BERLIN — On a cloudy day in mid-September, I biked across Germany's capital to meet up with Oliver Richtberg, a representative of the VDMA, at his organization's annual political conference. The VDMA is an industry association (whose name is a German acronym that translates to Association of German Mechanical and Plant Engineering). It represents thousands of German companies that manufacture industrial machines and equipment. The companies are a big part of what Germans call the "Mittelstand," which are small and medium-sized manufacturers that are widely considered to be "the heart of the German economy."
The VDMA has real political clout, and their annual conference, "the German Mechanical Engineering Summit," has become a must-go-to event for German leaders. Just the day before, Germany's chancellor, Friedrich Merz, had spoken there. Before he gave his speech, Merz listened as the president of the VDMA said their companies are "angry and disappointed" over the miserable state of the German manufacturing industry.
"Pretty much every statistic that we have is going in the wrong direction right now," Richtberg told me when we met up at the conference. Exports are nose-diving. Job cuts and furloughs are mounting. In the past six months alone, production is down 4.5 percent. It's part of a multi-year slump. The VDMA is now ringing the alarm bells that something big needs to change.
Germany is facing an economic crisis.
Economic growth has sputtered for more than five years, and its world-famous manufacturing sector is in deep trouble. There are several causes of the crisis, including the higher price of energy in the wake of Russia's 2022 invasion of Ukraine and the effects of U.S. tariffs.
But there's an even bigger shock beginning to hit the German economy, and it's one that may be familiar to Americans who lived through the early 2000s. Only this time, the threat Europe's largest economy faces is even scarier than anything the United States faced back then.
Economists are calling this threat "the second China Shock." The first China Shock happened in the early 2000s. That's when exports from China began surging and manufacturers around the world found themselves unable to compete. In America, this first China Shock led to over a million manufacturing workers losing their jobs and many industrial towns falling into doomspirals. In the view of numerous analysts, it contributed to a populist backlash that is still upending American politics (we've written about the first China Shock several times in the Planet Money newsletter).
Germany was largely spared from the first China Shock. However, economists are now warning that the second China Shock amounts to an earthquake that is shaking the very foundations of Germany's export-led industrial economy.
"It's an existential shock for Germany," says Dalia Marin, an economist at the Technical University of Munich. Marin sees the second China Shock as potentially leading to a "deindustrialization" that is "much worse than the United States experienced during the first China Shock."
So why was Germany one of the few industrial nations to see their manufacturing sector thrive in the face of the first China Shock? What exactly is this second China Shock? And why is it potentially so cataclysmic for the German economy?
Why Germany was insulated from the first China Shock
After China joined the World Trade Organization in 2001, it kicked its industrialization into high gear and flooded global markets with cheap manufactured goods. The economists David Autor, David Dorn, and Gordon Hanson later dubbed this "the China Shock." This shock vaporized chunks of the industrial bases of nations around the world, including the United States.
Germany, however, was largely insulated from the first China Shock.
Sander Tordoir, an economist at the Centre for European Reform, a think tank, says a big reason was that China's export boom back then was in low-end manufactured products like textiles, toys, consumer electronics, and furniture, "not in the industries that are the hallmark of the German economy, namely autos, chemicals, and machines."
Jens Südekum, a professor of economics at Düsseldorf University who is currently advising the German finance minister, published influential research on the first China Shock in Germany. He says it did disrupt some low-end manufacturing sectors in Germany, including their shoemaking industry. "But those were small sectors," he says.
In fact, Südekum says, the German manufacturing sector actually flourished thanks to trade with China. As China constructed sprawling new factories, they needed industrial machines and equipment that German companies (including VDMA members) specialize in making.
"After China joined the WTO in 2001, the German machinery sector and China, we had the perfect complimentary relationship," Richtberg says. "We made a lot of money in China."
And China's newly prosperous middle and upper classes increasingly wanted German-made cars manufactured by the likes of Volkswagen, Mercedes-Benz, and BMW. "The Chinese were crazy about German cars, so the German car industry made a fortune in the Chinese market," Südekum says.
Meanwhile, in the early 2000s, Germany pursued important labor market reforms that helped reduce unemployment and keep its manufacturing sector competitive. And the integration of post-communist nations into the European Union trading bloc proved to be a huge boon for German manufacturers, who were able to find new customers and establish more efficient supply chains with access to cheaper labor and resources across the former Iron Curtain.
