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STRATEGIC AUTONOMY
Less dependence on China will mean costs for Europe and Spain
China was probably the greatest de-inflationary force in the world economy during the early decades of the 21st century. Today, the debate in Europe is about reindustrialization, diversification of suppliers, and reduction of geopolitical risks. All of that may be necessary, but it won’t be free
Agenda Pública6 de julio de 2026
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Workers on a street in Shanghai, China.|Pexels / Jerry Zhang
At the turn of the 21st century, Europeans got used to a strange combination: buying relatively cheaper and increasingly better goods while the prices of nearly all services rose. A new TV offered more features than the old one and cost less. Computers gained power without getting more expensive at the same rate. Dressing a family became more affordable. Meanwhile, going to the dentist, paying college tuition, eating at a restaurant, or calling a plumber grew more and more expensive.Among other factors, the reason for that difference was China. Today, the debate in Europe about the Asian giant has begun changing register. Topics of globalization, competitiveness, and supply chains have given way to strategic autonomy, resilience, and de-risking. The pandemic, the war in Ukraine, and the rivalry between Washington and Beijing have reinforced the notion that over-reliance on China poses economic and geopolitical risks to Europe.Such a reading is sound enough, but it leaves out a relevant part of the story. The public debate has focused mainly on the costs of the so-called China Shock: the deindustrialization of the West, the loss of manufacturing jobs, strategic dependencies, and political unrest in many industrial regions, all extensively studied by economists. But the economic literature has tiptoed around the benefits that millions of consumers received in exchange.
“Globalization, competitiveness, and supply chains have given way to strategic autonomy, resilience, and de-risking”
China was probably the greatest de-inflationary force in the world economy through the first two decades of the 21st century. One need not idealize globalization or take Beijing’s side to recognize that fact. Without China’s manufacturing capacity, it would be tough to explain why inflation remained so low for so long – and why, predictably, the world that Europe now seeks to build will be more expensive.Since the year 2000, the major Western economies have witnessed a very similar pattern. Services —education, health, hospitality, personal care, home repair— have consistently grown costlier while the prices for many manufactured goods have scarcely risen – or have even gotten cheaper, in relative terms. Consumer electronics, textiles, household appliances, and furniture have followed a trajectory distinct from the rest of the economy.Part of that divergence can be traced to 2001, when China joined the World Trade Organization (WTO). That incorporation added hundreds of millions of workers to the global economy and expanded the world’s manufacturing capacity to an extraordinary degree. Western companies moved production to Asia, supply chains went global, and competition among manufacturers tightened with unprecedented intensity. Industrial automation, the logistics revolution, and technological advances all became parts of that process.
“China was probably the greatest de-inflationary force in the world economy through the first two decades of the 21st century”
The effect was a huge increase in the global supply of manufactured goods, though that change was gradual and almost invisible for consumers. Televisions, computers, and washing machine got cheaper and cheaper while their quality and performance improved. What was often attributed to technological progress alone was also the result of a globalizing trend that made China the world’s great factory.The macroeconomic consequences of this ran deeper than is generally admitted. Economists have long explained that labor-intensive services tend to become more expensive – the well-known “cost disease” described by William Baumol. A teacher, doctor, or waiter can’t multiply their productivity at the pace of an automated plant, but their wages need to rise to compete with the rest of the economy. If productivity barely grows, then those costs get passed to final prices. That’s why services have persistently become more expensive in almost all advanced economies.Spain offers a clear view of this dynamic. The massive influx of cheap manufactured goods from Asia helped contain inflation in categories such as electronics, household appliances, textiles, and furniture. At the same time, the growing weight of tourism and services pushed up the prices of labor-intensive activities like hospitality, catering, personal care, and some professional services.According to Spain’s National Institute of Statistics (INE), services today represent about 76% of GDP and 80% of employment. This structure leave Spain especially exposed to inflationary pressures arising from the cost of labor. While tradable goods benefited from international competition, many services remained on the margins and passed increases in wages and other costs to the consumer.
“A teacher, doctor, or waiter can’t multiply their productivity at the pace of an automated plant, but their wages need to rise to compete with the rest of the economy”
Between the start of the century and the pandemic, the relative fall in the price of goods partially offset the higher cost of services. Inflation didn’t vanish – it moved. Prices kept rising, but especially in those activities that couldn’t relocate or benefit from international competition. That balance favored consumption, permitted central banks to maintain extraordinarily low interest rates, and sustained an era of macroeconomic stability that would be tough to repeat today.
