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   products, sending out a massive wave of subsidized exports, and putting   
   export controls on rare earths — threatens to forcibly deindustrialize   
   Europe. Here’s what The Economist, normally a staunch defender of free   
   trade, recently wrote:   
      
   China is not just dumping exports and subsidising its companies, it is   
   also out-competing and out-innovating big European industries, including   
   carmaking. Last year Germany’s trade deficit with China stood at €66bn   
   ($76bn); this year it could widen to over €85bn, around 2% of GDP.   
   Alarmingly, China is exploiting Europe’s dependence, weaponising   
   embargoes or the threat of them in chips and rare earths.   
      
   Germany, traditionally Europe’s strongest manufacturing and exporting   
   nation, is already the hardest hit:   
      
   China, many European manufacturers have concluded, is threatening to put   
   them out of business, by both fair means and foul…The wails are loudest   
   in Germany, which is Europe’s biggest exporter to China and its biggest   
   investor in it by far…For the Mittelstand, the small manufacturers that   
   constitute a big slice of German industry, China used to be a source not   
   of angst but of profit. Their precision-engineered machine tools were an   
   exquisite fit for its rapid industrialisation. Chinese consumers raced   
   to buy German cars…   
      
   Times have changed…Once-stellar growth inside China has, for many   
   foreign firms, slowed to a crawl as competition with local rivals   
   intensifies. In addition, Germany’s previously small trade deficit with   
   China has ballooned…Last year it reached €66bn ($76bn), or around 1.5%   
   of GDP, driven by a collapse in German exports to China and a rush of   
   imports, notably of cars, chemicals and machinery—hitherto German   
   specialities.   
      
   Germany’s trade deficit with China this year is expected to surge again,   
   to around €87bn…German cars command only 17% of the Chinese market, down   
   from a peak of 27% in 2020…Worse, Chinese competition also jeopardises   
   sales in other markets. China’s net exports of cars have risen from zero   
   in 2020 to 5m units last year. Germany’s have halved over the same   
   period, to 1.2m units…Such figures have triggered fears in Germany of a   
   wave of deindustrialisation.   
      
   The Financial Times has a good article about this as well, and Brad   
   Setser has a good writeup of that article.   
      
   This is all on top of the existing headwinds facing European   
   manufacturing — the energy crisis from the cutoff of Russian gas and   
   self-inflicted “green” policies, Trump’s tariffs, and so on.   
      
   So Europe finds itself in an extraordinary perilous position right now.   
   Its main protector has suddenly withdrawn. It has a ravenous, brutal   
   empire attacking its borders, supported by the world’s most powerful   
   nation. Its main export markets are shriveling, and its manufacturing   
   industries are under dire threat from waves of subsidized foreign   
   competition. What can it do to fight back?   
      
   How Europe can resist the siege   
   The most important thing Europeans need is to panic. Europe is facing   
   its own Deluge — a sudden pincer movement by hostile great powers that   
   threatens to reduce it to a collection of small vassal states. This is a   
   true crisis, and it will not be solved by social media rhetoric, or by   
   brave declarations by EU leaders. It cannot be regulated away by   
   eurocrats in Brussels. It will require bold policies that change   
   Europe’s economic, political, and social models. Only a strong sense of   
   urgency and purpose can motivate Europe to do what needs to be done.   
      
   What needs to be done? One important step is for Europe to act more as a   
   single whole than as a collection of small countries. In the military   
   realm, this means coordinating European militaries and defense   
   industries much more. Matthew C. Klein writes:   
      
    From a properly European pespective, the security interests of each   
   country should be shared across all countries, just as, for example,   
   most Americans in Michigan or Maine would view an attack on California   
   or Florida as an attack on them…The first step is to give the   
   Ukrainians, who are already fighting the Russians, as much material and   
   financial support as they need. From the perspective of European   
   security, French, German, and British weapons are far more valuable in   
   Ukraine than in their home countries. If the Ukrainians were subjugated,   
   defending the rest of Europe would become much harder, with the   
   effective EU-Russia border lengthening dramatically…   
      
   Europe’s national militaries have had a tendency to favor their home   
   country’s producers, with the result that the continent is filled with   
   subscale defense companies that are often slow and unproductive. Common   
   defense procurement for a continental army should lead to higher output   
   and lower costs—a few large companies handling large orders should have   
   better unit economics than hundreds of artisanal manufacturers—but it   
   would require Europe’s national defense elites to change their   
   perspective. Philipp Hildebrand, Hélène Rey, and Moritz Schularick   
   recently published a useful proposal for how to make this work.   
      
   And economically, Europeans can partially compensate for the loss of   
   Chinese (and American) export markets by selling more to each other. The   
   Economist writes:   
      
   A second task is for European countries to make better use of the power   
   they have, by integrating their economies…By failing to integrate, the   
   EU is leaving a vast sum of money on the table. A single market that was   
   designed for goods is failing to help economies dominated by services.   
      
   And in his famous report on European competitiveness, Mario Draghi wrote:   
      
   We have also left our Single Market fragmented for decades, which has a   
   cascading effect on our competitiveness. It drives high-growth companies   
   overseas, in turn reducing the pool of projects to be financed and   
   hindering the development of Europe’s capital markets…The EU’s new   
   industrial strategy rests on a series of building blocks, the first of   
   which is full implementation of the Single Market. The Single Market is   
   critical for all aspects of the strategy: for enabling scale for young,   
   innovative companies and large industrials that compete on global   
   markets; for creating a deep and diversified common energy market, an   
   integrated multimodal transport market and strong demand for   
   decarbonisation solutions; for negotiating preferential trade deals and   
   building more resilient supply chains; for mobilising greater volumes of   
   private finance; and as a result, for unlocking higher domestic demand   
   and investment. Remaining trade frictions in the EU mean that Europe is   
   leaving around 10% of potential GDP on the table, according to one estimate.   
      
   And ideally, Europe should form a fiscal union — the EU itself should be   
   able to borrow and spend, not just the member countries. As Klein   
   writes, this needs to be accompanied by a greater tolerance for fiscal   
   deficits — after all, countries borrow in emergencies.   
      
   In other words, Europe’s first step in resisting its siege is to act   
   more like a country and less like a zone. It would also help to find   
   some way to bring the UK back into the fold, especially because polls   
   consistently find that British people regret Brexit.   
      
   Europe’s other top priority is to provide for the common defense. That   
   means spending more money on the military, of course, and it also means   
   greatly increasing the size of Europe’s nuclear deterrent. But it also   
      
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