BERLIN — Germany, revered for its robust manufacturing industry, finds itself at the precipice of an economic crisis that has left industry leaders alarmed and politicians scrambling for solutions.
On a gloomy day in mid-September, I met with Oliver Richtberg, a representative of the VDMA, at their annual political conference, aptly called the “German Mechanical Engineering Summit.”
The VDMA, a prominent industry association, advocates for thousands of companies in Germany’s mechanical and plant engineering sectors, which constitute a significant portion of what is referred to as the “Mittelstand” — Germany’s backbone of small and medium-sized enterprises.
The VDMA commands considerable political influence, as evidenced by the recent summit where Germany’s Chancellor, Friedrich Merz, gave a speech, following remarks from the VDMA president who expressed profound discontent over the dire circumstances plaguing Germany’s manufacturing landscape.
Richtberg shared sobering statistics indicating a troubling trend, with exports plummeting and job losses mounting. Production has decreased by 4.5 percent in the past six months, contributing to an ongoing slump in the industry that has persisted for several years.
This persistent decline has prompted the VDMA to issue urgent calls for significant changes to halt the economic downturn.
Germany’s economy has struggled for more than five years now, marked by slow growth and alarming troubles within its world-renowned manufacturing sector.
Several factors have contributed to this crisis, including spiraling energy prices following Russia’s invasion of Ukraine in 2022 and adverse effects from U.S. tariffs.
However, an even more formidable challenge looms — one that recalls the American experience of the early 2000s, but is positioned to impact Germany’s economy more severely.
Economists are now discussing a phenomenon dubbed the “second China Shock.”
The previous China Shock occurred in the early 2000s, during which China’s surge in exports resulted in a dramatic loss of manufacturing jobs in several countries, including the United States, and significantly harmed many industrial towns.
This initial shock is believed to have played a role in fueling a populist backlash that continues to reverberate through American politics today.
Unlike its previous experience with the first China Shock, Germany is now facing a second wave of challenges that threaten the core of its export-driven economy.
Dalia Marin, an economist at the Technical University of Munich, emphasized that this second shock represents an “existential threat” to Germany, with the potential for a level of deindustrialization that could eclipse the impacts experienced in the U.S. during the first shock.
To understand how Germany remained resilient during the first China Shock, it’s important to consider the dynamics at play in that period.
When China joined the World Trade Organization in 2001, it accelerated its industrialization and flooded global markets with low-cost manufactured goods, primarily in sectors like textiles, consumer electronics, and furniture.
According to Sander Tordoir, an economist at the Centre for European Reform, this focus on lower-end products protected Germany, whose economy primarily thrived on high-end manufacturing sectors, including automobiles and machinery.
Jens Südekum, an economist at Düsseldorf University and adviser to the German finance minister, noted that while some smaller sectors in Germany were disrupted, the broader manufacturing landscape actually benefited from China’s development.
As China built new manufacturing capabilities, German machinery and equipment manufacturers found lucrative opportunities in supplying industrial machines to their Chinese counterparts, creating a mutually beneficial relationship.
Additionally, the burgeoning middle class in China showed an increasing appetite for German luxury cars, further strengthening this economic interdependence.
Supporting factors during this period also included labor market reforms in Germany that reduced unemployment, as well as the integration of post-communist nations into the EU, which provided enhanced access to new markets and cost-effective labor.
Furthermore, the introduction of the euro allowed Germany’s economy to benefit from favorable currency dynamics that bolstered export competitiveness.
While many industries in other Western nations faltered due to competition from Chinese imports, Germany managed to maintain a thriving manufacturing sector, with exports to China constituting a significant portion of its GDP by 2012.
Germany’s comparatively robust performance led to a stark contrast between its economy and that of nations such as the U.S., where manufacturing’s share of GDP steadily declined.
Now, however, as the global landscape shifts with a second China Shock on the horizon, Germany is grappling with new threats.
The second shock is notably different from the first, as it targets Germany’s core industrial strengths rather than low-end sectors.
Key drivers of this new challenge include a surge in Chinese exports as the country attempts to overcome its domestic economic issues, stemming from a real estate crisis that emerged in 2021.