And, at least during certain periods, exchange rates may have helped too. At the turn of the millennium, Germany joined together with other European nations in a monetary union and adopted the euro. Many of the nations in that union have tended to have weaker economies. And, as Germany ran large trade surpluses — something that tends to push up the value of a currency — German exports may have benefited from a weaker currency than the country otherwise would have had. This was especially the case during periods like the European debt crisis. This lower value for their currency meant that German exports were relatively cheaper for Chinese consumers (although many other European nations also use the euro, and none of them seem to have benefited as much from trade with China).
Compared to the manufacturing sectors of other Western nations, which shriveled in the face of Chinese competition, "Germany was really an outlier," Tordoir says. He says a good part of that was luck: German manufacturers happened to make the stuff that China needed to industrialize and wanted to consume.
By 2012, German exports of goods to China reached almost 3% of its GDP. "That's a very big export business to one country," Tordoir says. By comparison, the value of U.S. exports of goods to China has never surpassed one percent of its GDP.
Why the second China Shock is different
Many economists are now warning the world about the onslaught of "a second China Shock." Tordoir says the one crucial driver of this shock is that, essentially, China has been trying to export its way out of a domestic slump ever since its real-estate bubble burst around 2021. Chinese exports have exploded since then.
But, unlike the first China Shock, the sequel is striking the core of Germany's economy. Chinese companies have leapfrogged to become worthy competitors in a slew of advanced manufacturing sectors, from machinery and equipment to electronics to automobiles, and China's homegrown competitors are now beginning to eat the lunch of German manufacturers. Demand for German-made products is in free fall, both in China and in export markets around the world.
For a long time, China was one of Germany's biggest — if not biggest — customers. Now the country has emerged as one of Germany's biggest competitors.
The numbers on this reversal are stunning. For example, in 2019, China was a net importer of passenger vehicles, importing about a million more cars than they exported. With its advances in making electric vehicles, by 2023, it emerged as the world's largest exporter of cars, exporting around five million more than it imported.
An important part of China's metamorphosis can be tracked back to 2015, when Chinese political leaders unveiled "Made in China 2025," a ten-year plan aimed at making China an advanced manufacturing powerhouse. Since then, China has invested heavily in research and development and pursued a range of industrial policies aimed at upgrading their technological and production prowess and reducing their dependence on foreign competitors. A 2024 analysis from The South China Morning Post found that China had achieved 86% of the 260 goals set out in the plan.
Chinese companies are now making — and designing — smartphones as technologically sophisticated as iPhones. China leads the world in lithium-ion battery and solar panel production. It has AI and robotics companies that are putting many European ones to shame. It's making rapid progress in manufacturing airplanes and ships. And, potentially devastating for Germany's economy, it's now producing world-class electric cars and competing head to head in making industrial machines and equipment.
"What's really special about China is they have those long-term strategic plans — and they actually execute them," Südekum says. He says the best example is the car industry. "China has orchestrated this transformation of their own domestic car market towards electric vehicles. They became the major exporter for electric vehicles, and now they don't need the imports from Germany anymore."
Richtberg, who serves as the head of the Foreign Trade Department at the VDMA, told me their manufacturers began noticing something big had changed in their business relationship with China around 2022 or 2023, in the waning days of the COVID-19 pandemic.
Their executives and workers had stopped making trips to China during the pandemic. " And then when they got back to China after two or three years," Richtberg says, "our machine makers said, 'Wow, they've developed a lot.'"
Richtberg says that Chinese manufacturers now offer machine products that are, on average, around 30 percent cheaper than German-made ones. These products may be lower quality, he says, but customers often seem to believe they're "good enough" for their purposes.
A crucial question regarding the second China Shock is how much of China's competitive edge is the result of unfair competition? Richtberg suggested that Chinese competitors have a ton of natural advantages over them, whether it's the economies of scale they have from operating in a massive market, their incredible supply chains, the long hours they work, their willingness to work for relatively meager pay, their investments in innovation, lower taxes and a lack of onerous regulations.
However, Richtberg says, there are plenty of non-legitimate aspects to Chinese competition that make it an uneven playing field. For one, he says, their Chinese competitors tend to skirt regulations.
For example, he says, European companies mark their products with a symbol, "CE," when their products comply with European regulatory standards and meet health, safety, and environmental protection requirements.
"And when European companies put it on their machine, we believe them," Richtberg says. "What Chinese companies are doing, they're putting a logo on their products — which looks pretty much exactly the same — but it means exported from China."
