Yves here. There have been some admissions about how German deindustrialization resulted from Europe sanctions on the cheap Russian gas on which manufacturers, particularly in Germany and Italy, depended. However, I have to confess to not seeing much about the impact of Chinese exports to Germany dealing a big blow before the Russian gas self-inflicted wound. However, if you look at the sick state of pretty much every non-Chinese car manufacturer, and “ruinous competition” among Chinese EV and battery makers in China, it’s not hard to see why Germany was already wobbly before the energy cost blow. Admittedly as this article points out, Chinese machine tools were a second route for China eating Germany’s lunch.
Keep in mind the impact by sector of China’s incursion versus the cheap-energy-self-harm are different. Energy intensive concerns like chemical producers, paper plants, and aluminum makers started rapidly cutting production when the energy price increase hit.
By Dalia Marin, Senior Research Fellow Bruegel; Professor of International Economics Technical University of Munich. Originally published at VoxEU
Trade with China displaced large parts of the American workforce in the 2000s, but Germany did not experience a similar shock at the time. This column argues that the ‘China shock’ has hit the German economy since 2020, particularly in its core automobile and machinery sectors. To avoid America’s painful de-industrialisation of the 2000s, Chinese market entry in Europe should be made conditional on forming joint ventures with European firms in order to remain globally competitive. These joint ventures should be designed carefully to deliver technology transfer to Europe and build resilient upstream capacity on the continent.
In a series of influential papers, Autor et al. (2013, 2016) document that trade with China devastated large parts of the American workforce in the 2000s after China entered the World Trade Organisation (WTO) in 2001. This was quite unusual. In previous trade liberalisation episodes, some workers in the import competing sectors were displaced by foreign competition, but usually they found a job in the export-expanding sector. But the ‘China shock’, as Autor and co-authors coined it, of the 2000s was completely different. The competition was so swift, sudden, and so concentrated in particular regions that American factory workers were hit hard, and some regions were completely deindustrialised. Many of the workers moved into the service sector that paid much less than they had earned before, and some went on welfare payrolls. In 2016, Trump won the election, which Autor et al. (2020) connected to trade-related job losses.
Germany Did Not Have a China Shock in the 2000s
Germany did not experience a similar China shock in the 2000s (Dauth et al. 2014), although the import competition shock from China was as severe in Germany as in the US. The change in the share of Chinese imports in total imports in the period 2001- 2007 was 213.5% in Germany, from 3.7% to 7.9% (Figure 1), and in the US it grew by 188% from 8.6% to 16.2% (Figure 2).
Figure 1 China’s share of total imports and exports in Germany
Figure 2 China’s share of total imports and exports in the US
In contrast to the US, Germany’s exports to China boomed. Its export share to China increased by 227% from 3.3% of total exports in 2007 to 7.5% in 2019 as Germany’s machine tools and auto industries helped to industrialise the Chinese economy (Figure 1). In the US, exports to China as a share of total exports increased by a meagre 23.7% in the same period (Figure 2). 1
Germany’s China Shock of 2020
Germany’s trade with China changed abruptly after 2020. Between 2020 and 2022 imports from Chinese increased by more than 60% based on official data from the German Statistical Office (Figure 3). In late 2023, Germany terminated its national purchase subsidies for battery electric vehicles known as the ‘environmental bonus’ which favoured in particular the import of Chinese electric vehicles. Moreover, in 2024 the European Commission introduced tariffs on imports of battery electric vehicles from China of up to 45.3%. Brussels also imposed tariffs on imports of mobile access equipment (construction equipment) from China ranging from 20.6% to 66.7%. Further import duties were introduced on a range of chemical products. These measures contributed to a sudden decline in Chinese imports in 2023-2024.
Figure 3 Since 2020, imports from China are exploding
The historic shift in Germany’s trade pattern with China can be seen in Figure 1. Within three years from 2019 to 2022 China’s share in German imports increased by 30% from 10% to 13%. Exports to China also suffered, reducing China’s share in total exports by 20%.
What is driving this trade pattern? Figure 4 documents that the two core industries in Germany – cars and machinery tools – experienced a historic shift. In both industries Germany stopped being a net exporter to China. Car exports to China dramatically declined by almost 70% between 2022 and 2024. Fierce competition in China and Chinese advancement in electric vehicles made Chinese consumers move from German to Chinese models. At the same time, car imports from China more than doubled between 2020 and 2023 before declining in 2023-2024 after the imposition of import tariffs on electric vehicles from China. For the first time ever, trade in cars with China is somewhat balanced in late 2024.