Defining a new equilibrium
That balance also had its costs. Many industrial regions in the United States and Europe underwent severe transformation. Millions of manufacturing jobs disappeared or were replaced by lower value-added activities. The economic literature has documented how the China Shock fueled inequality among regions, weakened certain communities, and contributed to the rise of populist and protectionist movements.Precisely because those costs were evident, the benefits stayed relatively hidden. Almost no one attributes the affordable price of a laptop or washing machine to trade integration with China. Nor is it easy to perceive that, for 20 years, inflation remained lower than it likely would have been without that global manufacturing capacity. Costs were concentrated into specific territories and sectors; benefits were shared among hundreds of millions of consumers. However, politics tends to respond to high-visibility losers and not to widely scattered winners.These days, Europe is trying to correct many of those vulnerabilities. The European Commission is pushing an industrial policy that would have been unthinkable a decade ago: battery production subsidized, the automotive industry shielded from Chinese competition, and suppliers of critical raw materials diversified, while production capacities considered strategic are being rebuilt.This change in direction seems difficult to avoid. With the pandemic, foreign dependence ceased to be a technical discussion about efficiency and started affecting essential products. Russia’s invasion of Ukraine brought a harsher lesson: interdependence can also be used as an instrument of pressure. At the same time, the rivalry between the U.S. and China has reduced the margin for organizing the economy by cost criteria alone.
“Almost no one attributes the affordable price of a laptop or washing machine to trade integration with China”
The problem is that this phase of correction will also have costs. Manufacturing more goods within Europe means producing them with higher wages, higher environmental standards, and deliberately less efficient supply chains. Diversifying suppliers implies giving up some portion of the economies of scale that made the great era of globalization possible. Maintaining strategic inventories costs more than operating with a just-in-time model. Economic security isn’t a substitute for efficiency, but it makes it more expensive.
The case of Spain and the future of strategic autonomy
In Spain, this tension runs through the economic agenda of Pedro Sánchez’s government. Reindustrialization has become an axis of this administration, with support from European funds to attract investment in batteries, semiconductors, green hydrogen, and electric vehicles. That commitment responds to a logic shared in Brussels: to recuperate productive capacity in sectors considered strategic.The better that strategy works, the more difficult it will become to replicate the environment of extraordinarily low prices enjoyed in the first two decades of the 21st century. Part of the dividend received by European consumers derived precisely from manufacturing outside of Europe. The repatriation of production means bringing back industrial jobs and reducing vulnerabilities, but also accepting higher labor costs, stronger regulatory requirements, and – predictably – higher prices.The political debate has been slow to recognize that part of the equation. For too long, an idea has been floated that Europe could reduce its dependence on China, bring factories home, and strengthen strategic autonomy without appreciable consequences for citizens – as if changing the location of production would also maintain the same prices, the same competitiveness, and the same level of well-being.Societies can choose from among diverse models of economic organization, but rarely do they garner all the advantages of each. Globalization offered efficiency and cheap goods in exchange for growing strategic dependence. The new industrial policy promises more resilience and more autonomy, but it sacrifices some of that efficiency.
“An idea has been floated that Europe could reduce its dependence on China, bring factories home, and strengthen strategic autonomy without consequences”
The debate around China has been dominated by the costs of globalization, which is understandable: those costs have been visible, concentrated, and politically explosive. On the other hand, the benefits were dispersed across hundreds of millions of consumers and went nearly unnoticed. As the West strives to redress the imbalances caused by China’s integration into the global economy, it’s finding that some of those benefits weighed more heavily than was evident: China exported both manufactured goods and a healthy dose of de-inflation.Strategic autonomy may prove to be a historical necessity. The lessons of the pandemic, the war in Ukraine, and the rivalry between great powers all make it difficult to defend a naïve return to the globalization of the early 21st century. But to continue presenting that autonomy as if it were free is not advisable. Its costs will be measured not just in billions of euros allocated to industrial subsidies or new battery factories – it will also gradually appear in the prices of many everyday goods. The coming decade may not bring an end to trade with China, but it could end the stage in which globalization contained a decisive portion of inflation, almost without consumers noticing.Methodological note: The graphic was inspired by a visualization published by the Financial Times on the evolution of prices of both labor-intensive services and tradable goods. To replicate that exercise, monthly data from Eurostat’s Harmonized Index of Consumer Prices (prc_hicp_midx) were taken for Spain, France, Germany, and the United Kingdom. A sample was selected of COICOP sub-indices representative of tradable and durable goods —such as clothing, footwear, furniture, household appliances, cars, audiovisual equipment, computers— as well as labor-intensive services —medical, dental, maintenance, transport, education, catering, accommodation, hairdressing, others—. Each series was transformed into an annual average and rescaled to a basis where prices for the year 2000 = 100.
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