Inside the Second China Shock Sweeping Across Europe

SUMMARY

Bloomberg explores the "second China shock" disrupting Europe's auto sector, visiting Bavaria's Yope Group with CEO Martin Books, and featuring economists David Autor and Stephanie Flanders on parallels to the U.S. manufacturing decline.

STATEMENTS

Germany's auto industry forms the backbone of its economy, supported by iconic brands like Mercedes, BMW, and Volkswagen, alongside a vast network of parts suppliers such as the Yope Group.
The German auto workforce shrank from over 800,000 in 2018 to just over 720,000 last year, with overall manufacturing employment dropping 2% year-over-year to around 5.5 million by September 2025.
Chinese competition, driven by the rise of battery electric vehicles capturing 17% market share in Europe, has made access to battery technology and raw materials difficult for German OEMs, while over 100 new Chinese OEMs intensify rivalry.
Germany's exports of components and vehicles to China have significantly decreased, forcing companies like Yope Group to close two plants, restructure, and lay off about 500 employees, reducing headcount from 2,000 to 1,500.
China's 2001 WTO entry unleashed the first "China shock," displacing U.S. manufacturing jobs, particularly in labor-intensive sectors like textiles, furniture, and toys, accounting for nearly 60% of U.S. manufacturing job losses from 2001 to 2019.
The U.S. mishandled the initial shock by removing trade barriers abruptly without gradualism or social policies to support affected workers and communities, exceeding labor markets' natural adjustment rate of a couple percent per year.
Europe's current China shock, triggered partly by U.S. tariffs diverting Chinese exports, threatens to hollow out sectors like automotive in Germany, though it's complicated by price cuts rather than sheer volume floods.
Chinese exports have grown 3% overall despite a 4% drop to the U.S., with increases spread across regions like Africa (from a small base) and Europe (about 1-1.5%), leading to a $1.2 trillion trade surplus.
Unlike the first shock focused on low-value goods, China's current exports target high-tech sectors like electric vehicles, where it leads globally, posing greater challenges to advanced economies like Europe's automotive and heavy industries.
To counter threats, companies like Yope Group are diversifying into defense, space, semiconductors, and medical sectors, leveraging core competencies in mechanics and mechatronics amid rising demand from conflicts like the Ukraine war.

IDEAS

The "second China shock" isn't mere diversion of U.S.-bound goods but involves Chinese firms cutting prices on different products to penetrate European markets more aggressively.
Europe's automotive heartland, Bavaria, exemplifies how ancient towns like Schweinfurt sustain modern industrial power, yet face existential threats from China's electric vehicle dominance.
Abrupt trade liberalization, as in the U.S. post-2001, overwhelms labor markets that naturally adjust only 2% annually through retirements and new entries, ignoring mid-career transitions.
German firms' long-term employee relationships clash with survival imperatives, leading to painful restructurings like plant closures in tight-knit communities.
U.S. tariffs inadvertently boosted China's global trade surplus to $1.2 trillion by redirecting exports, with Africa seeing outsized gains from a low base.
China's ascent up the value chain—from textiles to world-leading EVs—makes this shock more pervasive, hitting high-tech sectors central to consumer and industrial demand.
Defense diversification offers European manufacturers a buffer, as government spending on drones and space tech absorbs capacity without direct Chinese competition.
While harming manufacturers, cheap Chinese imports may inadvertently aid central banks by lowering inflation, potentially prompting rate cuts in the Eurozone.
Europe's "inflection point" with China, as noted by leaders like Macron and von der Leyen, signals a shift from partnership to protectionism amid unbearable trade imbalances.
Structural changes in Germany, amplified by Trump's policies and global tensions, are offset somewhat by surging defense budgets providing fiscal stimulus.

INSIGHTS

Rapid trade shocks exacerbate inequality by devastating localized manufacturing hubs without parallel job creation elsewhere, underscoring the need for targeted regional support.
Gradual policy adjustments, rather than sudden barriers, allow economies to reallocate labor effectively, preventing the social fallout seen in the U.S. Rust Belt.
China's pivot to high-value exports like EVs transforms global competition from low-wage battles to innovation races, forcing advanced economies to rethink supply chain vulnerabilities.
Diversification into geopolitically insulated sectors like defense not only sustains firms but accelerates technological spillovers beneficial to broader industry.
Trade surpluses from redirected exports highlight interconnected global markets, where one nation's protectionism subsidizes another's expansion into new frontiers.
Imported deflation from cheap Chinese goods eases monetary policy pressures, revealing a paradoxical benefit: competition that hurts producers can stabilize macroeconomics.

QUOTES

"The auto industry is really the backbone of Germany."
"China is really a challenge for the German automotive landscape at the moment."
"It really did great rapid damage to manufacturing intensive locations that were making commodity furniture, textiles and fabrics, clothing, toys, games, assembly."
"We didn't do anything to buffer that shock. The other is we had no real social policies in place to help people to help communities and to help people adjust."
"China has moved so far up the value chain... they're the best producer of electric vehicles in the world."

HABITS

Maintain long-term relationships with employees in family-run businesses to foster loyalty, even during necessary restructurings.
Diversify revenue streams proactively, targeting non-automotive sectors like defense and semiconductors as part of a 10-year roadmap.
Adjust operations swiftly in response to market shifts, such as postponing programs and reducing volumes to ensure survival.
Invest in core competencies like mechanics and mechatronics to pivot into emerging areas, including drone supply amid geopolitical changes.
Monitor global trade dynamics closely to anticipate export declines, enabling timely plant closures and workforce reductions.

