Report

How German industry can survive the second China shock

Think tank: Centre for European Reform

Author(s): Sander Tordoir; Brad Setser

January 16, 2025

This report from UK think tank the Centre for European Reform urges the next German government to rethink its trade and industrial policies.

As it heads to the polls, Germany is gripped with fear of deindustrialisation.

A new study by the Centre for European Reform (CER), ‘How German industry can survive the second China shock’ shows that China’s aggressive pivot to export-led growth puts it on a collision course with German manufacturing, a sector employing 5.5 million people and contributing 20 per cent of GDP. US tariffs on Chinese goods are likely to divert even more exports to Europe – putting additional pressure on German industry. The study urges the next German government to rethink its trade and industrial policies.

After its property bubble burst in 2021, China doubled down on export-led growth, driven by industrial subsidies and weak domestic demand. When China became a World Trade Organisation (WTO) member in 2001 its exports also soared. But then, China’s exports were in consumer electronics, furniture, apparel and household appliances – not the automotive and engineering sectors at the heart of the German economy. For example, Chinese vehicles exports, roughly in balance with imports just four years ago, have skyrocketed to 6 million in 2024, and the surge shows no sign of abating.

Today’s China shock is also much larger: China is now a $18 trillion economy that accounts for over a third of the world’s manufacturing production. And it is cutting Germany’s export opportunities, not just flooding the EU with imports.

The CER report shows that China’s renewed export-driven growth model poses a risk to Germany’s strong comparative advantage in growing markets for 200 greentech technologies.