The West Got Expensive. The IMF Blamed China.

Why simple answers feel true — and what the complex reality is actually costing us.

The Assumption

A widely circulated narrative — recently amplified by IMF data — goes roughly like this:

China's state subsidies, undervalued currency, and export-led growth model flooded Western markets with artificially cheap goods. That price divergence is why German factories are closing, why European manufacturers can't compete, and why the policy answer must be tariffs, countervailing duties, and economic decoupling.

The IMF's numbers are real. China's subsidies are estimated at around 4% of GDP. The yuan is assessed as roughly 16% undervalued. These are not fabricated.

But the causal story being built on top of those numbers? That is worth a serious autopsy.

The Inversion

Before accepting the framing, try inverting it:

What if "the West got expensive" is primarily a Western story — and China's export surge is the accelerant, not the cause?

If that inversion holds even partially, the policy prescriptions change dramatically. Tariffs against China cannot fix structural failures in European energy policy, Western corporate pricing behaviour, or Germany's digitalization stagnation. They will feel satisfying and solve less than advertised.

Where the Standard Story Stands on Solid Ground

The core diagnosis is documented. The IMF's 2025 Article IV report on China acknowledges that the deficiency in domestic demand has been offset by strong export growth, supported by real exchange rate depreciation — and that this has created adverse spillovers to trading partners.

So yes: the imbalance is real, the subsidies are large, and the currency misalignment is significant.

The question is what produced the gap in the first place — and who is responsible for it.

What the Standard Story Gets Wrong (or Omits)

1. The Operational Reality: Energy Is the Sharpest Edge

Start here because this is the most immediately tangible for anyone running or funding a manufacturing or deeptech operation in Europe.

In 2024, industrial electricity prices in the EU reached €0.199/kWh. In China: €0.082/kWh. In the United States: €0.075/kWh.

IEA Executive Director Fatih Birol named three strategic errors Europe made: excessive dependence on Russian gas, the neglect of nuclear energy, and the deliberate offshoring of solar manufacturing to China. These were policy choices made over decades — not responses to Chinese aggression.

The full manufacturing cost picture is sobering. Materials costs in Germany run roughly 40% above US levels and 60% above Chinese levels. Of that gap, approximately 10 percentage points come from industrial electricity prices, another 10 from EU ETS carbon costs, and another 10 from supply chain and logistics premiums.

Europe chose to price carbon aggressively. China's ETS is far more lenient. That is a competitiveness trade-off with known consequences — not an externally imposed wound.

For founders and operators: The energy cost differential is not a macro abstraction. It determines whether a European battery cell, electrolyser, or precision components manufacturer can reach cost parity with a Chinese competitor — regardless of subsidy regime. This is the first number to stress-test in any business case.

2. The Invisible Cost Driver: Western Corporate Margin Expansion

The standard narrative is almost entirely silent on this. It deserves scrutiny.

Economic analysis of the US recovery found that rising corporate profits explained over 40% of price increases between end-2019 and mid-2022 — compared to profits normally accounting for 11–12% of prices. By mid-2024, profits still explained roughly a third of cumulative price growth since 2019, far above the long-run average.

The evidence is genuinely contested: the Kansas City Fed puts corporate profit contribution at 41% of inflation in the first two recovery years; the San Francisco Fed found less evidence of economy-wide gouging. The debate is unresolved.

But that is precisely the point. This is a large, live empirical question that the China-blame narrative completely bypasses. If Western firms — particularly in food, energy, and retail — expanded margins dramatically during 2020–2023 and then kept prices elevated even as input costs fell, that is not China's doing. It reflects Western corporate concentration and pricing power.

Note: The margin expansion data is primarily American. European corporate dynamics differ — EU firms faced more genuine cost pass-through pressure. But this distinction itself argues against treating "the West" as a monolithic bloc when diagnosing the problem.

3. Housing and Regulatory Costs: The Wage-Push Engine Nobody Talks About

High housing costs feed wage demands. Wage demands feed unit labour costs. Unit labour costs reduce competitiveness. This chain is endogenous to Western policy — not imported from China.

The EU itself acknowledges that rising land values — not construction costs — have been the primary driver of long-term house price increases across Europe, and that regulatory bottlenecks, permitting delays, and NIMBYism constrain supply. In the US, regulatory costs account for over 40% of multifamily development costs. European structures are comparable.