FACTS

Schweinfurt, dating to 791, is one of Bavaria's oldest towns and a hub for Germany's auto parts manufacturing.
Battery electric vehicles hold 17% market share in Europe, complicating German access to batteries and raw materials.
Over 100 new OEMs have emerged in China, heightening domestic competition and reducing German exports there.
China's WTO entry in 2001 led to nearly 60% of U.S. manufacturing job losses from 2001 to 2019.
Chinese exports to the U.S. fell by over 4 percentage points, yet overall exports rose 3%, creating a $1.2 trillion surplus.

REFERENCES

David Autor's 2016 paper on the "China shock" and its impacts on U.S. manufacturing.
World Trade Organization (WTO) accession in 2001 as a pivotal event for global trade.
Yope Group's 10-year roadmap for diversification into defense, space, and semiconductors.

HOW TO APPLY

Assess current market vulnerabilities by analyzing export trends to key partners like China, identifying sectors like automotive facing rapid declines in demand.
Implement gradual workforce adjustments, starting with voluntary retirements and retraining programs to align with natural labor market turnover rates of 2% annually.
Diversify product lines into protected areas such as defense and medical tech, leveraging existing competencies to secure government contracts and reduce reliance on volatile consumer markets.
Monitor trade policy shifts globally, such as U.S. tariffs, to anticipate diversions and prepare pricing strategies or new market entries in regions like Africa.
Develop social support mechanisms for affected communities, including local retraining initiatives and fiscal incentives, to buffer economic shocks and facilitate transitions to high-tech roles.

ONE-SENTENCE TAKEAWAY

Europe's second China shock demands proactive diversification and gradual policies to safeguard manufacturing without repeating U.S. adjustment failures.

RECOMMENDATIONS

European leaders should impose targeted tariffs on high-tech Chinese imports like EVs to protect strategic sectors without broad escalation.
Firms must accelerate diversification into defense and renewables, capitalizing on geopolitical tensions for stable revenue.
Policymakers ought to fund regional retraining programs, focusing on EV supply chains to redeploy workers from declining auto jobs.
Central banks should incorporate import deflation effects into forecasts, using them to justify timely rate cuts for economic stimulus.
Governments need to negotiate bilateral trade deals with China emphasizing fair access to raw materials and batteries for mutual benefit.

MEMO

In the rolling hills of Bavaria, where medieval towns like Schweinfurt have endured for over a millennium, Germany's industrial engine hums with a precarious rhythm. Once the unchallenged powerhouse of Europe's auto sector, the region now grapples with a gathering storm: the "second China shock." Bloomberg's on-the-ground reporting reveals how suppliers like the Yope Group, nestled in this historic enclave, are recalibrating amid plunging exports and fierce competition from Beijing's electric vehicle juggernauts.

The Yope Group's CEO, Martin Books, stands amid whirring machinists in the company's headquarters, explaining the grim math. Eighty percent of their business feeds the assembly lines of Mercedes, BMW, and Volkswagen—titans whose parts end up in vehicles worldwide. Yet, as Books recounts, programs have been postponed, volumes slashed, and two plants shuttered, trimming the workforce from 2,000 to 1,500 souls. "We had to lay off around about 500 people," he says, his voice steady but laced with the weight of a family enterprise in a tight-knit community. Germany's auto employment has dwindled from 800,000 in 2018 to 720,000 last year, a microcosm of broader manufacturing woes where jobs fell 2% to 5.5 million by late 2025.

This echoes the first China shock that ravaged American heartlands two decades ago, a phenomenon dissected by MIT economist David Autor. When China joined the World Trade Organization in 2001, it unleashed a torrent of low-cost goods—toys, textiles, furniture—that hollowed out U.S. factories, claiming nearly 60% of manufacturing jobs lost through 2019. "It really did great rapid damage," Autor notes, critiquing America's failure to ease the blow with gradual policies or social safety nets. Labor markets, he argues, churn at just 2% yearly through retirements and entries; ripping off the band-aid left communities scarred.

But Europe's predicament rhymes differently. U.S. tariffs under Trump diverted Chinese exports, yet Beijing's response was cunning: not a flood of the same goods, but price-slashed innovations in high-value realms like EVs, where China reigns supreme with over 100 new automakers. Bloomberg's Stephanie Flanders unpacks the nuance—exports to the U.S. dipped 4%, but overall surged 3%, ballooning China's surplus to $1.2 trillion, with Europe absorbing a subtle 1-1.5% uptick alongside Africa's leap. Leaders like Emmanuel Macron decry the "unbearable" imbalance; Ursula von der Leyen signals an "inflection point." Germany's vaunted machine tools and cars, once symbols of export prowess, now teeter.

Amid the turmoil, adaptation flickers. Books eyes defense and space, supplying drones buoyed by the Ukraine conflict, as part of a decade-long pivot. Flanders highlights a silver lining: cheaper imports temper inflation, easing the European Central Bank's path to rate cuts. Yet for locales like Schweinfurt, survival hinges on more than rhetoric—it's about forging new paths in a world where history's echoes demand bolder reinvention. As Autor warns, without buffers, this shock could etch deeper divides across the continent's industrial soul.