China Played the Game, It Won. Now Europe Wants to Change the Rules

For decades, the West told China that free trade, capitalism and globalisation were the road to prosperity and political transformation. China listened to the first part—and rejected the second.

Now, 25 years after China joined the World Trade Organization, some of the same Western policymakers who championed its integration into the global economy are warning that China is destroying the very trading system they helped build.

Pascal Lamy, the former European trade commissioner and former director-general of the WTO, has now put the argument bluntly:

“China is in the process of killing the system of open global trade.”

His diagnosis deserves to be taken seriously.

But so does the history.

Because the question Europe now faces is not simply:

“Is China cheating?”

It is also:

“Did the West misunderstand what it was doing when it invited China into the system?”

And perhaps the most uncomfortable question of all:

“If China used the rules of globalisation to become an industrial superpower, why is the answer now to change the rules?”

The original bet was never purely economic

China's accession to the WTO was approved in November 2001 and took effect the following month.

It was presented as an enormous economic event.

But Washington's expectations went far beyond tariffs and trade.

The Clinton administration explicitly argued that integrating China into the global economy would encourage political and economic reform.

In 2000, Bill Clinton argued that WTO membership would deepen economic freedom inside China and that people gaining greater economic independence would eventually demand greater political participation. He described WTO accession as a mechanism that could help move China toward political reform.

The broader American theory was straightforward:

Bring China into capitalism, and capitalism will eventually bring China toward liberal democracy.

That was not a conspiracy theory invented decades later.

It was part of the public argument for engagement.

The Council on Foreign Relations now describes the same historical assumption: American policymakers believed WTO membership would accelerate China's market reforms and encourage it to participate more deeply in the international rules-based system.

The gamble was enormous.

And China did something the architects of the gamble did not fully anticipate.

It became extremely good at capitalism without becoming the liberal democracy they expected.

China accepted the market without accepting the political destination

This is the central historical irony.

The West assumed economic integration would eventually produce political convergence.

Beijing instead pursued a different model:

markets without political liberalisation; globalisation without Westernisation; capitalism without surrendering Communist Party control.

China opened.

It attracted foreign investment.

It joined global supply chains.

It became the factory of the world.

It accumulated technology.

It learned from multinational corporations.

It built infrastructure.

It developed domestic champions.

It moved from cheap textiles and toys into steel, machinery, chemicals, telecommunications, solar panels, batteries, electric vehicles, shipbuilding and increasingly sophisticated technologies.

And it did all of this while retaining a political system fundamentally different from the one Washington expected.

That is the real failure of the original Western bet.

Not that China joined the WTO.

But that the West assumed economic integration would necessarily produce political convergence.

It didn't.

And then China did something even more inconvenient

It became competitive.

Very competitive.

The OECD's new industrial-subsidy database provides ammunition for Lamy's argument.

Between 2005 and 2024, Chinese industrial firms received, on average, three to eight times more government support relative to revenue than firms based in OECD economies, according to the OECD's MAGIC database.

The database covers 525 major manufacturing groups across 15 industrial sectors.

The OECD estimates that subsidies across those sectors reached $108 billion in 2024.

More significantly, OECD analysis finds that subsidies can explain roughly 22% of global market-share gains among expanding firms, while for Chinese firms the figure rises to almost 60%.

That doesn't mean every Chinese product is artificially cheap.

It doesn't mean Chinese engineers are incapable of innovation.

It doesn't mean Chinese companies would collapse without government support.

It does mean the Chinese state has played a substantial role in shaping the competitive environment.

And that is a legitimate trade-policy problem.

The IMF independently estimates that China's industrial-policy support—including cash subsidies, tax benefits, subsidised credit and subsidised land—had an equivalent fiscal cost of about 4% of GDP per year.

So dismissing every Western complaint about Chinese industrial policy as racism or protectionism would be intellectually lazy.

There is a real issue here.

But that still doesn't absolve the West.

Because Europe helped create the imbalance

This is where the historical argument becomes uncomfortable.

Europe didn't wake up one morning and discover that China had become an industrial powerhouse.

European companies actively moved production to China.

They built factories there.

They transferred technology.

They trained workers.

They developed supply chains.

They outsourced components.