In machinery trade, Germany became a net importer of machinery tools from China already in 2015. Machinery imports from China more than doubled between 2020 and 2022 before declining over 2023-2024 after import tariffs were introduced. Machinery exports to China are stagnating. Given the importance of machinery imports from Germany for the industrialisation of the Chinese economy, this development is dramatic.
Figure 4 Germany’s car and machinery trade with China
The tables have turned. China is now the world leader in batteries and electric vehicles (and machinery), while Germany was the world leader in the combustion engine. China’s size, experience, and subsidies have helped China to learn and to scale up production. In a classic paper that introduces learning curves into trade models, Krugman (1987) shows that subsidies can speed up the learning process and boost the productivity of subsidised sectors, thereby putting competitors at a permanent disadvantage. Krugman’s theoretical argument has recently found empirical support by Lane (2025). Using South Korea’s sector-specific industrial strategy under President Park Chung-hee as a natural experiment, he found that, on average, subsidised industries experienced an average growth rate 80% higher than non-subsidised ones. The growth advantage persisted even after the subsidy was removed, underscoring the learning effect. Thus, Germany faces the threat of losing two of its core sectors to Chinese competition. Europe will need to keep import tariffs to facilitate learning in the face of the transition to electric vehicles and battery technology. The European Commission should also encourage Chinese investment in Europe (Marin 2024).
Europe Should Make Market Access Conditional on Joint Ventures
Germany and Europe should avoid America’s painful deindustrialisation of the 2000s. Germany’s China shock will be worse than the one the US experienced in the 2000s as cars and machinery are two of the core sectors of the German economy. These two sectors undertake most of Germany’s R&D and they play an important role for future technology and innovation. In the US, the China shock hit low-cost industries such as furniture, textiles, and clothing.
To this end, Germany should reverse-engineer China’s industrial policy by making market entry to the European market conditional on forming joint ventures with European firms. I warned two years ago about a possible China shock (Marin 2023a, b) and I suggested that the European Commission should broker a partnership with China by providing China with access to the European market in return for a commitment to invest in Europe and to establish joint ventures with European firms. Over the past 20-30 years, China has required foreign investors to form joint ventures as a condition for entry to the large Chinese market. By working with Chinese electric vehicle and battery manufacturers, German automakers could acquire the technical expertise in electric vehicles and batteries to remain globally competitive. The European Commission has adopted this policy in 2024 (Financial Times 2024) and introduced the ‘Industrial Action Plan for the European Automotive Sector’ in 2025 (European Commission 2025).
Early challenges and failures by European firms producing batteries without a foreign partner reinforce the need for partnership with China. Two important examples are Northvolt and ACC (the Airbus of batteries), a joint venture between Mercedes, Stellantis, and Total Energies. In both cases the core problem was to scale up production. In the start-up phase, European battery firms experienced a scrap rate of batteries of nearly 90%. They go through a valley of death until batteries become profitable (Les Echos 2025a, b, Financial Times 2025). By the time they become profitable, however, they might be out of the market. Partnering with Chinese EV and battery firms would allow European firms to skip the start-up phase and to move directly to profitability.
For this to work, joint venture contracts with Chinese firms must be carefully designed to make sure that Chinese investment delivers technology transfer to Europe. The danger is that these joint ventures will remain locked in assembly activity without learning. The European Commission should ask for a 50/50 ownership share between European and Chinese partners and require China to send a 25-30% share of Chinese professionals to these joint ventures to train European partners. To build resilient upstream capacity, local European input requirements are also desirable.
Summary
In this column, I document that the China shock has arrived in Germany, threatening its core sectors: cars and machinery. I also discuss what the European Commission should do to prevent a deindustrialisation shock even worse than the one the US experienced in the 2000s.
See original post for references
I think anyone who looked at the consequences of moving from ICE to EVs would crater the German car industry which had been the core of the German economy. This was clear for the last 10 years , as Germany went all in with net zero , the green energy movement and then compounded by the self harm of Russian energy embargoes. Its an example of economic self destruction, which is being closely followed by that of the UK.
Both Germany and China run up huge trade surpluses. Consequently, the idea that they can form an effective trade partnership seems improbable. Germany and Europe are going to go down very hard if they do not take drastic action, and maybe they are finally starting to see this, as they are being shunted brusquely from US markets while being undermined by the super competitive Chinese at home. Hence the push (in part) for heavy militarization in Germany to keep the wheels of industry humming, something already noted. In the longer run, it seems hard to believe that the EU will not take protective measures to save what industry it still has. Looks as if the fragmentation of the global economy is bound to intensify.