The Mercantilist Maginot Line
Germany sheds jobs as China’s trillion-dollar surplus and the West’s demographic crisis make factory re-shoring impossible
Grüezi!
1 A Stab In The Heart
The internal combustion engine has powered Germany’s industry since Carl Benz put an engine on a horse buggy in 1885.
Now, the world’s largest automotive parts supplier – Bosch – is cutting 5,500 jobs. ZF Friedrichshafen – the second or third biggest – up to 14,000. Volkswagen, which puts those parts into cars, is shedding 35,000 jobs by 2030.
Baden-Württemberg’s economy minister called Bosch’s announcement “a stab in the heart of German industry.”
There aren’t many places left to stab. In 2024, BMW’s net profit collapsed 37%, Volkswagen dropped 33%. Mercedes-Benz 28%. The most recent quarter offers little respite.
Volkswagen is in free-fall: 2025 Q3 saw it post a €1.1 billion loss, as US tariffs, Porsche impairment charges, and Chinese competition hit home. Mercedes-Benz Q3 2025 profit is down 31% year-on-year, hit by collapsing Chinese demand and restructuring costs.
Even BMW – which clawed its way back to a €1.7 billion Q3 profit after 2024’s disaster results – remains exposed to the same forces: China’s weakness, tariff pressures, and the impossibility of profitable EV production at scale.
German car production is at its lowest level in three decades – 1.5 million units down on historic highs. Exports are 13% below pre-pandemic levels.
Germany, and Europe, face a problem that cannot be solved within the existing rules: accept rapid and catastrophic deindustrialisation; fragment into protectionist blocs; or admit that the ‘rules-based order’ was always just Washington’s writ – and that writ no longer runs.
The Arithmetic
In 2024, China’s manufacturing trade surplus exceeded $2 trillion – roughly 10% of its economy, about double what Japan or Germany achieved in their heyday.
In a closed global system, trade balances sum to zero. If one dominant player runs a 10% surplus, everyone else must absorb a matching deficit. There’s no other mathematical possibility.
The speed and substance of the current China shock are different from the first one of the early 2000s. The first wave hit textiles and toys – painful for some sectors but cheap for consumers.
This wave is targeting electric vehicles, batteries, legacy semiconductors, steel, and chemicals. China’s EV market share has jumped from 5% to 35% in four years. Solar production exceeds 80% global share. What took a decade first time around has happened in just four years.
China’s prices fell in September 2025, showing factories putting volume over margins. In August alone, clean technology exports hit $20 billion – EVs surged 26%, batteries 23% – whilst prices dropped precipitously. China’s factories are exporting domestic deflation – exactly as Germany’s once did.
Europe Has No Shield
The United States prints the global reserve currency and can run deficits to rebuild factories.
Europe has no such protection. Bound by Maastricht budget rules, lacking unified treasury capacity, saddled with structurally higher energy costs, Europe faces deindustrialising without the fiscal space for a plan B.
BASF is scaling back in Germany whilst investing billions in China. European steelmakers idle blast furnaces as Chinese steel floods in. Chinese EVs are arriving just as European carmakers face expensive climate transitions they kept putting off.
2 Why China Can’t Be Negotiated Away
Western policymakers sometimes comfort themselves that China’s export surge is temporary – that China will somehow boost domestic consumption and rebalance the system. They’re fooling themselves.
For two decades, China’s property boom accounted for 25–30% of its GDP. Real estate is 60% of Chinese household wealth. China’s construction engine has seized. Apartment prices in major cities have fallen 40% from 2021 peaks. Chinese household consumption is at 38% of GDP versus 68% in the United States.
When property was booming, buildings absorbed excess steel and concrete. Now that the construction cranes have stopped, that capacity has to go somewhere. Beijing has also doubled down on supply-side stimulus, directing credit into advanced manufacturing.
In the first three quarters of 2025, retail sales rose just 3% – the slowest pace since late 2024 – even with targeted subsidies.
China’s households, beset by falling asset prices, remain in retail paralysis.
The Pension Trap
China’s demographic crisis is one more padlock on the safe. China’s social security system recorded its first annual deficit in 2020; without reform, reserve funds could run out by 2035. China’s retirees will outnumber the entire US population within two decades.
These numbers are forcing the state to prioritise foreign reserve accumulation and industrial employment over household transfers.
In January 2025, Beijing raised the retirement age to 63 for men and 55–58 for women over the next 15 years – fiscally necessary but triggering public resentment that showed up not in street protests, but more precautionary savings.
Nothing is shifting these fundamentals. They’re structural features of China’s political economy that would require dismantling the deep patronage networks that underpin the Party’s power. China’s late-2025 stimulus package of $1.4 trillion focused on bailing out local governments, not thrifty consumers.