They pursued lower production costs.

European consumers bought the cheaper goods.

European corporations benefited from higher margins and access to China's enormous market.

Investors benefited.

Retailers benefited.

Consumers benefited.

And governments celebrated globalisation.

Until the factory moved too close to home.

That doesn't mean China bears no responsibility for its industrial policies.

It means Europe cannot pretend it was merely an innocent spectator watching Chinese industrialisation happen to it.

European capital participated in the process.

The numbers are brutal

The European Union imported €559.4 billion worth of goods from China in 2025 while exporting €199.6 billion.

That produced a goods trade deficit of approximately €359.8 billion.

The deficit is not imaginary.

It is enormous.

And imports have risen dramatically over the longer period: compared with 2015, EU imports from China were up 89%, while exports rose only 37%.

Lamy describes the deficit as nearly €1 billion every day.

The European Commission's trade officials are increasingly alarmed.

In October 2026, Commission officials warned that Chinese imports were rising sharply across machinery, textiles, metals and chemicals, while the EU had already opened dozens of trade-defence investigations.

So yes, Europe has a problem.

But what exactly is the problem?

China's success—or Europe's inability to compete?

The answer is both.

The restaurant analogy is actually useful

Imagine a street with one restaurant.

It has been there for decades.

It knows the customers.

It has established suppliers.

It has a comfortable profit margin.

Then another restaurant opens across the road.

It has cheaper prices.

Faster service.

Better logistics.

More efficient kitchens.

And customers start crossing the road.

The old restaurant has two choices.

Improve.

Or complain.

Now imagine the old restaurant owns relationships with the local authorities.

Instead of improving its food, it begins demanding inspections of the competitor.

“Check their hygiene.”

“Check their licence.”

“Check their suppliers.”

“Check their building.”

“Check their workers.”

Some of those complaints may be legitimate.

The competitor might actually be violating health regulations.

But that doesn't change the uncomfortable fact that the old restaurant has a competitive problem.

That is increasingly the dilemma facing Europe.

And this is where the comparison between China and other export powers becomes important.

When Germany exports cars, nobody declares the trading system dead

Germany became rich by exporting industrial products.

Mercedes-Benz.

BMW.

Volkswagen.

Machine tools.

Chemicals.

Industrial equipment.

When Germany ran huge trade surpluses, the world generally described this as German competitiveness.

Japan built an export machine around Toyota, Honda, Sony, Mitsubishi and shipbuilders.

South Korea built Samsung, Hyundai, LG and major shipyards.

The United States became dominant in aircraft, software, semiconductors, pharmaceuticals and advanced machinery.

Nobody said:

“America is killing open global trade because Boeing sells too many planes.”

Nobody said:

“Germany is destroying capitalism because Volkswagen sells cars everywhere.”

Nobody said:

“South Korea is threatening the rules-based order because Samsung dominates memory chips.”

Export success has historically been treated as evidence of competitiveness.

So why does China's success trigger a fundamentally different reaction?

The answer is not simply racism.

There are genuine differences in China's economic system.

But there is also something geopolitical happening:

China is no longer merely competing inside Western-created industries. It is becoming a leading producer across industries that Western economies once dominated.

That changes the psychological equation.

The real shock is not cheap toys

Cheap toys were never going to destroy European industrial power.

The real shock is that China moved up the value chain.

It is not simply selling clothes.

It is selling electric vehicles.

Not simply electronics assembly.

It is producing batteries.

Not simply low-cost consumer goods.

It is building ships.

High-speed rail.

Solar equipment.

Industrial machinery.

Telecommunications equipment.

Electric-grid infrastructure.

And increasingly sophisticated semiconductors and artificial-intelligence hardware.

That is what Lamy calls China's “industrial maximalism.”

The old theory of globalisation assumed comparative advantage would evolve.

A country would become good at textiles.

Then wages would rise.

Textile production would move elsewhere.

The country would climb the value chain.

That happened in Japan.

Then South Korea.

Then Taiwan.

Then parts of Southeast Asia.

But China became so large that it has been able to climb the value chain while retaining enormous capacity in lower-value industries.

That is the disruption.

China didn't merely join the factory floor

It became the factory floor.