The chain from "we failed to build housing" to "European manufacturers can't compete with China" is real, it's long, and it runs entirely through domestic policy failures.

4. Germany's Productivity Flatline Predates the Trade Surge

Research from the Institute for Employment Research (IAB) finds that productivity per worker in Germany has been stagnant since 2017 — well before the pandemic, well before the current intensity of Chinese trade competition.

A car that stopped accelerating in 2017 cannot plausibly attribute its slowdown to a competitor who started racing in 2020.

Germany's digitalization failures, infrastructure underinvestment, and demographic pressures are structural challenges that Chinese trade policy did not create and tariffs against China cannot solve.

This is the gap in the original analysis that most directly calls for intellectual honesty: causation is being reversed, and nobody in the standard narrative names it.

5. The IMF Is More Careful Than the Narrative Suggests

The LinkedIn framing implies the IMF has taken a hard line against China. The actual position is more calibrated.

IMF Managing Director Georgieva stated explicitly: "We haven't recommended action to appreciate the Renminbi. What we want to see is a market-based exchange rate that reflects fundamentals." The IMF's preferred mechanism is boosting Chinese domestic demand — correcting imbalances from the demand side, not through currency pressure.

And the IMF's own critics point out something equally important: US fiscal deficits are an equally large driver of global imbalances — but the Fund applies softer pressure on Washington than on Beijing. Global imbalances require both a surplus country and a deficit country. The analysis that focuses exclusively on China's surplus while ignoring America's dissaving is, by construction, incomplete.

6. The Tariff Trap: Solving One Problem by Creating Another

The standard narrative concludes with a call for escalating countervailing duties. Here the second-order effects are critical — and routinely ignored.

Bruegel's analysis finds that European firms and consumers depend on access to the cheapest available suppliers for clean energy technologies — currently China in most cases. Broad tariffs on Chinese goods would simultaneously raise the cost of solar panels, batteries, and electrolysers that Europe needs to reduce its energy cost disadvantage.

In other words: the policy instrument meant to close the China competitiveness gap would raise the cost of the green transition that is Europe's primary path to closing the energy cost gap.

That is not a rhetorical paradox. It is a genuine policy dilemma that serious people must work through before advocating escalation.

The Time Horizon Problem: Where the Real Intellectual Failure Lives

This is where the analysis matters most for founders and the innovation ecosystem — and where the standard narrative is most dangerously shallow.

The problems described above operate on two very different clocks:

Problems that could theoretically move in 2–3 years:

• Currency misalignment (the yuan could adjust; IMF pressure is real)
• Specific subsidy regimes (trade negotiations can produce commitments)
• Targeted tariff structures on specific sectors (already underway on EVs)
• Corporate pricing behaviour (competition policy, margin normalisation)

Problems that are structural — 10 to 20 years minimum:

• European energy infrastructure and nuclear capacity
• Housing supply and permitting reform
• Germany's digitalization and productivity trajectory
• EU regulatory architecture and its speed of adaptation

The standard narrative treats both categories as equivalent — as if the same policy lever (tariffs, trade pressure) can address both. It cannot.

The deeper cognitive failure is that Western political systems are structurally oriented toward the 2–3 year horizon. Electoral cycles punish long-horizon investment. This means the tractable problems get all the attention, and the structural problems accumulate.

China operates on a different temporal logic. Industrial policy in China is designed in 5-year plans with 15-year ambitions. The move into solar, EVs, and batteries was not opportunistic — it was the result of decade-long state commitment to building cost curves down. The West offshored those industries while China industrialised them. We are now surprised by the results.

This is the insight worth carrying into every investment and policy conversation: the question is not just "what's the right answer?" but "what time horizon are we actually capable of executing on — and how do we design financing and governance structures that can hold a 15-year commitment?"

China's Real Advantage Is Not (Only) Subsidies

This is the point the standard narrative most dramatically misses.

China's primary innovation advantage in physical sectors — EVs, batteries, drones, manufacturing robotics — is not the subsidy regime. It is the ability to test, iterate, and deploy at scale in the real economy, at a speed that Western regulatory frameworks do not permit.

