The Week of August 9, 2026: The EU’s China trap, defense, tax, inflation, and much more.
The Week of August 9, 2026: The EU’s China trap, defense, tax, inflation, and much more.
Its business may not be glamorous, but the Belgian company Citribel matters. It matters for what it does and for what it symbolizes. It operates one of the two remaining factories in Europe that produce citric acid. It now faces an existential threat from subsidized Chinese competition — a trend echoed elsewhere in the European chemicals sector.
In a recent article for the Financial Times, Peter Foster and Joe Leahy report that Citribel, which has been loss-making for three years, has been forced by higher costs to raise prices at a time when Chinese producers have been lowering theirs. Chinese citric acid sells in the EU for 40-50 percent less than Citribel’s. (The EU’s anti-dumping duties in this area are far lower than those charged by the United States.) Since 2019, Citribel’s sales have fallen by 50 percent. China’s exports of citric acid to the EU have risen by the same amount.
Citric acid matters too: It is used in foods, as well as in pharmaceutical and cleaning products. As Citribel’s CEO put it to the FT, “If China says, ‘no citric acid anymore’ then the shelves will very quickly be empty.”
To Foster and Leahey, the chemicals industry is a “textbook example” of how Chinese industrial policy and the subsidies that accompany it (often supplemented at the regional level) have led to Chinese companies dominating entire industries. This is aided by an undervalued currency.
The FT article is accompanied by charts showing a surge in Chinese exports of bulk chemicals. These include acetic acid (used in, among other applications, the manufacture of plastics, dyes, insecticides, photographic chemicals, antibiotics, hormones, and organic chemicals), titanium dioxide (among its applications, paint, sunscreen, and food coloring), polypropylene (packaging, automotive parts, and medical devices), polyethylene terephthalate (used for food and beverage containers and textile fibers), PVC, and methylene diphenyl diisocyanate (sealants, coatings, and adhesives).
Not only must Europe’s chemical companies contend with their Chinese competitors’ low prices, but they must also deal with soft domestic demand, high energy prices, and green taxes. The pricey energy is partly due to Europe’s “green transition,” and the taxes are entirely attributable to it, a kind of reverse mercantilism. The EU’s production of industrial chemicals (bulk and specialty combined) has fallen from a 2007 peak of 301 million tons to 224 million tons today. Capacity is being cut, and new investments have slumped.
There is little sign that this will stop. As Foster and Leahey explain:
The battle among China’s chemicals industry companies mirrors that of other sectors such as solar panels, with producers increasing capacity regardless of demand in order to win market share. In commodity chemicals, the biggest company wins with larger scale meaning lower costs.
China’s citric acid production reportedly doubled between 2012 and 2025.
The collective pre-tax profit margin of Chinese chemicals companies has fallen from nearly 10 percent in 2021 to just above 4 percent now. About a quarter are loss-making, up from 12 percent in 2017. On the other hand, China accounted for about 18 percent of the EU’s imports of chemicals (by value) in 2024 — double the share in 2014. To the Beijing regime, that counts for more than a bottom line in the black.
Beijing prioritizes production over profit for both defensive and offensive reasons. Autarkic by inclination and conscious of the geopolitical tensions it has done so much to stir up, the CCP wants China to be able to produce what it would need in the event of war or blockade. Beijing’s economic model is best understood as fascism with Chinese characteristics: Capitalism is harnessed to the ends of the state to yield returns that may be economic, political or geopolitical—it depends. If the regime was pursuing a conventional (Western) economic agenda, it would boost China’s faltering domestic demand. Instead, it is weaponizing excess production by exporting at such low prices that competitors abroad will fail to thrive, or perhaps even survive, leaving China with the whip hand.
Up until now, China’s export drive in chemicals has been mainly focused on bulk products, but what if it pulls off the same trick with specialty chemicals, where the EU still has an edge? Specialty chemicals are higher up the value chain, and typically have very specific applications, such as in semiconductor manufacturing. Awkwardly, they are largely derived from bulk chemicals.
Chemicals are only part of a bigger picture. Thus, in the first decade of this century, more solar panels were manufactured in Germany than in any other European country. Globally, German production was exceeded only by Japan. Much cheaper Chinese panels began to pour into Europe in the early 2010s. Very few are manufactured today in Germany or, for that matter, anywhere else in Europe.