And then it began building the machines used by the factory floor.

That distinction is crucial.

China's share of global manufacturing has risen enormously over the past two decades.

The OECD data underlying its industrial research illustrates China's extraordinary manufacturing weight across strategic sectors.

The consequence is a problem for traditional development economics.

What happens when one country becomes simultaneously dominant across multiple manufacturing ecosystems?

Steel.

Ships.

Solar.

Batteries.

Chemicals.

Machinery.

Vehicles.

Electronics.

It becomes increasingly difficult for competitors to find sectors to which production naturally migrates.

And that is exactly the structural problem Lamy is highlighting.

But Europe has another problem: it forgot industrial policy

Europe spent decades preaching market liberalisation.

Open markets.

Competition.

Low tariffs.

Rules.

Global supply chains.

Outsourcing.

Comparative advantage.

Consumers should get cheaper products.

Companies should manufacture wherever production is most efficient.

That model worked beautifully—until the political consequences became painful.

European consumers got cheaper goods.

European corporations got efficient supply chains.

But European industrial capacity also migrated.

Factories closed.

Industrial communities weakened.

Strategic dependencies grew.

And when geopolitical competition intensified, Europe discovered that efficiency and resilience are not the same thing.

A supply chain can be incredibly efficient while simultaneously making you vulnerable.

Then came COVID

The pandemic exposed this brutally.

Medical supplies.

Semiconductors.

Protective equipment.

Pharmaceutical inputs.

Shipping.

Energy.

Suddenly governments realised that “cheapest supplier wins” could become a national-security problem.

Then came Russia's invasion of Ukraine.

Europe discovered the risks of excessive energy dependence.

Then came the US-China technology confrontation.

Then semiconductor restrictions.

Then rare-earth controls.

Then electric vehicles.

Globalisation was no longer merely economics.

It became geopolitics.

And now Europe wants Plan B

This is precisely what makes Lamy's latest argument significant.

He isn't simply saying:

“China is bad.”

His argument is that Europe's existing trade-defence machinery was designed for a world that no longer exists.

The EU generally investigates individual products and individual forms of unfair competition.

China, according to Lamy's argument, operates through a much more systemic industrial strategy.

That creates an asymmetry.

A bureaucracy investigating one product at a time can struggle against a country pursuing industrial strategies across entire sectors.

The Franco-German proposal reported this week reflects the same anxiety.

France and Germany want the EU to develop a faster-response mechanism capable of countering severe economic distortions and, in extreme cases, restricting market access.

That is a profound change.

Especially for Germany.

For decades, Germany was among the world's strongest defenders of export-oriented globalisation.

Now Berlin is increasingly asking Brussels to protect European industry from Chinese competition.

And here is the irony

Europe is rediscovering industrial policy.

The United States already has.

China never abandoned it.

So the supposedly “free-market” Western world is now moving toward subsidies, domestic-content rules, strategic procurement, tariffs, export controls and supply-chain restrictions.

The language has changed.

“Industrial policy” has become “economic security.”

“Protectionism” becomes “strategic autonomy.”

“Subsidies” become “investment incentives.”

“Trade barriers” become “resilience.”

Sometimes the distinction is legitimate.

Sometimes it is simply vocabulary.

But the underlying reality is unmistakable:

The age of naive globalisation is ending.

Yet there is a massive double standard here

China's subsidies can distort competition.

That is true.

But Western governments subsidise strategically important industries too.

The OECD itself notes that industrial subsidies have increased across regions.

In 2024, subsidies across the 15 sectors tracked by its MAGIC database reached their second-highest level on record.

The United States, Europe, Japan and South Korea all use industrial policy.

The United States has deployed enormous incentives for semiconductors, electric vehicles and clean energy.

Europe subsidises strategic industries.

Japan subsidises semiconductor investment.

South Korea supports strategic manufacturing.

So the debate cannot honestly be:

“China uses industrial policy while the West believes in free markets.”

That world does not exist anymore.

The real debate is:

Whose industrial policy is legitimate, and whose is treated as a threat?

The WTO itself was never designed for this world

This is another crucial part of the argument.

The WTO was built around rules designed for international trade.