Europe’s Pincer
Europe faces a pincer movement. Germany’s largest export market has become its fiercest competitor. For years, German industry thrived selling machines and premium cars that modernised China.
I remember Wolfgang Schäuble smirking as he was told about China’s plans to emulate Germany. Schäuble is no longer here, but that era is over. Chinese firms have mastered the technology and moved up the value chain.
Meanwhile, the import flood continues. The US has walled itself off with tariffs. Europe, nervously committed to open markets and slow to reach consensus, remains porous.
The EU’s trade deficit with China for goods has ballooned to nearly €400 billion, driven by chemicals, steel, and car parts.
3 The Mercantilist Maginot Line
The Atlantic alliance is dismantling efficiency-driven globalisation. In its place, it is planning to hide behind a ‘Mercantilist Maginot Line’ anchored by two 2026 deadlines.
Europe’s Carbon Wall
The European Union’s Carbon Border Adjustment Mechanism launches on the first day of 2026. Legally it is an environmental policy, practically it aims to neutralise China’s cost advantages in carbon-intensive sectors.
How? EU importers of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen must purchase certificates priced at EU carbon allowances. This forces importers to pay the difference between carbon prices in the country of production and EU carbon prices. Recent amendments postponed the certificate sales to 2027, but liability kicks in from 2026 – forcing immediate supply chain restructuring.
The target is China’s heavy industry sector which remains coal-reliant despite the country’s aggressive renewable expansion. The carbon border adjustment penalises precisely this energy mix.
The requirement for authorised declaration creates bureaucratic barriers that favour compliant supply chains over opaque spot markets.
Closing Mexico’s Backdoor: USMCA Review
The other China countermeasure comes halfway through next year, when the North American trade agreement is scheduled for review. It will be a fractious renegotiation aimed at closing the ‘Mexico Backdoor’ that Chinese firms use to sidestep US tariffs.
Since Section 301 tariffs, Chinese firms have aggressively invested in Mexican border states, using Mexico as a final assembly point to qualify for duty-free status. This allows Chinese goods tariff-free entry across the border, undermining the US strategy.
The US will demand significantly tighter origin rules. Core materials – steel, aluminium – must be melted and poured in North America to qualify, not merely processed or finished.
This disqualifies steel imported from China and stamped in Mexico. Current labour requirements will also see tougher enforcement to negate low-cost Mexican labour used by Chinese subsidiaries.
Will it work? The US holds leverage through tariff threats and the ability to withdraw unilaterally with six months’ notice.
The Laundromat Response
As direct trade becomes difficult, the ‘Laundromat’ economies have risen. Vietnam’s exports to the US reached $85 billion in first seven months of 2025, whilst imports from China hit $101 billion (40% of total) – suggesting Chinese components undergo final assembly then export as ‘Vietnamese’ goods.
Turkey imports Russian oil (up 43% post-invasion), refines it, and re-exports to the EU, whilst funnelling through $11.6 billion in Chinese electrical equipment.
Mexico has become America’s top trading partner, but much of its growth reflects Chinese capital seeking tariff-free backdoors – precisely what the 2026 review targets.
4 The Demographic Ceiling: Biological Blocks
The ‘Mercantilist Maginot Line’ relies on a fatal premise: that advanced economies can physically staff the manufacturing base they want to rebuild.
Attempting to solve a trade problem with industrial policy whilst ignoring the biological reality of demographic collapse.
The Replacement Rate Catastrophe
The replacement fertility rate is 2.1. Across the industrialised world, rates have fallen far below:
South Korea: 0.72 (2023) – creating critical manufacturing labour shortages
China: ~1.0
Italy/Spain: ~1.2 – massive fiscal strain as dependency ratios explode
Germany: ~1.5 – the German Economic Institute estimates 300,000 skilled worker shortage by 2030 in renewables alone
In 2020 for every hundred people of working age, 70 were under 65. By 2060 it will be just 41.
Labour scarcity isn’t cyclical – it is the default position of 21st-century economies.
The Ghost Factory Phenomenon
Meanwhile subsidies are flooding projects with capital whilst labour markets can’t supply the workers. Projects get announced, funded, ground-broken – then they stall.
TSMC in Arizona: The archetype. TSMC committed $65 billion for three factories in Phoenix – a crown jewel of US re-shoring. Mass production at the first facility was delayed from 2024 to the first half of 2025. The second pushed to 2027–2028. Chairman Mark Liu blamed insufficient skilled workers. The company struggled to find US technicians to install and operate advanced equipment. Cultural friction made matters worse – Taiwanese management demanded 12-hour days, weekend shifts, and on-call availability. High staff turnover forced TSMC to fly in hundreds of Taiwanese workers.
