Whether or not the United States now qualifies as Europe’s adversary, it’s clear that its postwar role as guarantor of Europe’s security is over. Friedrich Merz has already called for European strategic independence from Washington—a watershed declaration for a likely incoming German chancellor.

For European leaders, meeting this historical moment will mean preparing to defend their national interests on their own—including, potentially, against the United States. And in any future strategic competition with Washington, Europe has an overlooked trump card: manufacturing prowess.

Led by Germany, Europe collectively outproduces the United States in steel, vehicles, ships, and civil aircraft. European Union member countries, on average, also pay less to service their debts than the United States. This gives the EU the industrial heft and financial firepower to support Ukraine and embark on domestic rearmament as U.S. President Donald Trump abandons Kyiv and NATO. But it will require the bloc to invest in its defense and defend the manufacturing base that underpins it against China’s trade dumping and US tariffs.

Many European leaders look with envy on the U.S. tech sector. But manufacturing plays a far greater role in the EU economy than in the United States. On average, manufacturing accounts for 16.4 percent of the EU’s gross value added compared to just 11 percent in the United States. The EU’s manufacturing sector employs 30 million people versus just 13 million in the United States. While U.S. tech is highly profitable, the industry employs just 6.5 million people.

The stagnant EU economy has fueled calls for Europe to prioritize high-tech sectors over its “old” industrial base. But while new technologies matter, this is a false dichotomy. There are three reasons why maintaining Europe’s manufacturing edge is critical not just for its growth, but also for its security.

First, manufacturing drives the little productivity growth that Europe still generates. While digital technologies have propelled U.S. productivity growth, in the eurozone’s five largest economies, so-called mid-tech manufacturing—such as cars and machine-building—has dominated the top 10 sectors, with some of the fastest productivity growth since 2012.

If the EU is to fund large and immediate increases in defense spending, it will need the income created by its industrial sector to generate tax receipts and keep its debt levels sustainable. These sectors are far from a lost cause. For example, ASML, widely seen as Europe’s most important tech company, is a machine-builder. Exports of clean technology account for 4 percent of Germany’s GDP, a figure unmatched in any other G-7 economy or even China.

Second, industrial production is a precondition for Europe to rearm quickly. Not only does Europe produce more vehicles than the United States and 50 percent more steel, but Airbus also produced twice as many planes as crisis-stricken Boeing in 2024. And Europe maintains critical upstream industries for defense production, such as steel and chemicals, although they are reeling from high energy costs.

Today, supply chains for modern industry double up as defense supply chains. The United States serves as a warning of the risks of letting them etiolate: It maintains a military shipbuilding industry that struggles with cost overruns and inefficiencies, partly because of the small number of commercial ships it produces, eroding its supply chains. In contrast, Europe still produces a significant number of highly specialized ships each year.

Third, even as Europe aims to catch up with the United States in advanced technologies, its comparative advantage in the trans-Atlantic relationship will continue to lie in manufacturing. Because U.S. industrial capacity cannot match domestic demand, EU has long run a surplus in goods trade with the United States, dominated by machines, cars, and chemicals. Much of its advanced manufacturing is outsourced to Europe and Asia. On the flip side, Europe is mainly reliant on the United States for its tech and software services.

Washington is aiming to reindustrialize and rebalance the trading relationship. But in an economy already operating above full capacity, with a tight labor market and planned controls on immigration, there will be constraints on expanding domestic supply. Manufacturing can ensure that the EU remains an indispensable partner to a more transactional U.S. administration.

But Europe’s trump card is being jeopardized by both neglect and hesitancy. The defense industry is weakened by fragmented, bespoke production and years of underspending. Even if defense budgets now rise, the cumulative deficit over the last decade relative to NATO spending target of 2 percent of each nation’s GDP amounts to 850 billion euros ($916.9 billion).

At the same time, the EU is equivocating as the wider manufacturing sector is progressively squeezed by China. Since its property bubble burst in 2021, China has doubled down on investment in autos, machinery, clean tech, and aviation—despite a lack of domestic demand for these goods. By exporting its overproduction, China is cutting into EU producers’ global export markets.

