Germany drops its objections to EU industrial shield as China imports surge

A year ago, Germany was the loudest voice urging caution on the European Commission's Industrial Accelerator Act. Berlin worried about retaliation from Beijing. Today, with Volkswagen preparing to shut four factories and the far right surging in the polls, Chancellor Friedrich Merz is pressing the Commission to move faster. The change of heart in Europe's largest economy has transformed the politics of a proposal that could become the EU's primary defence against a wave of Chinese imports now hitting sectors Europe regards as essential to its future.

Berlin's reversal changes the calculation

When the Commission first put forward the Industrial Accelerator Act, Germany's government asked Brussels to consider whether third countries might retaliate. The phrasing was diplomatic, but the meaning was clear: Berlin did not want to provoke China. German industry had spent decades building supply chains and export markets that ran through the People's Republic. The car sector, in particular, sold millions of vehicles to Chinese buyers and sourced components from Chinese factories. Rocking that boat felt reckless.

That calculation has shifted. Volkswagen, the country's largest manufacturer, is now negotiating a cost-cutting programme that could eliminate 100,000 jobs and close four German plants, something unprecedented in the company's history. The crisis is not contained to one firm. Across the German automotive supply chain, companies are reporting falling orders, shrinking margins and mounting competition from Chinese electric vehicle makers that can undercut on price by 20 to 30 per cent. The economic distress is feeding political instability. The Alternative for Germany party, which has capitalised on voter anger over deindustrialisation, is polling at record levels. Merz, who took office promising economic competence, cannot afford to look passive.

Sebastian Schaffer, Volkswagen's top lobbyist in Brussels, made the industry's position plain at a European Parliament hearing on Wednesday. "Any company that accepts European taxpayers' money should do something to save European taxpayers' jobs," he said. It was a striking statement from a company that, until recently, preferred to lobby against trade barriers rather than for them.

The second shock targets Europe's industrial core

Industry officials and economists have started describing the current moment as a "second China shock." The first came after China joined the World Trade Organization in 2001. That wave devastated lower-tech, labour-intensive manufacturing across Europe: textiles, furniture, footwear, toys, consumer electronics. The damage was real but concentrated. It hit southern and eastern member states hardest, while northern economies, particularly Germany, adapted by moving up the value chain or outsourcing production to China themselves.

The second shock is different in kind. The sectors now under pressure are those Europe has identified as central to its economic and technological future: electric vehicles, batteries, steel, chemicals, wind turbines. These are industries that the EU has spent years designating as strategic, subsidising through frameworks like the Green Deal Industrial Plan, and protecting through existing trade defence instruments. Beijing's subsidies to its own producers, combined with massive overcapacity in sectors from solar panels to EVs, mean that Chinese firms can sell into the European market at prices European competitors struggle to match.

The trade figures tell the story. According to Eurostat, the value of vehicle and automotive part imports from China to the EU rose from €14.5 billion in the first half of 2025 to more than €20 billion in the same period of 2026. The EU's overall trade deficit with China now runs at roughly €1 billion per day. Those numbers have concentrated minds in capitals that were previously content to treat the imbalance as an acceptable cost of doing business with a major trading partner.

What the Industrial Accelerator Act would do

The IAA, as proposed by the Commission, is designed to operate on two fronts. The first is defensive: it would restrict Chinese investment in sectors the EU deems strategic, including electric vehicles, raw materials and solar panels. The logic is straightforward. Chinese firms, backed by state subsidies, have acquired European assets or set up local production to circumvent tariffs and gain access to EU public procurement contracts. The IAA would give the Commission new powers to screen and block such investments on economic security grounds.

The second front is offensive. The act would introduce Made-in-EU requirements for public procurement, effectively excluding Chinese suppliers from bidding on government contracts in designated sectors. For member states that have relied on cheap Chinese equipment to meet green energy targets, this is an uncomfortable proposition. Solar panels and wind turbine components sourced from China have been significantly cheaper than European alternatives. The IAA asks governments to pay more in the short term to protect domestic supply chains in the long term.