Besides some differences in spacing, the symbols look almost identical. It's almost as if Chinese manufacturers are messing with their Western competitors. "It would be funny if it weren't so sad for our industry," Richtberg says.
An even bigger issue that could make this unfair competition is that the Chinese government has been showering their country's manufacturers with subsidies. Chinese manufacturers are coddled by the government by, for example, being given free or cheap land, access to cheap credit, and support even when they fail to become profitable. A recent IMF study estimated that annual Chinese subsidies to their industries amount to a staggering 4 percent of their GDP.
How Germany should respond
For years, Richtberg says, the VDMA has been urging Germany and the EU to get China to play by the rules, follow regulations, and end subsidies that make global competition unfair. But, he says, China hasn't been listening. The VDMA is calling on the German government to lower taxes and reduce regulations so their companies can be more competitive. And, in a break with the past, the VDMA is now expressing support for erecting countervailing tariffs when foreign products are found to be made with the support of government subsidies. Most of the economists we spoke to also expressed support for countervailing tariffs.
However, European Union tariffs will only protect German companies within Europe. A crucial problem for Germany is that its economy has been incredibly dependent on exports. According to data from the World Bank, in 2024, German exports accounted for more than 42 percent of its GDP. Compare that to the United States, where exports accounted for less than 11 percent of GDP. How will Germany compete with China in export markets outside the EU?
This gets to why the second China Shock in Germany could prove much more devastating than the first one proved to be in the United States. For one thing, the first China Shock centered on the imports of low-end manufacturing goods. Even then, it killed more than a million manufacturing jobs in the US and workers and communities struggled to adapt.
And the US has long been less reliant on manufacturing than Germany. When the China Shock was hitting the US economy in the early 2000s, manufacturing (value-added) accounted for about 13 percent of US GDP. Today it accounts for only about 10 percent of U.S. GDP. Manufacturing accounts for about 18 percent of Germany's GDP, according to the World Bank.
The export-led industrial model that Germany has pursued for decades is now at a crossroads. In addition to the China Shock, there's the retreat of the United States behind a tariff wall. That means Germany is struggling to sell products in what were long its two biggest export markets.
And, Tordoir says, high U.S. tariffs against Chinese goods are hurting Germany through another channel: "Chinese products are bouncing off the U.S. tariff wall and are being rerouted." So, Tordoir says, Chinese exporters are looking to sell more in Europe, where there are much lower tariffs.
Tordoir says one core issue in all of this is that Chinese consumers don't consume enough, and he hopes that one win-win solution for everyone will be convincing China to pursue policy reforms that increase their domestic consumption and stop their export onslaught.
Germany — which itself long pursued an export-led growth model and ran huge trade surpluses, sometimes to the chagrin of other nations — has recently begun working to increase domestic spending. The country, under Chancellor Friedrich Merz, has passed constitutional reforms that allow the government to spend more, and the government has begun to do so on things like defense and infrastructure.
"The only way out that I can see is that we need to rely on internal demand, demand from the European Union really," Südekum says. He thinks that Germany's recent spending reforms, which he was involved in, are an important first step. As a next step, he and Tordoir both expressed support for the idea that the European Union should develop incentive schemes to encourage European consumers to "Buy European."
As far as other policies to help Germany overcome its current struggles, some of the economists we spoke with, ironically, pointed to China as worthy of some emulation.
Tordoir said it's worth studying how the Chinese government made strategic investments and pursued far-sighted industrial policies that are now paying incredible dividends. It may be harder to wrangle a diverse group of liberal democracies with different interests, but he hopes that Germany will join other EU nations to develop EU-wide industrial policies to boost their own strategic sectors.
Marin worries that Germany has been failing to innovate in crucial technological sectors, including electric vehicles and batteries. A new book titled Kaput: The End of the German Miracle, by German business journalist Wolfgang Münchau, offers a rather harsh critique of German leaders in recent decades for clinging to an old industrial model and being unwilling to make important investments and policy changes in the face of epic technological changes. Germany lacks a vibrant digital sector and a significant venture capital industry — and even its world-famous automakers have been slow to pivot to electric vehicles and the integration of cutting-edge software into their cars.
Marin says a big reason for China's technological leapfrogging was due to a particular model in which it got Western companies to form joint ventures with Chinese companies, thereby transferring technology and know-how to their workers and entrepreneurs. She argues that Germany should "reverse-engineer" this model, and get foreign companies — including from China — to now help German workers and companies advance technologically since they've fallen behind in crucial areas.
Copyright 2025 NPR
