From the series European news
German industrial output has been falling for six years. This is happening at a time when the US is imposing tariffs, competition from China is growing, and the energy shock caused by the war in Iran comes on top of the severing of energy ties with Russia triggered by the conflict in Ukraine. Friedrich Merz's government is attempting to revive the economy through substantial defence spending and investment in infrastructure, combined with domestic reforms. However, the latter is precisely what the government is struggling with, and there is still no sign of the renewed momentum it had hoped for. As frustration grows across the country, the government's decline in the polls has been mirrored by the rise of the AfD. This is the context in which the debate over “China shock 2.0” is unfolding.
The first and second shocks
The report “China Shock 2.0: The Cost of Germany's Complacency”, written by Sander Tordoir and Brad Setser for the Centre for European Reform think tank, argues that the German government is mistaken if it believes it can revive the economy through domestic reform measures, increased public spending, and reduced energy costs: the main cause of its economic difficulties lies in competition from China. Handelsblatt credits this report with playing a decisive role in convincing the German chancellor of the need for new measures to protect European industry from competitors [June 15th].
The first “China shock”, following China's accession to the WTO in 2001, had “reshaped global manufacturing and harmed many low-wage industrial regions, including in the US”, the report states. However, some sectors, particularly in Germany, benefited from China's rapid industrialisation by “selling chemicals, cars, and manufacturing equipment”. “China shock 2.0”, on the other hand, is different, because “China is increasingly dominant in the sectors that form the productive core of Germany's economy: cars, machinery, specialised chemicals, electrical equipment, aircraft manufacturing, and clean tech capital goods”. Tordoir and Setser accuse China of unfair competition, through currency undervaluation and the use of industrial subsidies. Without “protection” from Chinese trade, they argue, Germany risks “deindustrialisation”.
Calls for protection
Calls for greater protection have been growing in Germany for some time. As early as 2024, Handelsblatt warned of a new “China shock”, with Chinese competition making itself felt in the automotive, industrial-machinery, and chemical sectors. But while the large corporate groups in the automotive sector continued to invest in China, the industrial-machinery sector increasingly complained that its biggest customer was becoming its biggest competitor [August 23rd, 2024]. Even now, the differences between sectors are also reflected in divisions within the German government.
In June 2025, for the first time, the German Mechanical and Plant Engineering Association (VDMA) called for protection from Chinese competition. In fact, since then, Germany has begun to import more machinery from China than it exports there. Chinese manufacturers, according to the Financial Times, have closed the quality gap, and their machinery is 30% cheaper than European counterparts [November 12th, 2025]. If Berlin has so far been reluctant to support protectionist measures, it has its reasons.
Battle over surpluses
In 2025, Germany's current-account surplus stood at 4.5% of GDP (€203 billion), a sharp fall from its record high of 8.25% in 2016. By contrast, China's current-account surplus in 2025, relative to its GDP, stood at 3.8% (3,243 billion yuan, or €645 billion at the average exchange rate for 2025). Given that China's surplus relative to GDP is smaller than Germany's, it is understandable that Berlin feels awkward when faced with calls for China to increase domestic consumption and reduce exports in order to address macroeconomic imbalances. These are the very same demands that have been levelled at Germany for decades — and which Berlin has ignored.
The opaque nature of the various ways in which countries subsidise their domestic industries makes the debate prone to the use of “political data”. According to Tordoir and Setser, the official Chinese figure of 3.8% is manipulated, and China's true surplus is said to exceed 5% of GDP. However, the battle over the size of the surplus and industrial policies obscures the fundamental issue: the emergence of a continent-sized power, which uses a macroeconomic model similar to Germany's, is raising the stakes in the struggle for the partition of world markets.
The China party
Another factor behind Germany's reluctance to adopt protectionist measures against China is the presence of a significant “China party” in Germany, in the form of key sectors of the economy that depend on the Chinese market. First and foremost are car manufacturers. In the good years, for example, Volkswagen sold more than 40% of its cars in China and generated between €4-5 billion a year from its operations there. However, even the Wolfsburg-based manufacturer is feeling the heat from Chinese competition. By 2025, the proportion of cars sold in China had fallen to 30% of total sales, and profits from China had dropped below €1 billion [Handelsblatt, April 24th]. Now Volkswagen, alongside Stellantis and Renault, also backs “Buy European” measures setting minimum thresholds for production in Europe.
