Germany faces economic crossroads as Trump’s tariffs loom

As German voters prepare to head to the polls, the nation’s struggling economy is at the forefront of political discourse. Years of sluggish growth, rising energy costs, and increasing competition from China have weakened the once-thriving export powerhouse. Now, with former U.S. President Donald Trump back in the White House and poised to impose new tariffs, Germany’s economic challenges are set to intensify.

A Declining Economic Powerhouse

Germany, the world’s third-largest economy, has barely expanded in recent years. It contracted in both 2023 and 2024, marking the first back-to-back annual declines since the early 2000s. Projections for 2025 estimate a meager 0.3% growth, according to the International Monetary Fund. This stagnation is a stark contrast to the economic boom from 2005 to 2019, fueled by cheap Russian gas, robust Chinese demand, and free global trade.

However, the landscape has shifted dramatically. The German auto industry, once a dominant force, now faces intense competition from Chinese electric vehicle (EV) manufacturers like BYD and Xpeng, as well as Tesla. German automakers, including BMW, Mercedes, and Volkswagen, were slow to embrace EVs, leaving them vulnerable as the industry pivots away from internal combustion engines.

At the same time, Germany’s energy-intensive industries are reeling from rising fuel costs following Russia’s invasion of Ukraine in 2022. With natural gas imports now coming from further afield, prices have surged, forcing companies to cut production or shut down entirely. Employers in the metal and electrical engineering sectors warn of an ongoing deindustrialization that threatens the nation’s economic stability.

Structural Barriers to Growth

Beyond external pressures, Germany also faces internal economic hurdles. The country’s rigid borrowing limits, known as the “debt brake,” restrict government investment in infrastructure and digital modernization. Meanwhile, high taxes and excessive regulations further weigh down businesses.

“We haven’t yet digitized, and our bureaucratic burden is higher than in other countries,” says Achim Wambach, president of the Leibniz Centre for European Economic Research. Without substantial reforms, Germany risks becoming an aging, stagnant economy unable to compete in a rapidly changing global market.

Trump’s Tariffs: A New Economic Threat

Since returning to office in January, Trump has announced a series of aggressive trade policies, including a 25% tariff on steel and aluminum imports set to take effect in March. He has also proposed a 25% tariff on imported automobiles, semiconductor chips, and pharmaceuticals, potentially as early as April.

These tariffs pose a significant threat to Germany, whose economy relies heavily on exports. The U.S. is Germany’s largest export market, accounting for 10% of all German exports. Industries such as automotive manufacturing, already under pressure, could suffer further declines as American consumers opt for domestically produced vehicles.

According to Swiss research firm Prognos, approximately 1.2 million German jobs are directly or indirectly tied to exports to the U.S. If Trump’s tariffs drive down demand for German goods, these jobs could be at risk. Additionally, tariffs on other nations, such as Mexico and China, may create ripple effects that intensify competition in global markets, further squeezing German exporters.

A Pivotal Moment for Germany’s Future

Germany’s economic model, long built on industrial production and global trade, may need a radical overhaul. Economists warn that failure to modernize and shift toward emerging sectors like artificial intelligence and renewable energy could see Germany fall from its position as the world’s third-largest economy.

“If we don’t move beyond traditional industries such as cars, machinery, and steel, we won’t hold our global economic standing for much longer,” says Michael Böhmer, chief economist at Prognos.

As Germany grapples with economic stagnation, global competition, and potential trade barriers, the decisions made in the coming months will shape the country’s economic future for years to come. With voters demanding solutions, the next government must act swiftly to navigate these mounting challenges and reinvigorate growth.