Whereas China once relied on German imports, it has now grown into a formidable rival in advanced manufacturing, producing everything from machinery and electronics to automobiles.
With this shift, demand for German goods is dwindling, affecting exports both to China and other global markets.
The transformation within the Chinese economy is staggering.
In 2019, China relied heavily on imports for its vehicle market, but by 2023, it transformed into the world’s largest car exporter, shipping out around five million more cars than it imported, aided by significant advancements in electric vehicle manufacturing.
China’s sweeping strategy, articulated through “Made in China 2025,” outlined a goal to establish the nation as a leader in advanced manufacturing sectors, leading to increased investments in research and development and industrial policy designed to bolster technological independence.
As a result, Chinese enterprises are now emerging as serious competitors to German manufacturers in key industries.
Richtberg observed that upon returning to China after a hiatus due to the COVID-19 pandemic, German manufacturers noted considerable advancements in Chinese production capabilities, with machines being offered at prices approximately 30 percent lower than their German counterparts.
While quality may differ, customers often perceive these cheaper alternatives as adequate for their needs.
Richtberg highlighted the competitive advantages that Chinese companies possess, such as extensive economies of scale, efficient supply chains, and a labor force willing to accept lower wages.
However, he also cautioned that many could consider such competition to be unfair due to regulatory discrepancies, with evidence of unregulated practices among Chinese manufacturers.
For example, while European companies adhere to strict regulatory standards and label their products accordingly, some Chinese firms employ deceptive labeling tactics, undermining compliance.
Additionally, the extensive subsidies provided by the Chinese government create an uneven playing field, further complicating the competitive landscape for German manufacturers.
As a response, the VDMA is urging both the German government and the EU to take stringent measures, including implementing countervailing tariffs against subsidized foreign imports.
Economists, too, have voiced support for protective tariffs as a necessary countermeasure.
Though these tariffs can shield German companies within Europe, they do not resolve the broader issue of dependence on exports, with over 42 percent of Germany’s GDP being attributed to exports in 2024.
In contrast, exports account for only a small fraction of the U.S. GDP, complicating Germany’s ability to compete in the global market as its reliance on China — once a prime customer — morphs into competition.
The ramifications of this second China Shock could be more profound for Germany than the first was for the United States, as it fundamentally threatens the industrial structure of the German economy.
Whereas the original China Shock primarily impacted low-end manufacturing, the current crisis jeopardizes high-value sectors that account for a significant share of Germany’s GDP.
Germany is grappling with not just the challenges posed by Chinese competition but also a shift in U.S. trade policies, which have seen the country retreat from international markets to embrace protectionism.
With high tariffs imposed on Chinese goods, Chinese products are increasingly redirected to European markets with lower tariffs, thus increasing competition for German manufacturers.
As a potential solution, some economists, including Tordoir, propose that Germany should encourage China to bolster its domestic consumption while alleviating pressure on its export economy.
Germany has started to pivot towards increasing domestic spending, driven by recent constitutional reforms under Chancellor Merz’s leadership, allowing for greater government investment, particularly in defense and infrastructure.
Südekum argues that fostering internal demand is essential for stabilizing the economy, particularly within the framework of the European Union.
Both Tordoir and Südekum advocate for strategies that incentivize European consumers to prioritize locally produced goods in their purchasing decisions, potentially revitalizing the manufacturing sector.
There are calls for Germany to draw inspiration from successful aspects of China’s industrial policy, which emphasizes long-term planning and strategic investments.
While aligning the diverse interests of numerous EU nations is no small task, establishing EU-wide industrial policies may be a pathway to strengthening Germany’s standing in global markets.
Additionally, concerns persist regarding Germany’s ability to innovate in critical technology sectors, including electric vehicles and batteries.
Wolfgang Münchau’s book, “Kaput: The End of the German Miracle,” offers a critical perspective on Germany’s stagnation in its industrial model and stresses the need for investment and adaptation to evolving technological landscapes.
Amidst these shifts, the future of Germany’s manufacturing industry hangs in the balance, as it must navigate unprecedented competition while redefining its economic model for sustainable growth.
image source from：npr