A Chinese EV manufacturer can test a new battery chemistry in a vehicle, deploy it in a city, collect real-world data from millions of cycles, and iterate — all within a timeframe that European or American regulatory approval processes would not even begin to accommodate.

This is not a trade policy problem. It is a governance-of-innovation problem. And it cannot be solved by tariffs. It requires fundamental rethinking of how the EU permits, funds, and accelerates physical innovation from prototype to deployment.

The EU's answer — the Green Deal, the Critical Raw Materials Act, IPCEI — moves in the right direction but at the wrong speed. The financing architecture is still optimised for de-risked, late-stage deployment rather than the experimental, iterative, real-world testing that actually builds industrial competence.

For founders in deeptech and climate tech: the question to ask of any market is not "is China subsidising this?" but "how fast can we test in the real world, and what is the regulatory cost of each iteration?" That cost differential — not the subsidy regime — is often the decisive factor in whether European and American startups can build competitive cost curves.

A Footnote on China's Internal Contradictions

The state-led model that produced China's manufacturing dominance also produced its housing crisis. The same capital allocation machinery that directed investment into solar, EVs, and batteries also directed it into property — with well-documented results. Chinese middle-class households are now sitting on depreciated assets while still servicing mortgages written at higher valuations.

This matters for the trade imbalance story: suppressed domestic demand — partly a consequence of household wealth destruction through the property collapse — is one of the mechanisms driving China's export surplus. The IMF's preferred solution (boost domestic consumption) runs directly into this structural problem. It is easy to prescribe; it is very hard to execute when household balance sheets are impaired.

The state-led model is not without costs. Acknowledging China's real-economy testing speed as a genuine competitive advantage does not require endorsing the full package.

Open Questions (That Nobody Is Asking)

1. What share of the EU-China manufacturing cost gap is attributable to Chinese subsidies vs. European energy policy failures? The IEA's own framing suggests the latter is larger. Has anyone in the tariff debate actually measured this?
2. If Germany's productivity has been stagnant since 2017, what specifically caused it — and which of those causes can be addressed in the next 5 years? Without this answer, the China debate is a distraction from the more urgent domestic reform agenda.
3. How do we design financing instruments that can hold a 15-year industrial policy commitment in a political system oriented toward 4-year electoral cycles? This is the hardest question in European industrial strategy — and it is almost never asked.
4. What would it take for European regulatory frameworks to permit real-economy testing at Chinese speed? Not in a sandbox. In the actual economy, at scale. What stands in the way — and who benefits from those barriers?
5. Broad countervailing tariffs will raise the cost of Chinese solar panels and batteries for European buyers. By how much, and what does that do to the EU's green transition timeline? If the answer is "it delays it by 5 years," that cost needs to be in the political conversation alongside the manufacturing protection benefit.
6. Which Western companies are thriving in the same competitive environment? What distinguishes them? If some European manufacturers are succeeding in sectors exposed to Chinese competition, the structural story is more complicated than "China kills everything it touches."

What This Means in Practice

The multi-causal diagnosis leads to a different set of priorities than the standard narrative:

The tractable 2–3 year moves — currency adjustments, targeted sector tariffs, subsidy negotiations — are worth pursuing. But they address a fraction of the competitiveness gap.

The structural 10–20 year moves — energy infrastructure, regulatory reform, housing supply, digitalization — are the ones that will actually determine whether Europe has a competitive manufacturing base in 2040. They require financing architectures, governance commitments, and political time horizons that current institutions are not designed to support.

China's advantage in this regard is not primarily its subsidies. It is its ability to commit capital and regulatory permission to long-horizon industrial experiments — and to iterate at speed in the real economy. Closing that gap requires the West, especially Europe to build analogous capacity, not just to punish the competitor who built it first. Because the US has a functioning private equity and venture capital market that ensure that private investments can make extraordinary profits.

None of this makes China's subsidy regime or currency management defensable. But it does mean that framing Western industrial decline primarily as a China problem — rather than a multi-causal crisis with significant self-inflicted components — is analytically weak. And it leads to policy responses that feel politically satisfying while solving considerably less than advertised.

The golden pot is not hidden under any single dimension. It never was.

Destruction Desk
We perform autopsies on innovation’s failed assumptions.

This newsletter was edited by Manfred Lueth.

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