Germany's economic stagnation has long been blamed on domestic issues: high labour costs, bureaucratic inertia, and a lack of innovation. But a new analysis from the Centre for European Reform (CER) argues that the real culprit may lie elsewhere. In a study titled "China shock 2.0 – the cost of Germany’s complacency," economists Sander Tordoir and Brad Setser contend that Beijing's targeted industrial policy is systematically undercutting German industry, from automotive to advanced manufacturing.
The study highlights how China has built commanding positions in critical sectors such as rare earths, basic chemical inputs for pharmaceuticals, semiconductors, robotics, batteries, and electric vehicles. In these markets, Chinese firms now dominate both technologically and economically, often pushing European competitors aside. The authors point to the rapid rise of Chinese carmakers since the pandemic as a stark example of how quickly industrial power balances can shift, with serious consequences for traditional manufacturing hubs like Wolfsburg, Stuttgart, and Ingolstadt.
Export trends reveal a shifting landscape
China's export growth has outpaced global trade significantly, while Germany's exports to China have been declining since 2023. The CER study warns that European companies will continue losing market share not only internationally but also within Europe itself. The near-total collapse of Germany's once-thriving solar industry serves as a cautionary tale. The authors draw parallels with the decline of industrial centres in the United States during the 2000s, suggesting that Germany's industrial regions could face a similar fate if left unprotected.
While many German economists focus on domestic reforms—such as those advocated by Ifo president Clemens Fuest, who calls for a "comprehensive strategy" to boost long-term growth—Tordoir and Setser argue that external pressure from China is the primary driver of Germany's woes. They point to China's use of market barriers, extensive state subsidies, strategic control of raw materials, and direct economic policy interventions as conferring substantial advantages on Chinese companies.
The study recommends stronger protective measures, including higher import tariffs on sensitive industrial goods, greater preference for European products in public procurement, and stricter requirements for Chinese companies manufacturing in Europe. The authors even suggest joint-venture rules modelled on China's own practices.
Berlin's cautious stance versus EU pressure
Germany has so far resisted such calls, partly due to its deep economic ties with China and fears of retaliation. Europe remains dependent on Chinese supplies of critical raw materials and industrial intermediates, as detailed in a recent analysis of EU's critical dependence on China in five industrial sectors. This week, Economy Minister Katherina Reiche (CDU) is leading a delegation of around 40 business representatives to Beijing to explore cooperation projects—a move that has drawn criticism from within the EU.
France, Spain, Italy, the Netherlands, and Lithuania have signed an informal position paper calling for a tougher EU response to China's trade practices. Germany notably did not join. In March, Chancellor Friedrich Merz (CDU) called for a trade agreement with Beijing, a proposal Brussels rejected. This divergence underscores a growing rift between Berlin and its European partners, as detailed in Germany's China trade visit undermines EU push for tougher stance.
The stakes are high. If the "China shock 2.0" materialises as the CER study predicts, Germany's industrial backbone—and by extension, the European economy—could face a prolonged period of decline. The question is whether Berlin will act before it is too late.
