Rising Tariffs Threaten German Industry's Recovery

The German industrial sector is facing a significant downturn, exacerbated by new tariffs imposed by the United States. The announcement from U.S. President Donald Trump, effective from Saturday, introduces a 10% import tariff on all goods entering the U.S., with a staggering 20% rate for imports from Germany and the European Union due to their trade surpluses.

This move comes at a challenging time for Germany's economy, which has seen stagnant growth for three years. The introduction of these tariffs is likely to extinguish any hopes for an economic recovery this year. Many companies, already grappling with high taxes and energy costs, may consider relocating production to the U.S. to avoid tariffs and benefit from lower operational costs.

In response to these challenges, various business associations have reached out to political leaders from major parties, including CDU, CSU, and SPD, urging them to implement policies that promote growth. There is a pressing concern that without intervention, businesses may move investments abroad or cease operations altogether, discouraging future investors from entering the German market.

Germany's industrial output has been declining for years, currently sitting 16% lower than in 2017, with no signs of recovery. Companies are struggling with reduced order volumes, leading some to initiate short-time work or file for bankruptcy. Marie-Christine Ostermann, president of the Families Entrepreneurs Association, warns of a rapid deindustrialization process occurring without improved economic policies.

However, some experts argue that fears of deindustrialization are overstated. Timo Wollmershäuser, chief economist at the Ifo Institute in Munich, believes that while the German industry is undergoing structural changes, it is not on the brink of collapse.

Historically, structural changes in the economy are not new. The industrial revolution in the 19th century saw a major shift of labor from agriculture to manufacturing. After World War II, the demand for services increased alongside economic prosperity, while technological advancements improved productivity in manufacturing, leading to a reduced need for labor in that sector. Currently, only about 19% of the workforce in Germany is employed in industry, down from 50% in 1970.

Despite these changes, Germany's industrial sector still contributes significantly to the economy, accounting for approximately 20% of gross value added, higher than the EU average of 16%. The country's industrial strength is rooted in its historical legacy, with pioneering figures like Werner von Siemens and Gottlieb Daimler shaping a robust manufacturing landscape.

However, there are growing concerns that the traditional business model centered around manufacturing may be threatened. The war in Ukraine has further intensified the decline in industrial output, particularly due to soaring energy prices impacting energy-intensive sectors. Output in these industries is now over 18% lower than at the end of 2021.

The automotive industry, a cornerstone of German manufacturing, is facing its own crisis, with production decreasing by around 43% since early 2018 due to regulatory pressures, the push for electrification, and competition from China. Major companies like Volkswagen and Ford are implementing cost-cutting measures and reducing their workforce.

While Wollmershäuser maintains that broad deindustrialization is not occurring, he acknowledges that production volumes have significantly dropped. Nevertheless, the gross value added in the sector has only slightly decreased, indicating a shift towards hybrid business models that combine products with services. This trend is particularly evident in the automotive sector, where research and development roles are increasing.

As companies adapt to a more service-oriented model, they are increasingly focusing on research and development, which has seen a rise in employment in these areas. In the automotive industry, the proportion of employees in R&D has increased, reflecting a broader trend across the industrial sector.

The demographic shift is also influencing these changes, with a projected shortage of skilled labor in the coming years. Companies may find it more advantageous to relocate production to regions with abundant labor supply, challenging the notion that industries should be encouraged to repatriate jobs.

Experts suggest that the decline in industrial presence in Germany is not solely due to market forces but is also influenced by political decisions that have made the business environment less favorable. The current energy policies, which prioritize renewable sources, have resulted in skyrocketing electricity prices that drive production away from Germany.

As the landscape of the industrial sector continues to evolve, the implications of these changes remain to be seen. The potential for German companies to shift both production and R&D to the U.S. raises concerns about the long-term sustainability of Germany's industrial base, prompting industry groups to advocate for stronger governmental support.