The auto industry is the tip of the spear. As recently as 2020, China was not a net car exporter. Now, it exports 5 million more vehicles than it imports annually, while Germany’s net car exports have halved since before the COVID-19 pandemic—dragging down supply chains from Italy to Czechia.

Chinese overproduction is even a direct security risk in some sectors. Last year, China cut off U.S. drone-maker Skydio from batteries, throttling deliveries to Ukraine. Critics of a European industrial policy reflexively warn of the risks of propping up so-called losers. Yet Europe let Northvolt go bankrupt— threatening to deepen the continent’s reliance on China.

Adding to Europe’s woes, Trump plans to impose tariffs on EU goods soon and is rolling back former President Joe Biden’s green subsidies benefitting EU car and wind turbine makers. With China flooding global markets and the United States apparently unwilling to accept more EU imports, foreign markets will not rescue Europe or Germany as they did after the euro crisis.

But the EU can take its fate into its own hands. Germany is the country most exposed to China’s imbalances, and it also has the most fiscal space to respond. The incoming Merz government just announced a massive defense and infrastructure spending package worth at least 11 percent of its GDP—ditching Germany’s debt brake, which acted as an unnecessary fiscal straitjacket. This will likely prove crucial to end the investment drought plaguing Europe’s largest economy. Higher investment will stoke domestic demand and offset lost export markets. But simply increasing aggregate demand is not enough: The EU must also direct it toward strategic industries.

The EU should use trade and industrial policy to steer civilian demand away from China and toward “made in Europe” production. The EU is about to negotiate a clean industrial deal. Its goal should be to put in place sector-wide policies that concentrate European demand, allowing fierce intra-EU competition but avoiding firm-specific handouts.

The fiscal cost of these changes is manageable. The International Monetary Fund estimates that the clean tech subsidies of the Inflation Reduction Act cost the United States around 0.25 percent to 0.4 percent of its GDP annually. Europe, with its lower average debt and deficit levels, can easily afford similar scale of investment.

Another challenge is retaining openness toward free trade partners: to maintain market scale, ensure competition, and invest in new alliances as the United States withdraws from the global scene. One simple fix would be to include the EU’s 72 partners with free trade agreements in local content rules and demand reciprocal access. Another option would be to design subsidy schemes scoring products based on environmental, national security, and labor standards—ensuring that partners such as Canada, the United Kingdom, and Mercosur qualify while cutting China out.

In parallel, the continent needs to move toward producing standardized military kit for mass production. The promise of stable defense contracts is already revitalizing Germany’s stock market, proving that targeted demand can restore Europe’s industrial core.

There are two ways to do so. One is by relying on national specializations: France in aircraft production, Germany in tanks, the Netherlands in radar, and Poland in drones. Another approach is to share the spoils by requiring leading EU defense manufacturers to spread their plants across the continent, much like how Airbus operates.

Biden’s signature bills—the Inflation Reduction Act and the CHIPS and Science Act—aimed to arrest the United States’ long-standing industrial decline and reduce its reliance on China. Ironically, it is now the EU, not the United States, in urgent need for these policies.

Some changes are already underway: The EU is increasing defense spending, negotiating a clean industrial deal, and deploying its trade defense tools against China. But these efforts need to be more ambitious and better coordinated. Europe’s large market, head start in manufacturing and a large, well-trained workforce give it a chance of success. A 50-year-old German car engineer is unlikely to reincarnate as a digital entrepreneur, but such a worker can retrain for clean technology or defense manufacturing

Getting industrial policy right will strengthen Europe’s strategic position. It will not address immediate defense deficiencies such as a lack of intelligence capability or insufficient long-range precision strike assets. But despite its existential angst, Europe remains a wealthy region with a powerful industrial base that can drive both rearmament and the productivity growth needed to fund it.

Trump’s tariffs alone are unlikely to bring back U.S. manufacturing anytime soon. In the future, the United States may face a choice: continuing to import the EU’s manufacturing surplus or cementing its dependence on China. The biggest risk is that EU leaders bicker among themselves rather than defend their industrial strength. In that sense, U.S. Vice President J.D. Vance was right to say that Europe should worry about the enemy from within.