fallen from a meagre €34.6m in 2015 to €27.9m last year.    

China's expansion in EVs, AI, batteries, biotechnology, renewable energy, robotics, semi-conductors and other future technologies tells the story.  Last March alone, Chinese exports of EVs and hybrids jumped a record 140% year-on-year to 349,000 units. BYD   ̶   the world's biggest EV company   ̶   accounted for a third of the increase.

The initial view that EVs were an anomaly has since been invalidated by the "DeepSeek shock," which disrupted the artificial intelligence world, and by a number of other startup successes, from Horizon Robotics to autonomous vehicle shop Qcraft.  China-made consumer goods are becoming ubiquitous in the West. 

What's unprecedented are not the absolute trade figures, but how big China's surplus is relative to the world economy.  Thus, China's trade surplus in manufactured goods is a larger share of world GDP than any country has ever captured in the past.  I am not saying that this trade surplus is necessarily bad for the the world or Malta.  China isn't "stealing" from other countries when it sells more than it buys.  Rather, China is subsidizing the rest of us by selling us cheap goods.

Moreover, because the balance of payments always balances, the counterpart of China selling more goods than it buys is China purchasing more overseas assets than it sells. In fact, China buys an enormous quantity of US Treasury bills and other safe assets that pay low interest rates - and helps keep those rates low.

However, China's soaring trade surplus creates three major problems.  First, China's surging exports are economically and socially disruptive. The previous "China shock" eliminated millions of jobs all over the world, with job losses concentrated in a relatively limited number of industries.  Most of the workers involved weren't able to find alternative jobs.

The second problem is that the trade surplus is harmful to China's trading partners, degrading their domestic capacity in industries crucial to national security.  This risk has amplified beyond what it was some 30 years ago. As the political scientists Abraham Newman and Henry Farrell have argued, governments that have control over economic "chokepoints" - crucial nodes in the world production system - can and do use that control to throttle, or threaten to throttle, geopolitical rivals.

The massive Chinese trade surpluses threaten to give the Chinese government control of multiple chokepoints. For example, China recently used its dominance of rare earth production and processing to put the screws on the United States, Japan, and the EU amid trade disputes. In one dispute between the Dutch government and China over unauthorised technology transfer, China threatened to disrupt the entire EU automotive industry by withholding critical supplies of semiconductor chips.

Third, there is the risk that China will secure a long-term advantage in the industries of the future. The self-reinforcing nature of advanced technology implies a "winner-take-all" dynamic: once a cluster of industries takes off; it often becomes impossible for another set of companies to catch up and compete with it. This explains why the European digital industry was never able to successfully compete with Silicon Valley:  it started too late and the EU never sheltered it from American competition.  The same dynamic may take place with the EU vis-a-vis China.

The EU needs stronger defences against unfair Chinese competition. A revaluation of the Chinese currency by between 20-30 per cent against the euro would go a considerable way.  If that cannot be achieved, the EU should consider imposing additional general tariffs of up to 20 per cent on imports from China.

Undoubtedly, China would retaliate with tariffs on EU exports or export restrictions on essential inputs such as rare earth metals.  But the European Central Bank (ECB) could respond by lowering interest rates.  While the ECB warns that "import tariffs imposed by other countries tend to lower euro area inflation and weaken growth," it also says that "the sectors most exposed are also the most responsive to interest rate change energy and food price shocks."   In other words, monetary policy can help offset disinflationary pressures and support activity.

The EU badly lacks a successful industrial policy to avoid losing its industry.  A minimum viable production can only be maintained or created together with reliable allies such as Canada and the Mercosur bloc. Tariff income from imports of Chinese electric cars should be used to support the transition of the EU car industry.  EU import tariffs on Chinese solar panels should be introduced and used to fund R&D and to establish production in the EU for the next generation of solar panels.

Lest some other economists think that I am advocating a mercantilist policy, I would accompany the tariffs with a set of strong non-tariff measures and initiatives.  These would include stronger penalties for IPR violations; redress mechanisms for firms that feel subject to forced technology transfer; and changes in Chinese laws and policies to make R&D subsidies WTO compatible.

The USA and the EU should offer China some incentives, such as greater integration into global economic institutions, for example by inviting it to become a member of the Paris Club and giving it a greater weight in the IMF and World Bank.  As it is, China's say in these institutions is far below what any reasonable assessment of its role in the world economy would dictate.

Other approaches include working with China at the technical level to convince its government that the policy of huge trade surpluses is counterproductive.  Research by the Rhodim Group and the Atlantic Council shows that, as export dependence deepens, external demand swings hit harder.  This is partly because, as domestic stimulus yields diminishing returns, each round adds more debt for less real activity.  The outcome is what one may call "a feedback loop": weak domestic drag forces China to rely on exports, while export‑led growth locks the economy further into a vulnerable path.

Malta's trade with China is miniscule on the world stage, but we could still play a modest role in leveraging our friendship with that country to promote a better understanding of the role of mutually beneficial international trade in the economic development of both the EU and China.  Our Foreign Minister could pay some attention to this matter.

Frans Camilleri is an economist. He studied at Oxford and University of East Anglia, is a former corporate head at Air Malta, and has served on various public and private boards.