Making the EU’s new industrial rulebook work for Central Europe
This article is part of a series published by the Atlantic Council’s GeoEconomics Center examining how Central and Eastern Europe can navigate the profound shifts underway in European trade and industrial policy. The previous edition can be read here.
European manufacturing hubs don’t need to agree on everything, but surmounting China Shock 2.0 will require compromise. Look beneath the surface of the policy debates that have grown louder this year, and you will find that European Union (EU) capitals are already abandoning familiar positions and old battle lines.
Berlin is coming to appreciate the need for cross-sector protections against Chinese overcapacity. Paris is being careful not to gloat that it was right all along about strategic autonomy, lest it reinforce suspicions that it is simply trying to promote French firms. The Tusk government has switched Warsaw’s position to one of outward support for the Carbon Border Adjustment Mechanism (CBAM), a tool that can be used to justify protectionism against markets lacking emissions standards.
For Central and Eastern Europe (CEE), these shifts are not insignificant, as they will bring into view—or at least pay lip service to—the importance of the region’s remaining manufacturing capacity. However, the various policy initiatives to be launched over the coming months are unlikely to address one of the most audible strands of commentary coming from CEE: complaints that the mandatory decarbonization targets of the European Commission’s Green Deal did nothing but undermine competitiveness.
For capitals in the East, Europe’s industrial shift is a mixed bag
To a degree, the numbers back them up. On energy, industrial electricity in the EU averaged €0.199 per kilowatt hour (kWh) in 2024, against €0.082 in China and €0.075 in the United States. CEE has fared worse than the EU average: between 2019 and 2023, industrial electricity prices rose 171 percent in Hungary and 137 percent in Poland, against 21 percent in the United States. Labor costs are now much higher than in China and in countries such as Morocco that benefit from favorable trade agreements with the EU and have attracted substantial Chinese investment.
Just as concerning is the fact that the region’s capitals enjoy less fiscal space and borrow at higher rates than Western member states. Poland and Romania—while both in the privileged position of enjoying high growth rates and less reliance on Germany as an export destination—have high and growing deficits, which limit how much their governments can invest in the infrastructure and subsidies needed to benefit from any reshoring trend. All the more reason for the region to come up with a more deliberate strategy to seize the opportunities offered by what might be an unprecedented policy inflection in the EU. Tariffs, taxes, and subsidies all have uncomfortable tradeoffs and will not be sufficient without attracting private investment. But the reverse is also true. Without an economic security mandate providing a floor in the market, would global private capital really bet on manufacturing in Europe now?
Europe’s new policy matrix offers an opening
The Industrial Accelerator Act, which is currently in the early stages of legislative procedure, should be overwhelmingly good news for the EU’s stronger manufacturers. It is meant to turn the objectives of the February 2025 Clean Industrial Deal into binding rules, including local content requirements for public tenders and subsidies and pathways for foreign investors subject to screening to commit to onshoring added value through local employment and technology transfer.
Originally titled the “Industrial Decarbonization Accelerator Act,” the dropped word captures the shift in the policy debate—one that most CEE capitals will welcome. But they are still worried that new rules will add to the costs of their own producers without guaranteeing more demand. Member states with more fiscal room for maneuver can pair national procurement preference with subsidies to pull production toward their own markets rather than toward the Union’s most competitive manufacturing regions. Unlike France, Germany, and Italy, CEE also lacks large corporations that have the resources to represent their interests in Brussels and ensure that national implementation of EU policies benefits them.
The solution might involve loosening the “Made in Europe” requirement to a “Made with Europe” one. Bringing trusted trading partners into the mix could protect firms’ competitiveness while still keeping production within a trusted network. Competition rules will also need to be updated to stop large member states from using national subsidies exclusively on national firms.
CEE will also need a stronger position on Europe’s fledgling tariff wall and how to make it more effective. The region’s capitals had a patchwork of different positions on the much-vaunted tariffs on Chinese electric vehicles introduced in 2024. Better coordination will hopefully be possible over the next year, which will see steps toward implementing the CBAM alongside ever more frequent use of safeguards and a growing debate over a “European 301” that could allow a blanket tariff on Chinese goods.
Despite the region’s dislike of its underlying Emissions Trading Scheme (ETS), which has been loosened somewhat this year, CBAM is a clear opportunity to make CEE manufacturing a relatively more competitive option for EU buyers. Capitals like Warsaw even support the Commission’s December 2025 proposal to extend CBAM to some 180 downstream products from 2028. That would help the region’s mid-stream manufacturers, whose imported inputs are currently subject to CBAM while finished goods remain untouched.
While the debate over a European 301 plays out, additional safeguards will be considered. The new steel regulation halves quotas and doubles out-of-quota duties to 50 percent. Other metal inputs will be considered next, but this approach is unlikely to extend to consumer goods, as it affects all trade partners. With its own production capacity to protect, CEE will have a crucial perspective on which goods to target next, from aluminum to downstream steel. Finally, positions on cross-sector tariffs on Chinese imports vary widely. Warsaw is on the hawkish side, and Prague would be too, were it not for the importance of the car industry to its economy. Meanwhile, Hungary remains highly skeptical, despite this year’s change in government. The region will at least need to agree on some common principles, however, so it can trade support for an incremental European 301 for guarantees that Western European firms will buy from Central European producers.
A manufacturing strategy for a tighter EU budget
The coming months will be crucial for negotiations on the new long-term EU budget covering a seven-year period starting in 2028. Innovation, advanced technologies, and the clean tech sector will have to compete with the EU’s expanding role in cross-border defense projects and support for Ukraine. To accommodate these demands, the European Commission is radically revamping the financial framework. Traditional EU spending on cohesion and the Common Agricultural Policy is being streamlined into a single National and Regional Partnership Plan, from which member states will draw funds.
Despite the mushrooming of new roles, a minority of member states, including Austria, are ruling out any increase to the EU budget—and political uncertainty in France and Germany means there is no guarantee that Paris and Berlin will step in to broker a compromise. Slovakia’s presidency of the Visegrad Four clearly appreciates the risk that the region may lose out, especially as richer members such as Czechia are on the cusp of becoming net budget contributors. Against this backdrop, the region’s manufacturing resilience should be used as an asset to secure continued EU investment in energy and transport infrastructure.
Squaring the circle on protectionism and competitiveness
The united front displayed by Central Europe at the February Competitiveness Council achieved meager results. Free allocations within the ETS will last slightly longer, making energy bills for some heavy industries slightly cheaper. But this is hardly a structural shift. CEE should therefore avoid treating protectionism and competitiveness as opposing camps and use its support for the measures on which Germany and France are increasingly aligned to secure benefits for the region.
Even as the EU begins to stray from the free-trading principles it applied globally, its internal rules are the only level playing field still on offer, giving CEE governments an opportunity to muster collective heft. The task, then, is not to choose between protectionism and competitiveness but to write the rules so that manufacturing capacity in the Single Market’s East is considered by all firms seeking to reshore their supply chains.
Charles Lichfield is the director of economic foresight and analysis and the C. Boyden Gray senior fellow at the Atlantic Council’s GeoEconomics Center.
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