Intel in Germany: Even grimmer. Intel’s €30 billion German facility – hailed as European technological sovereignty – was postponed repeatedly through 2024 before being officially cancelled in 2025. Financial struggles played a role, but the project was doomed by local labour markets. The facility required 3,000 high-tech workers. The local apprentice programme had trained just two people. High energy costs, bureaucratic sluggishness, acute labour shortages render large-scale German reindustrialisation increasingly unviable.
The US Manufacturing Gap: The National Association of Manufacturers and Deloitte project shortages of 1.9–2.1 million manufacturing workers by 2030. Even with rising wages – average manufacturing earnings are just over $100k – recruitment remains impossible. The cost of re-shored production remains permanently higher than global averages, feeding structural inflation.
The Labour Premium Spiral
The demographic trap is also driving inflation. Whilst Chinese overcapacity drives goods prices down, worker shortages drives services and construction costs up. US data from September 2025 show that prices for services less energy rose 3.8% year-over-year, even as goods inflation slowed. Consumers can buy cheap televisions but can’t afford home repairs or healthcare.
In tight labour markets, skilled trades command rapidly increasing wages.
This feeds permanent inflationary pressure that central banks cannot quell with rate hikes without crushing the investment needed to solve the supply side.
Re-shoring investment balloon meets demographic needle point.
5 Three Futures, One Likely Outcome
The global economy runs a 19th-century ‘beggar-your-neighbour’ regime at 21st-century speed, with no one in charge to moderate the brutality.
Europe gets deindustrialisation without policy space to respond.
The US gets inflation and deficits without geopolitical benefits.
China gets export dependence without domestic demand recovery.
Historically imbalances this severe have resolved in two ways: coordinated rebalancing, as in the strong-armed 1985 Plaza Accord; or systemic breakdown, as in the 1930s.
A new Plaza Accord is impossible – the required leverage has vanished. That leaves breakdown. The question is whether fragmentation happens chaotically or with some coordination.
The Mercantilist Maginot Line
The likeliest outcome: the ‘Mercantilist Maginot Line’ where the US and EU align their defensive positions – US national security tariffs and EU climate tariffs – creating a unified ‘Atlantic Wall.’
During the July 2026 trade review, Washington threatens dissolution unless Mexico closes the Chinese EV and parts ‘backdoor.’ Mexico capitulates, imposing foreign investment screening effectively banning Chinese automotive investment. BYD has already paused Mexican factory searches.
The EU carbon border adjustment enters the payment phase in January 2027. The US and EU agree a ‘Steel and Aluminium Club,’ waiving tariffs for each other whilst erecting common external walls against ‘non-market, high-carbon’ producers.
By 2030, inflation settles at 3–4% due to supply chain duplication. Technology stacks split. Huawei and China control the Global South’s digital infrastructure; the US controls Europe plus Japan and South Korea.
Beijing accepts the loss of Western markets and pivots aggressively to the Global South, dumping goods at near-zero margins to kill local industries in Africa, Latin America, Southeast Asia.
The demographic constraint limits Western reindustrialisation – automation becomes mandatory, but labour-intensive sectors contract permanently.
Messy Divorce
What if coordination fails entirely? The US pursues unilateral ‘America First’ at maximum pressure; the EU clings to the shreds of WTO procedures; China weaponises its currency.
Faced with 60%+ US tariffs, China abandons currency stability. The renminbi depreciates 15–20% to offset tariffs, exporting massive deflation and crushing German, Japanese, Korean industries unable to compete.
The North American trade review fails. The US imposes tariffs on Mexico. Supply chains seize. Auto production halts for weeks; prices skyrocket. China restricts exports of processed gallium, germanium, graphite – 90% market share. Western battery production lines go dark.
A severe depression would swamp manufacturing-heavy economies. Goods become cheap through Chinese dumping, but supply chain breaks cause periodic shortages of critical items – medicines, electronics. With economic engagement severed, the ‘cost of war’ drops for Beijing. Risk of Taiwan blockade rises significantly.
Chinese New Year Miracle
The longest shot? Internal costs of the current production model become too high for the Chinese Communist Party. Facing youth unemployment and deflation, Xi Jinping executes a 1990s-style pivot. Beijing mandates wealth transfer from state and corporate sectors to households through direct cash transfers and privatising state enterprise dividends for social security. The state orchestrates bankruptcy of ‘zombie’ firms in solar, EV, steel, reducing global supply. China allows currency appreciation, boosting local purchasing power and reducing export competitiveness.
Why is this unlikely? This requires dismantling political patronage networks – local governments, state enterprises – that keep the system in equilibrium. The demographic crisis makes it even less likely.
The pension deficit will force accumulation, not re-distribution.
6 Winners and Losers in the New Geography
The mercantilist scenario – now the baseline – is what is reshaping the industrial landscape. Whilst headlines focus on Germany’s crisis, separate ‘war economy’ and ‘green fortress’ ecosystems are doing nicely.