At least Germany’s automakers are still around, but they are in a mess. Their China bet has turned sour. Chinese manufacturers have outplayed them in China and are now mounting a significant challenge in Europe, greatly assisted by the “green transition” being forced on the auto sector (and its customers) by Brussels. This has deprived German auto companies of much of the inherent competitive advantage they had built up in over a century of manufacturing cars powered by the internal combustion engine. Their task was made harder still by consumer reluctance to embrace electric vehicles.
Meanwhile, benefiting from subsidies, a large home market and relaxed capital discipline, Chinese automakers could spend what it takes to develop EVs to a high enough standard (and at a low enough price) to appeal to European consumers, who are themselves under increasing regulatory pressure to go electric. European climate policymakers created a new “market” that was a gift to Chinese mercantilism, made nicer still by its wrapping: The higher costs the transition had imposed on European manufacturers.
From the New York Times:
The number of cars produced in Germany has fallen 28 percent since 2016, according to the VDA, the German automakers’ association, putting the country well behind China, the United States, Japan and India. Germany could soon also be overtaken by South Korea and Mexico.
Oh, yes:
BAIC Group, an automaker owned by the Chinese government, has become Mercedes’s largest shareholder, with a stake of almost 10 percent.
Trouble for Germany’s automakers means trouble for the many engineering businesses that work for them. The country’s engineering sector is also under direct attack from Chinese manufacturers of capital and other intermediate goods, fields in which German companies, including its famed Mittelstand, a vital tier of midsize, often export-oriented firms, have long excelled.
The Wall Street Journal:
Germany now imports more advanced capital goods from China than it exports there. . . . [Its] trade balance with China in capital goods slid from a surplus of roughly 750 million euros to a €500 million deficit between mid-2024 and August 2025 on a 12-month rolling average, according to New York-based Apollo Global Management. Germany’s machine-tools exports to China slumped by around one-third in the first quarter from a year earlier.
Germany’s Machinery and Equipment Manufacturers’ Association reckons that Chinese companies now control one-third of global production in the machinery sector. That will grow. The Journal reports that “under its ‘10,000 Little Giants’ initiative, the Chinese government funneled massive subsidies, tax breaks and state resources into thousands of specialized midsize firms, explicitly designed to replace Germany’s famed “hidden champions.”
Job losses are mounting, and the more they do, the murkier Germany’s political outlook will become, another win for Beijing. The populist-right (and Russia-friendly) AfD is at 28 percent in the polls, way ahead of the CDU/CSU, the center-right half of the governing coalition, which is on 21 percent while, at 12 percent, the SPD, its partner on the left, is trailing the Greens (15 percent) and only just ahead of the hard-left Der Linke (11 percent).
Germany is far from the only EU country having to cope with surging Chinese imports. China’s global trade surplus was $1.2 trillion last year. Of that, the EU accounted for €360.6 billion in 2025, a 15 percent increase over 2024, a trend bolstered by American tariffs as some goods that once would have been sent to the United States were diverted to the EU instead. Adding to the bloc’s pain, some of its exports to third countries have been displaced by the Chinese. But even if Germany is not alone, there are times when it must feel like it is. In June, China’s traded goods surplus with the EU increased by 27 percent over the previous year. But for Germany it jumped by some 80 percent.
Germany’s trade woes cannot be shrugged off by the rest of the EU. Germany generates about 24 percent of the bloc’s GDP, and in some respects it “underwrites” the euro. Germany’s imports of EU-made goods may support as many as five million jobs elsewhere in the bloc. And Germany’s plans to assume a leading role in Europe’s defense will not be helped by an economic crunch.
As Europeans have again been reminded, rare earths, an indispensable element in countless high-tech products, have provided an early example of China’s willingness to exploit a dominant industrial position for non-economic purposes.
China’s Ministry of Commerce announced that it had banned any further shipment to 14 companies in the European Union of “dual-use” materials or products — items that China describes as potentially having both military and civilian applications. As a result, the companies may struggle to buy many of the critical minerals they need to make products like rare-earth magnets and semiconductors, which are essential for cars, offshore wind turbines, robots, drones and other advanced manufacturing applications.
