As Germany heads for federal elections in February 2025, a spectre is haunting the country – the spectre of deindustrialisation. German industrial production is way below its 2018 peak, and started declining earlier, and faster, than in other eurozone countries. Some firms, like Volkswagen (VW), are now negotiating possible German plant closures and mass layoffs. This is not a function of shrinking global trade, as global trade continues to expand. China’s growing imbalances, to which Germany is uniquely exposed, are a more likely culprit.
China’s increasing technical sophistication, its political commitment to invest in, and subsidise, advanced manufacturing and its low level of demand pose a clear challenge to all advanced economies – the US as much as Germany. For all the talk about deglobalisation and the need for supply chain diversification, the global economy – including the large European countries – is becoming more, not less, reliant on Chinese supply in key sectors.
Donald Trump’s re-election is likely to create new points of tension between the EU and the US. Trump’s concerns about China’s surplus with the US are likely to result in measures that exacerbate the threat that China’s imbalances pose to EU industry. If the US imposes widespread sizeable tariffs on China – as Trump says he intends to do – even more of China’s excess production will be redirected to the European market.
But Germany’s politics have still not caught up with the risks that its economic model is facing. Rather than recognising Chinese industrial policies in clean energy sectors as a clear threat to Germany’s industrial leadership, it opposed EU tariffs on Chinese electric vehicles. The EU’s targeted countervailing duties – a modest, ‘within the rules’ response compared to trade practices employed by both the Trump and Biden administrations – passed thanks to support from more far-sighted members of the Union like the Netherlands, France and Ireland. Such countervailing duties are specific tariffs imposed to offset the effects of foreign government subsidies on imported goods.
Without German support, the EU may struggle the next time it tries to stand up to Beijing. Doing so in collaboration with Washington will be challenging under Trump, who is aggrieved by Germany’s bilateral trade surplus with the US. But fundamentally the US and EU share the same concern about Chinese overcapacity. If Germany wants to avoid rapid deindustrialisation, with significant, geographically concentrated losses in jobs and productivity, its new government must urgently rethink its trade, industrial and fiscal policies. This paper looks at the causes and consequences of China’s surpluses, and sets out what Germany needs to do to mitigate their effects.
About the authors:
Sander Tordoir is the chief economist at the Centre for European Reform.
Brad Setser is the Whitney Shepardson senior fellow at the Council on Foreign Relations.