Shi Kang Photo: Courtesy of Shi Kang

The EU has set October as a key juncture for assessing progress in its economic and trade talks with China. While keeping dialogue open, the EU has amplified the "China shock 2.0" narrative, blaming Chinese exports for its trade deficit and domestic deindustrialization and signaling possible protectionist measures.

October will test the effectiveness of China-EU engagement, but could also introduce fresh uncertainty over the direction of bilateral economic relations. Against this backdrop, both sides need to move beyond zero-sum thinking, take an objective view of trade realities, manage their differences and preserve the foundations of economic cooperation.

The assessment carries dual significance. First, it will show whether previous rounds of talks have brought the two sides closer to common ground on new energy, trade barriers and industrial rules. Second, it could bring competing interests within the bloc to the fore. Under pressure from certain industry groups and political sentiment, Brussels may use the results to justify further trade restrictions.

However, China and the EU remain deeply intertwined economically, and a complete decoupling would not serve Europe's interests. Even if fresh frictions emerge in October, they are unlikely to fundamentally alter the broader pattern of bilateral economic ties. Instead, negotiations are likely to continue alongside trade friction, with competition becoming more pronounced but channels for dialogue remaining open.

The China-EU trade imbalance cannot simply be attributed to rising Chinese exports. It needs to be understood in the broader context of macroeconomic conditions and the global division of industrial production. At its core, Europe's trade deficit with China reflects both strong European demand and China's capacity to supply high-quality products.

China is steadily evolving from a major manufacturing country into a manufacturing powerhouse. For many overseas buyers, price is no longer the sole consideration. In many product categories, China offers highly competitive products, and in some cases, is among the few countries capable of reliably meeting required standards.

Some European politicians hope a stronger yuan will weaken the competitiveness of Chinese products, but such an approach would achieve little. China's industrial competitiveness rests on the breadth of its industrial supply chains, continuous technological advances and supply chain stability - advantages that cannot be offset by exchange-rate adjustments alone. Ultimately, trade balances reflect the interplay of savings and investment patterns, domestic demand and the structure of global supply chains, rather than the trade policies of any single country.

Europe's savings rates, domestic demand and cross-border industrial specialization all directly affect bilateral trade figures. Yet many voices in the European policy debate deliberately sidestep the region's own structural weaknesses. High energy costs constrain domestic manufacturing output, while the structure of consumer demand in certain sectors and the realities of globally distributed industrial supply chains are all oversimplified as a question of Europe's trade deficit with China. Treating that deficit alone as a measure of fairness in bilateral trade reflects a fundamental misunderstanding of the underlying issues and risks prompting targeted trade restrictions.

The "China shock 2.0" narrative reflects, at its core, a misreading by some in Europe of China's evolving manufacturing competitiveness. China's export strengths in new-energy vehicles, green equipment and advanced manufacturing are no longer driven by cost advantages alone. They stem from sustained research and development (R&D) investment, comprehensive industrial supply chains, economies of scale supported by its vast domestic market, and rising productivity.

If Europe continues to view China's industrial rise solely through the lens of "overcapacity" and "dumping," it risks two misjudgments. First, it would fail to recognize China's progress in industrial upgrading and overlook the benefits that market competition brings to the global green transition. Second, it could turn normal industrial competition into a confrontation between systems, politicizing commercial issues, disrupting normal business operations on both sides and hindering coordinated development across global green industries.

Protectionist measures such as tariffs and import restrictions cannot resolve Europe's industrial difficulties. Instead, they risk eroding its long-term competitiveness. Europe is facing deep-rooted structural challenges, such as high energy costs, insufficient investment in the real economy, sluggish productivity and a slow pace of green transition. Trade protection may offer temporary relief to domestic industries, but it does nothing to address the underlying problems.

Raising import barriers would drive up raw material and component costs for European businesses, squeeze their R&D budgets and weaken incentives to innovate. For European consumers, import restrictions would push up prices for goods such as new-energy products, adding to the cost of living. A more closed market would also weaken domestic companies' incentives to reform in the face of external competition, delaying industrial upgrading and ultimately undermining the global competitiveness of European industry.

Over the next one to two years, China-EU economic and trade relations are likely to see intensifying competition and persistent differences, but room for cooperation will remain. We must recognize that there are no fundamental conflicts between China and the EU, and that the best way to address trade imbalances is not to erect barriers but to engage in pragmatic negotiations.

Encouraging more Chinese companies to invest in Europe and making good use of China's capital and comprehensive industrial chains could help create local jobs, strengthen European businesses' innovation capabilities and global competitiveness, and help European products expand into international markets. Europe should be asking itself: What can we offer the world? And how must we change to win in global markets?

The author is a chair professor at the PBC School of Finance, Tsinghua University, and director of its Research Center for International Macro Policy.