This was partly a response to the EU sanctions on 14 Chinese or Hong Kong companies for helping the Russian war effort against Ukraine. Sure enough, among the companies hit by the Chinese sanctions was Rheinmetall, Germany’s leading defense contractor. And it was no surprise that China took aim at some smaller European companies with expertise in the processing of rare earths.
Once again, the New York Times:
One of the companies on China’s list is Germany’s Sindlhauser Materials. Sindlhauser’s website says it makes yttrium alloys with zircon. Yttrium and samarium have been the two kinds of rare earths in shortest supply outside China after Beijing imposed export controls, with prices rising as much as a hundredfold.
Yttrium alloys with zircon are used in making advanced semiconductors. Makers of semiconductor manufacturing equipment have been complaining for months about acute shortages of yttrium compounds.
The idea is, in all probability, to put such companies out of business. Beijing understands the strategic value of its position in rare earths. It also knows that Western powers are set on overturning that advantage as soon as they can, and it must have every intention of thwarting that project.
Independent of any military considerations, Beijing also regards economic competition as another front in its geopolitical contest with the West, and so:
Another company restricted by China was one of Europe’s premier manufacturers of custom-designed electric motors with powerful rare-earth magnets inside, Italy’s Lafert Group. Lafert’s motors power many of the robots and other industrial automation in Europe’s factories.
And then there was this:
Beijing has been encouraging multinationals to move more of their supply chains into China, including buying electric motors from Chinese companies. While Beijing has severely restricted exports of rare earths and rare-earth magnets, it has allowed unrestricted exports of fully assembled electric motors with the rare-earth magnets already inside.
When Beijing has an opportunity to deepen Europe’s dependency by tightening China’s grip on the supply chain, it will take it.
Adam Smith argued against free-trading nations retaliating in kind against their mercantilist competitors unless retaliation had a real prospect of success. He believed that the benefits of even unilateral free trade (lower import costs, taking advantage of specialization, and so on) would outweigh the costs of dealing with a mercantilist counterparty.
But Smith also accepted that free trade’s advantages could be outweighed by a country’s need to be able to fight a war. “Defence,” he wrote in The Wealth of Nations, “is of much more importance than opulence.” He also understood how supply chains and national security were intertwined: “If any particular manufacture was necessary . . . for the defence of the society, it might not always be prudent to depend upon our neighbours for the supply.”
Under the circumstances, even those (few) in Brussels who genuinely believe in free trade should have no qualms about taking steps to ensure that the EU’s industrial base does not leave it vulnerable to blackmail (or worse) by Beijing, a hegemon on the march.
The EU has been implementing or examining various ways to rebalance its trade with China. The former includes attempts to diversify (unsuccessfully so far) away from China and to rely on traditional, if inadequate, remedies (three-quarters of all EU anti-dumping and anti-subsidy investigations are currently directed at China). The bloc’s reliance on China is so extensive that reducing it will have to be a matter of the scalpel, not the chainsaw. That will take time the EU may not have, time that may be further stretched by Brussels’ need to secure the approval of the EU’s member states for whatever it may propose.
Beijing will put pressure on member states and on the EU Commission to halt any “de-risking” (the EU’s term for decoupling lite). The Chinese authorities have told Brussels that they will “resolutely respond with countermeasures should the [EU] insist on . . . imposing discriminatory and restrictive measures against Chinese companies or products.” Beijing has urged “the European side to face reality, return to the right track of dialogue and consultation, and take actions that truly benefit the development of China-EU economic and trade relations.”
By “reality,” China presumably means adopting the approach recommended by Spain’s hard-left prime minister, Pedro Sánchez, who in June argued that the EU must “be pragmatic and . . . build bridges both with major economies — potential allies such as China — and traditional allies, such as the United States.”
Potential allies?
In “reality,” the EU has already been on the bridge to Beijing for too long. The question now is whether it has the capacity and the will to get off it.
The Capital Record: Sound & Vision
We released the latest in our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, hosted by financier David L. Bahnsen, makes use of two formats to deliver Capital Matters’ defense of free markets. The original podcast continues, but if you want to watch David talk, please click on the YouTube link.