But the modern economy is increasingly about:

• industrial subsidies;
• state-owned enterprises;
• sovereign investment funds;
• technology controls;
• data;
• supply-chain security;
• export restrictions;
• national-security exceptions;
• strategic minerals;
• semiconductor ecosystems;
• government-backed finance.

The economic system has changed faster than the institutions regulating it.

Lamy himself now acknowledges part of this historical failure.

He argues that the United States, EU and Japan should have strengthened WTO rules on subsidies and state aid before China's accession.

Instead, a major subsidy-discipline provision was allowed to lapse in 1999.

That is an extraordinary admission.

Because it means the problem was not simply:

China entered the system and broke it.

It was also:

The system's architects knew the rules were incomplete and failed to fix them.

And that brings us back to 2001

China did not sneak into the WTO.

The WTO approved its accession.

The United States supported it.

Europe negotiated with it.

Western corporations wanted access to its market.

Investors wanted its labour force.

Consumers wanted cheaper products.

Governments wanted global growth.

Everyone thought they knew where this experiment was going.

They were wrong.

China didn't become the political system the West expected.

But economically, China became something arguably more consequential:

a peer competitor.

That is why the language has changed so dramatically.

Twenty-five years ago, China's rise was described as an opportunity.

Today it is increasingly described as a threat.

The West's “parallax error”

Lamy talks about a historical mistake.

But perhaps the bigger parallax error was this:

The West confused China's integration into capitalism with China's eventual transformation into a Western-style economy and political system.

China never signed that second contract.

It joined the WTO.

It reduced tariffs.

It opened sectors.

It integrated with global supply chains.

It complied with many WTO commitments.

And it simultaneously maintained extensive state direction of finance, land, industrial policy and strategic sectors.

The West saw economic integration as a road toward political convergence.

Beijing saw economic integration as a road toward national development and technological strength.

Those were not the same journey.

Now Europe faces the bill

The European Union's €359.8 billion goods deficit with China is real.

The industrial subsidy gap is real.

Chinese overcapacity is a real concern.

Chinese companies are genuinely becoming formidable competitors.

But Europe's industrial decline cannot be blamed entirely on Beijing.

Europe made choices.

European companies outsourced.

European consumers demanded cheap goods.

European policymakers prioritised efficiency.

Europe underinvested in some forms of strategic industrial capacity.

Energy costs became a structural disadvantage.

Regulation became increasingly complex.

Capital markets remained fragmented.

The European single market remains incomplete.

And Europe allowed industrial policy to become almost a dirty word while other powers treated manufacturing capacity as strategic infrastructure.

China didn't force Europe to make all those decisions.

So what should Europe actually do?

Not surrender to China.

But not pretend tariffs alone can restore European competitiveness either.

Europe needs something much harder:

industrial renewal.

Invest in energy.

Build cheaper and more reliable power.

Reduce regulatory friction.

Complete the single market.

Develop deeper capital markets.

Fund research.

Build semiconductor capacity.

Protect strategic technologies.

Train workers.

Modernise infrastructure.

Support companies—but demand productivity in return.

Use trade defence where genuine distortions are demonstrated.

And negotiate with China where negotiation is possible.

In other words:

Compete.

Don't merely complain.

Because protectionism cannot substitute for productivity

This is the part Western politicians may not want to hear.

A tariff can protect a factory.

It cannot automatically make that factory innovative.

A subsidy can keep a company alive.

It cannot guarantee that company becomes globally competitive.

A ban can keep Chinese products out.

It cannot make European products cheaper.

And protectionism can easily become corporate welfare for inefficient incumbents.

If Europe uses trade barriers simply to preserve yesterday's industries, China will eventually win anyway.

Because China is not standing still.

And China has its own problem

There is an important counterargument to the triumphalist version of the Chinese story.

Industrial subsidies can create overcapacity.

They can encourage excessive investment.

They can keep unproductive companies alive.

They can distort capital allocation.

The IMF estimates China's industrial policies reduce aggregate productivity through misallocation.

China's model therefore carries its own risks.

Beijing cannot assume that producing more of everything forever is sustainable.

At some point, domestic consumption must matter more.

Households must have greater purchasing power.

Productivity must justify investment.

And markets must be allowed to eliminate some failures.

