The European Commission is pressing China for progress by next month to address the widening EU-China trade imbalance, and raising the possibility of new protectionist trade policy. The deadline raises a question: how should China and its trading partners address perceived economic imbalances while sharing the benefits of Chinese industrial competitiveness?

China’s merchandise trade surplus approached US$1.2 trillion last year even as other exporting economies press for controls. “Overcapacity” is accepted as the blanket explanation for China’s industrial success, with government support leading to a production glut.

But this framing obscures more than it clarifies. China’s success is multifaceted, given the vast scale of its ecosystem, intense domestic competition and dense supplier networks. An effective response must distinguish between genuine imbalances and the productive advantages that offer opportunities for cooperation.

China’s car industry showcases the strength of its competitive edge. The International Energy Agency found that while making an electric car costs 30 per cent less in China than in advanced economies, only about one-third of that difference is due to batteries. Furthermore, the gap for conventional vehicles is similar. China’s advantage is embedded in its manufacturing system rather than being the product of government subsidies.

Research by Rhodium Group makes the point clearly. It estimates that Chinese carmaker BYD enjoys a cost advantage of about US$4,700 per vehicle over Tesla’s Chinese operations. Direct grants account for only around US$292; the bulk of the advantage is due to vertical integration and lower research, administrative and supplier costs. While industrial policy helped develop China’s industrial ecosystem, subsidies and government support do not explain the resulting cost structure.

China’s experience in textile production offers a precedent. Even as wages rose and some production moved to Vietnam, Bangladesh and elsewhere, China retained a major presence – over 30 per cent of global textile exports – because of its supplier clusters, infrastructure, skills and capacity to upgrade production.

That does not mean China should stay the course indefinitely. Chinese policymakers have been discussing consumption-led rebalancing for two decades, and policy commitment has become more explicit. The 2025 consumption action plan addressed wages, pensions, healthcare, childcare, paid leave and benefits for migrant and flexible workers. The government subsequently adopted China’s first five-year plan devoted specifically to consumption, targeting retail sales of about 60 trillion yuan (US$8.96 trillion) by 2030.

That does not mean China should stay the course indefinitely. Chinese policymakers have been discussing consumption-led rebalancing for two decades, and policy commitment has become more explicit. The 2025 consumption action plan addressed wages, pensions, healthcare, childcare, paid leave and benefits for migrant and flexible workers. The government subsequently adopted China’s first five-year plan devoted specifically to consumption, targeting retail sales of about 60 trillion yuan (US$8.96 trillion) by 2030. We’ve seen incremental results. While household consumption still only accounts for around 40 per cent of the gross domestic product, Beijing is moving in the right direction. Last year, per capita, disposable income rose by 5 per cent and consumption expenditure by 4.4 per cent.

Still, there is quite a bit of work to be done. China’s household savings rate reached an estimated 32.4 per cent in the first quarter of this year, compared with a pre-pandemic average of 29.6 per cent.

The government is already directing more fiscal resources towards pensions, healthcare, unemployment insurance, childcare and portable benefits for migrant workers as part of the domestic transformation. Greater household security and wealth would reduce precautionary savings and support sustained consumption. Similarly, boosting an openness to foreign goods and services could translate into a stronger demand for imports.

The government is already directing more fiscal resources towards pensions, healthcare, unemployment insurance, childcare and portable benefits for migrant workers as part of the domestic transformation. Greater household security and wealth would reduce precautionary savings and support sustained consumption. Similarly, boosting an openness to foreign goods and services could translate into a stronger demand for imports.

Addressing the sensitive topic of exchange-rate flexibility could support this adjustment; any resulting yuan appreciation would further increase Chinese households’ purchasing power abroad.

But any adjustment must also occur internationally. I previously wrote about the trend of Chinese companies moving from producing “in China for the world” towards producing “in the world, for the world”. The competitive edge of Chinese enterprise can help support overseas industry through the same system of joint ventures, technology and local-supplier development programmes that took China into global markets.

Chinese process knowledge combined with employment and industrial capacity in Europe and other markets would create meaningful local value, rather than the limited gains of merely assembling imported kits, which is what would happen if the doors to cooperation on win-win trade and investment were closed.

China’s trading partners should reserve permanent protection for genuinely strategic vulnerabilities. Where import surges cause demonstrable injury, temporary and reviewable safeguards may provide time for industrial adjustment. Subsidy transparency, common environmental and safety standards, stronger competition rules and negotiated market-opening commitments would address distortions more precisely than an open-ended campaign against “overcapacity”.

China is more than open to the idea – it has removed tariffs on imports from 53 African countries. Cooperation requires a rebuilding of trust. China should stick to strengthening domestic demand and encouraging overseas investment. Its trading partners should also widen the opportunities for cooperation.

Restrictions on stopping China buying advanced chipmaking machines from Dutch tech giant ASML are looking like a positively archaic holdover. Governments should instead be working towards easing their technology and investment restrictions, using clearly defined security concerns and verifiable safeguards to guide those decisions. Such openings would create opportunities for businesses on both sides.