The Common Good, Pornography, Gambling, and You (Podcast/YouTube)
David is joined today by Christian theologian, Dr. Andrew Walker, to discuss the recent flare-up of interest in the “common good.” They will evaluate what first principles underlie the current debate, where there is common ground, and how we can advance the conversation to a place that honors both liberty and virtue. You will be shocked to hear that the conversation will delve into federalism, limiting principles, the need for specificity, and yes, a hierarchy of loves. Few Capital Record episodes scratch all the itches of what we care about like this one!
Show notes: Andrew Walker’s Daily Wire article; David’s NR article
The Capital Matters week that was . . .
Defense
A year into the First World War, it took the 1915 “shell crisis” (and countless numbers of dead) for the British to get to grips with the fact that they had not been making enough of the right kind of shells for the new kind of war that they were fighting on the Western Front.
One of the best ways we have of avoiding a new kind of great power conflict now is ensuring that we have the munitions we need to fight one — and that everyone else knows it.
That’s not how things currently stand . . .
As grim as the news is about the United States’ missile shortfall, there are some signs that the administration is trying to change the way the government’s procurement policies work . . .
Going beyond the money to hard supply figures, CSIS — the think tank that has been crunching the numbers on munitions — reports that transfers to Ukraine pale in comparison to the Iran war in their impact on key munitions supplies. For one, “The vast majority of items provided to Ukraine relate to ground combat.” Unlike the surface-targeting and air-defense munitions where concern is greatest, “These systems have not played a major role in the war against Iran, and their inventories would be only a minor factor in a war against China” . . .
Quite what this means for the future of tank warfare (and by extension defense spending priorities) is a matter of debate. Tanks will still be needed. The question is the extent to which their role will change . . .
Artificial Intelligence
The development of AI may — time will tell — represent another giant leap for our species. But like so many other innovations, its development has been accompanied by fears of the unknown, fears fomented by forces unwilling to see the U.S. maintain its lead in the AI race, and which cannot be ignored . . .
Antitrust
The Democratic attorneys general who sued to block Paramount Skydance’s acquisition of Warner Bros. have cast themselves as defenders of Hollywood’s workers. They argue that the merger will result in fewer jobs in the entertainment industry. But at least one prominent Democrat isn’t buying it. California Governor Gavin Newsom, whose own attorney general is leading the suit, has quietly urged him to settle rather than block the deal outright. Why? Because he thinks killing the merger could cost California more jobs than if it goes through. He’s right . . .
Environmentalism
By Austin Gae & Jacob Tomasulo:
For decades, the federal government’s misinterpretation of a single word (“harm”) in the Endangered Species Act (ESA) has had severe effects on private property owners, project development, and species recovery.
Fortunately, on July 14, the Fish and Wildlife Service (FWS) and National Marine Fisheries Service (NMFS) published a final rule to fix this long-standing problem by rescinding the regulatory definition for the word “harm” . . .
Inflation
The prevailing narrative is that Kevin Warsh and the rest of the Federal Reserve’s governing committee caught a break on the most recent inflation report, which had average consumer prices rising by 3.4 percent from a year ago. That was enough for inflation to have “cooled” from June’s 3.5 percent rate. Pairing that with a poor jobs report, prognosticators believe that the Fed has the data it needs to keep interest rates steady another month. Refusing a rate hike would avoid upsetting the president and, even scarier, the stock market.
But inflation has cooled only based on the cheap standard of whatever it was last month — not the official target of 2 percent that Warsh insists he is maintaining. As the Washington Post editorial board points out, currently “low” inflation is 70 percent above this benchmark and has now been above target for 64 consecutive months . . .
The Debt
Long-term interest rates are, by definition, an indicator of the market’s view of an economy’s prospects, not least its vulnerability to inflation. So it is not a good sign that the yields on 30-year Treasuries continue to rise, reaching 5.22 percent in Thursday’s auction, the highest since 2001. The $25 billion auction was easily covered but, as was noted in the Financial Times, the price had to be right. Investors are fretting about two interlinked concerns: inflation, and the growing size of the government’s debt. And the higher rates rise, the greater the debt problem becomes . . .
Taxation
Voters in Missouri had a rare chance to free themselves from the hassle and costs of the state’s personal income tax. Sadly, they rejected the move. The state legislature placed Amendment 5 before residents on August 4, 2026. That revision to the state constitution would have put Missouri on track to eliminate its individual income tax and replace the revenue with a broad-based sales tax . . .
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