China may have beaten the West at industrial policy in several sectors.

That does not mean industrial policy is economically costless.

The real battle is now about what comes next

The old globalisation model is dying.

But its replacement has not yet been written.

One possibility is fragmentation:

America builds one technology ecosystem.

China builds another.

Europe tries to maintain autonomy.

Trade barriers multiply.

Supply chains split.

Countries choose sides.

Another possibility is reform:

The WTO is strengthened.

Subsidy rules are updated.

State support becomes more transparent.

Trade distortions are addressed.

Strategic industries receive narrowly targeted protection.

And countries compete without completely dismantling the global trading system.

The second outcome would be vastly better.

But it requires something that geopolitics increasingly lacks:

trust.

And this is where the restaurant analogy ultimately breaks down

A restaurant owner can call the authorities on his competitor.

But countries cannot permanently stop competitors from becoming better.

If China produces cheaper electric cars, Europe must either become better at making electric cars—or explain why European consumers should pay more.

If China builds cheaper solar panels, Europe must decide whether it wants to compete, protect its industry, or accept dependence.

If Chinese ships are cheaper and more numerous, Europe must rebuild shipbuilding capacity if it considers that strategically important.

If Chinese machinery becomes more competitive, European manufacturers must innovate.

Trade policy can buy time.

It cannot buy competitiveness.

China did not kill free trade by becoming competitive

This is where I would challenge the most provocative version of the argument.

China has not single-handedly destroyed open trade.

The global trading system is under pressure from China—but also from the United States, the European Union, Russia, India and others.

Washington has imposed tariffs and technology restrictions.

Brussels is now discussing stronger trade-defence tools.

Governments everywhere are subsidising strategic sectors.

The old consensus is collapsing because almost nobody believes unrestricted economic interdependence is politically safe anymore.

China is one of the biggest causes of that transformation.

But it is not the only one.

The uncomfortable truth

The West wanted China to become capitalist.

China became capitalist enough to become a strategic competitor.

The West wanted China integrated into global supply chains.

China used those supply chains to build its own industrial ecosystem.

The West wanted China to consume more Western products.

China learned how to produce competing products itself.

The West wanted Chinese factories.

China wanted Chinese industrial capacity.

And now Europe is discovering that globalisation was never a one-way street.

You cannot invite another country into your market and permanently assume that you will remain the dominant producer.

Competition means competition.

The real failure was not China winning

It was the West assuming China could never win.

That is the deeper lesson.

For decades, the globalisation bargain worked because Western companies were overwhelmingly at the top of the value chain.

China was the factory.

The West designed the products.

China assembled them.

The West owned the brands.

China provided the labour.

That hierarchy has changed.

Chinese companies now design.

Manufacture.

Engineer.

Finance.

Export.

Build infrastructure.

Develop brands.

And increasingly set technological standards.

The restaurant across the street didn't merely open.

It learned the recipe.

Then it built a bigger kitchen.

Then it trained better chefs.

Then it started selling the ovens.

And now the original restaurant is calling the authorities.

Twenty-five years after WTO accession, the question is no longer whether China belongs in global trade

China is already too deeply embedded in it to be removed without enormous economic damage.

The question is whether the world can create rules that allow competition without allowing state power, subsidies and geopolitical coercion to overwhelm the system.

Europe has every right to defend its industrial base.

But it should be honest about what it is doing.

This is no longer the pure free-trade world Europe once preached.

It is managed globalisation.

Strategic competition.

Industrial policy.

Economic security.

Selective protection.

And geopolitical bargaining.

The era when Brussels could lecture developing countries about the virtues of free trade while European companies dominated global value chains is disappearing.

Now the competition has arrived at Europe's doorstep.

And the lesson for Europe is brutally simple:

If you want an open market, you must be prepared to compete in it.

If the rules need changing, change them transparently.

If China violates them, enforce them.

If the rules are obsolete, reform them.

But don't rewrite the history.

Because China did not force Europe to believe that free trade would solve everything.

Europe believed it.

China simply became much better at the game than many Europeans expected.

And now the restaurant owner who once enjoyed the entire street is discovering the hardest rule in capitalism:

You don't own the market just because you were there first.