This does not mean that the manufacturer is abandoning its presence in China. Volkswagen's new research and development centre in Hefei, where new models for the Chinese market are “conceived”, is now fully operational. This is the first time in its history that Volkswagen has developed a car entirely outside its historic headquarters in Wolfsburg. But the “In China for China” strategy is also becoming an “In China for the world” strategy, in which the Asian giant is increasingly becoming the production base for exports to the rest of the globe. Thomas Ulbrich almost seems to be dreaming of a “condominium” in which the Wolfsburg and Hefei centres divide the world market between them. The CEO of Volkswagen China Technology Company in Hefei envisages a “southern hemisphere” open to the “Chinese technological ecosystem” and a “western hemisphere” dominated by Euro-American technologies [Handelsblatt, January 28th]. It is plain to see why Europe's largest automotive manufacturer does not wish to irritate Beijing.
The European debate
It would be simplistic to view this debate solely in terms of protectionism versus liberalism, and not only because this tends to reduce the issue to the import and export of goods, while ignoring the flow of services and capital. Certain measures that appear to be protectionist actually foster closer integration between the European and Chinese economies. One example is the tariffs on imports of Chinese cars, combined with the welcoming stance towards investment in Europe by Chinese car manufacturers.
This practice forms part of the strategy put forward by Mario Draghi in his 2024 report on European competitiveness. His proposal is set out in four points. Firstly, to import — albeit from diversified sources — goods from sectors where “Europe's cost disadvantage is too large to be a serious competitor”. The second scenario concerns sectors in which the EU is concerned about the location of production and employment, but not about where the underlying technology comes from. An effective policy mix would consist of incentivising inward foreign direct investment, while at the same time adopting trade measures that offset the cost advantage gained by foreign subsidies. Thirdly, to impose local content requirements (“Buy European” measures) and encourage joint ventures between foreign and European companies in sectors where the EU has a strategic interest and wants to be able to ramp up production in the event of “geopolitical tensions”. Fourthly, to fully protect “emerging sectors” that have great potential for future growth.
The current debate within the EU on new measures to protect European industry — for example, through the Industrial Accelerator Act (IAA) — concerns precisely the implementation of this strategy; yet it is taking place against a backdrop where calls for protection from Chinese trade are now multiplying. The fact that these voices portray Chinese trade as a threat to security is nothing new in history.
The resurgence of economic nationalism
In National Power and the Structure of Foreign Trade [1945], Albert O. Hirschman explains how foreign trade can be used as an instrument in the pursuit of national power, focussing in particular on German practices in the 1930s. The list of tactics he describes ranges from stockpiling large reserves of strategic materials to redirecting trade towards friendly or subordinate countries, and even to attempts to control ocean shipping routes. Furthermore, the Germans aimed to make it as difficult as possible for their trading partners to do without German trade and cultivated groups within partner countries, hoping to turn them into a sort of “commercial fifth column”.
Although all these practices were present in Nazi Germany's trade policy after 1933, Hirschman warns that “there is a real danger of attributing too much cleverness to German policy”. “It seems probable”, he writes, “that the amazing coherence of German politics was due only in part to detailed planning springing from economic analysis and that an important role was left to experimentation in the elaboration of actual policies”. Indeed, many of these practices had emerged in Germany in previous decades, for purely economic and commercial reasons.
Hirschman recalls how, as early as the 1890s, “intensely alarmist literature” had emerged in Britain and France on the rapid expansion of German exports and the “scientific methods” by which the Germans systematically studied the needs and habits of foreign customers. Then came the accusations of unfair competition and “dumping”, as well as criticism of the export of German capital and personnel. In reality, he writes, everyone practised dumping to varying degrees, and while some German commercial agents abroad may well have engaged in espionage, they were generally there to pursue legitimate business interests. Naturally, for those who could not withstand the competition, it was only too easy to raise the spectre of “economic aggression”.
Today, just as in the past, the ultimate driving force behind the conflict is the uneven development of capitalism. The rise of new powers and the relative decline of the old are intensifying the battle for the partition of the world market: “China shock 2.0” is part of the crises in the world order.