Go with the flow

Globalization 2.0 means the EU should embrace innovating with China, not just trading with it

The trade talks between China and the European Union on Oct 8 and 9 came at a crucial moment for the global economy. While political debate in the EU increasingly emphasizes the risks of economic engagement with China, developments elsewhere suggest that a more pragmatic approach may better serve the bloc's long-term interests.

Only weeks earlier, China and the United States, the world's two largest economies, continued high-level dialogue and explored mechanisms for managing economic competition. Their engagement reflects a fundamental reality: Trade confrontation carries costs for both sides, while predictable economic relations benefit businesses, consumers and global stability.

Europe should draw the lessons from this and approach its economic relations with China rationally and pragmatically.

For much of the 20th century, globalization was primarily associated with international trade in finished products. EU and US companies exported automobiles, machinery, electronics and advanced technologies worldwide. China subsequently emerged as a major manufacturing base within this system.

Today, however, globalization has entered a new phase. It first connected markets. Then it connected factories. Now it increasingly connects innovation.

In this Globalization 2.0, capital, technology, research, components, software and production are integrated through international value chains. Economic competitiveness increasingly depends not only on individual national industries but also on participation in global innovation ecosystems.

China-EU economic relations illustrate this transformation particularly clearly.

EU companies initially entered China to manufacture at competitive costs and later to serve its rapidly expanding consumer market. Increasingly, they are investing in China to develop new technologies.

Volkswagen has established extensive research and development capabilities in Hefei, Anhui province, and cooperates with Chinese companies such as XPeng and Horizon Robotics. According to Volkswagen, its Chinese development structure can shorten time-to-market by approximately 30 percent.

Mercedes-Benz is expanding partnerships with Chinese companies including Momenta and ByteDance, while BMW reports that 70 percent of its Chinese R&D activities focus on digital and electronic technologies.

The trend extends beyond automobiles. BASF has developed its Zhanjiang complex in Guangdong province into its third-largest integrated production site globally, while Airbus has expanded its aircraft assembly operations in Tianjin.

These investments reveal an interesting contrast between political rhetoric and commercial reality. While EU policymakers debate how to protect domestic companies from Chinese competition, some of the bloc's leading industrial corporations are deepening their technological cooperation with China to strengthen their own global competitiveness.

They are not simply competing against China's industrial ecosystem. They are increasingly leveraging it.

China's investment environment has also evolved. Although challenges remain, the country has progressively liberalized foreign investment regulations, eliminating the remaining foreign investment access restrictions in manufacturing in recent years.

The transformation is increasingly visible in the opposite direction as well. China is no longer simply receiving foreign investment and technology; Chinese companies are becoming important international investors themselves.

According to Rhodium Group, Chinese foreign direct investment in Europe, including the United Kingdom, reached 16.8 billion euros ($18.8 billion) in 2025, a 67 percent increase from the previous year. Greenfield investment reached a record 8.9 billion euros.

Hungary attracted approximately 3.9 billion euros, making it Europe's largest recipient that year.

As a Hungarian economist, I find this development particularly significant. Hungary has long been integrated into European automotive value chains, especially those led by German manufacturers. Chinese investments are now adding another dimension to this industrial ecosystem.

BMW's Debrecen manufacturing facility, CATL's battery investment in the same city and BYD's electric-vehicle manufacturing project in Szeged illustrate how European and Chinese industrial capabilities can increasingly complement each other.

These projects offer opportunities for European employment, local suppliers, technological cooperation and industrial upgrading, provided that investment is accompanied by effective local integration.

Consider a vehicle developed by a German company, incorporating Chinese technology, using batteries manufactured in Hungary and assembled for international markets. Is it German, Chinese, Hungarian or European?

In Globalization 2.0, the answer increasingly lies in the value chain rather than the nationality of the finished product.

Economic integration does not necessarily mean that one economy's industrial success comes at another's expense. Cooperation can be seen as a source of competitiveness.

Research by the European Central Bank found that increased exposure to Chinese intermediate goods was associated with a 0.6 percentage-point improvement in industrial production growth in affected European sectors. Competitive inputs can lower manufacturing costs and strengthen European companies operating further along the value chain.

This is particularly pertinent to Europe's current economic challenges. Mario Draghi's competitiveness report in 2024 estimated that the EU requires an additional 750 to 800 billion euros in annual investment.

The EU needs investment in energy infrastructure, advanced manufacturing, digital technologies and the green transition. China has developed significant capabilities in several of these sectors, creating opportunities for complementary investment and joint innovation.

For decades, Europe benefited from globalization by bringing advanced technologies to the rest of the world. As technological capabilities become more geographically diverse, Europe can benefit from international cooperation in both directions.

The objective should not be dependence on any single partner, but diversified and resilient economic interdependence. Fair competition, reciprocity and transparent market access remain essential.

The recent US-China engagement demonstrates that competition and cooperation need not be mutually exclusive. Strategic differences will remain, but they should not prevent pragmatic economic dialogue.

For China and the EU, the opportunity extends beyond expanding bilateral trade. It encompasses greater connection among research institutions, increased integrated production capabilities, the encouragement of two-way investment and developing technologies.

Hungary's experience illustrates how these relationships can take practical shape within the EU's existing industrial networks.

The October negotiations are therefore an opportunity to strengthen economic cooperation based on mutual interests, rather than allowing political differences to define the entire relationship.

The future of globalization will not be determined simply by where products are manufactured, but by how countries create value together.

That is the promise of Globalization 2.0: diversification rather than separation; balanced interdependence rather than dependence; and investing, producing and innovating together rather than merely trading with one another.

The author is the director of the Eurasia Center at John von Neumann University in Hungary, the former consul general of Hungary in Shanghai and a visiting scholar at Fudan Development Institute.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.