The proposal also aligns with the Commission's broader strategy of reducing strategic dependencies, particularly on critical raw materials and clean technology supply chains. But the IAA goes further than previous measures, including the Foreign Subsidies Regulation and the existing trade defence instruments, by targeting the structure of investment and procurement rather than simply imposing tariffs on specific products.

Beijing objects, but the political wind has turned

China has made its opposition to the IAA clear. Beijing views the proposal as discriminatory and has warned that it violates WTO principles. The objections carry weight in some European capitals, where there is genuine concern about the risk of retaliatory measures against European firms operating in China. Companies like BMW, BASF and Volkswagen itself still have substantial Chinese operations, and a trade war would hit their revenues.

But the political momentum in Brussels has shifted. Anna Cavazzini, the Green MEP co-leading the file, told the hearing that "urgency has increased" and described the IAA as a "cornerstone" of the EU's response to Chinese trade practices. "There's a lot of alignment that we need to strengthen the Commission proposal," she said. The phrasing is significant. The Greens have traditionally been wary of industrial policy that favours large incumbents, but the threat to European clean technology manufacturing has brought them onside.

President Ursula von der Leyen struck a characteristically careful balance last month, calling China "a key economic partner" and insisting that reducing reliance should come "without breaking ties." But she added that "being a partner does not mean accepting permanent imbalances" and warned that when dialogue fails, the EU must be "ready to make full use of our instruments." The language was calibrated, but the direction of travel was unmistakable.

Questions the IAA cannot answer

Sander Tordoir, chief economist at the Centre for European Reform, put the challenge bluntly. "The level of ambition is justified. If it's Europe's main tool to respond to the second China shock, it's essential to make it count," he told MEPs. "Do it right or don't do it at all." The implication was clear: a half-measure would be worse than no measure, because it would signal weakness without delivering protection.

The problem is that the IAA, even if fully implemented, addresses only part of the competitive gap. Chinese EV makers are not winning market share solely through subsidies. They have achieved genuine cost advantages in battery production, vertical integration and software development. European manufacturers have been slow to adapt, and the regulatory burden of EU emissions targets, safety standards and data protection rules adds costs that Chinese competitors do not face at home. No procurement rule can close that gap.

There is also the question of enforcement. The EU's track record on implementing industrial policy is patchy. The Green Deal Industrial Plan announced with fanfare has delivered less than promised. The Foreign Subsidies Regulation, adopted in 2022, has been slow to produce results. Member states disagree on how far to go, and the Commission has sometimes lacked the staff and expertise to enforce its own rules. The IAA will require significant administrative capacity to function as intended.

Then there is the strategic dilemma at the heart of the debate. Europe wants to reduce its dependence on Chinese supply chains while simultaneously accelerating the green transition. Those two objectives conflict. Chinese solar panels, batteries and critical minerals are cheaper and more readily available than European alternatives. Restricting access to them will raise the cost of decarbonisation, a trade-off that few policymakers have been willing to acknowledge in public.

A deadline that concentrates minds

Berlin and other European capitals are now pressing the Commission to propose concrete measures by next month. That timeline is ambitious, and it reflects the political pressure building across the continent. The German car industry's crisis is not abstract. Plant closures and mass layoffs have immediate electoral consequences, and the rise of the far right has made mainstream parties acutely aware that voters are running out of patience with promises of future competitiveness.

The Parliament is likely to back a strengthened version of the Commission's text. The real negotiations will happen in the Council, where member states with different industrial profiles and different levels of exposure to Chinese trade will haggle over the scope of investment screening and the stringency of procurement rules. France, which has long favoured stronger industrial policy, will push for the toughest provisions. Smaller member states that rely on Chinese components for their energy transitions will resist.

What is clear is that the political window that existed a year ago, when Germany could argue for caution, has closed. The question is no longer whether the EU will act, but how far it is willing to go, and whether the measures it adopts will be sufficient to alter the competitive dynamics that are now reshaping European industry. Tordoir's warning lingers: do it right, or do not bother.