Europe’s Winners
Defence and aerospace companies face full order books until 2030, driven by NATO spending targets and the perceived threat from Russia. Rheinmetall, Thales, Leonardo, Saab, and BAE Systems are the primary beneficiaries.
Grid and utilities benefit from an electrification dividend that cannot be imported – grids must be domestic. Investment to connect renewables and EVs delivers windfalls for Iberdrola, E.ON, National Grid, plus cable manufacturers like Prysmian.
Sovereign technology providers become essential as EU investigations of US and Chinese clouds make localised solutions mandatory for government and defence data. SAP sovereign partnerships, Orange Cyberdefense, and Capgemini are well positioned to capture this demand.
Infrastructure construction firms too – someone has to build battery plants, LNG terminals, data centres – stand to benefit. Vinci, Hochtief, and ACS can all profit from the re-shoring boom, though demographic constraints limit the scale. Automation will become mandatory.
Europe’s Losers
Legacy automotive volume manufacturers get squeezed by Chinese EVs at the low end and Tesla at the high end. They’ve lost the China export market that sustained their economies of scale. Volkswagen’s Wolfsburg crisis, Stellantis’s capacity struggles, and Eastern European supplier networks will bear the brunt.
Energy-intensive chemistry cannot compete without cheap energy. With Russian gas gone and green hydrogen expensive, these firms can’t match US or Chinese rivals. BASF shrinks its German footprint, Covestro struggles, basic steelmakers get undercut by Chinese dumping.
Solar manufacturing faces extinction in Europe. The continent wants solar deployment but can’t profitably make panels against Chinese subsidies. Meyer Burger and remaining panel makers face a cliff edge.
The Regional Split
Europe becomes two-speed. The new Rust Belt – running from Germany’s Ruhr, to Italy’s Po Valley – faces high energy costs plus loss of Chinese exports. ‘Connector’ hubs boom: Poland and Romania benefit from near-shoring. Turkey, with customs union but lower costs, booms in white goods and automotive parts. ‘Green powerhouses’ – Spain, the Nordics – with abundant renewables can attract energy-hungry industries like data centres.
Germany’s options? Specialisation. Whilst VW struggles, engineering firms making tools for the new world thrive. Siemens Energy and specialised defence suppliers in sensors and optics are seeing double-digit growth.
China can copy a car but it still struggles to copy ultra-specialised, high-precision machinery. But again, demographic constraints will limit scale – automation density becomes the defining competitive metric.
Asia’s Fork
Impact depends entirely on geography. Asia splits into ‘The Great Wall’ (China), ‘The Connectors’ (Vietnam, India, ASEAN), and ‘The American tail’ (Japan, South Korea).
Chinese businesses, blocked from the West, will aggressively cannibalise Global South markets. Chinese champions will dump advanced goods at rock-bottom prices in Africa, Latin America, Southeast Asia to keep factories running. Local companies will be crushed unless governments erect protectionist walls.
‘Connector’ economies – Vietnam, India, Mexico – are currently winners but face a squeeze in 2026–2027. The US is already auditing Vietnamese solar and Mexican auto exports for ‘hidden’ Chinese content. Businesses in these regions must choose sides.
But demographic advantages matter: Vietnam (median age 32), India, Mexico all have the younger workforces the West lacks – this provides genuine competitive advantage if they navigate the geopolitics shrewdly.
Japan and South Korea are potentially caught in the crossfire. Korean firms face painful loss of their largest market for advanced chips due to US export controls. They must pivot sales to US and EU, facing high entry barriers.
Japan integrates into the Western defence industrial base, offsetting consumer trade losses with China. But both face their own demographic collapses – South Korea’s world leading automation goes hand in hand with a 0.72 fertility rate – the lowest globally.
7 Pro-Crastination or Anti-Crastination?
Unable to impose on China the painful political choices necessary to restructure its economy – boosting consumption, accepting bankruptcies, allowing currency appreciation – the United States has resorted to tariff walls. The result is the worst of all worlds.
We are not getting a clean divorce. We are getting a messy, contested separation where supply chains snap, efficiency evaporates, and the global growth engine stalls.
A liberal trading order based on efficiency cannot coexist with domestic industrial security. The West spent 75 years avoiding this choice. That era has ended.
Evidence from late 2025 points toward the managed option. BYD’s Mexico retreat, EU commitment to the carbon border adjustment, China’s relatively measured retaliation – all suggest this outcome.
The Liberal International Order is dead. A fractious and resentful Atlantic Bloc is being born. But it will be smaller, more robotised, and more expensive than its architects imagine.
For business leaders, policymakers, and investors, the transition is happening. The question is how quickly they adapt to the reality already here. The deadlines of 2026 – the trade review, the carbon border payment phase – are approaching fast.
After that, the trajectory locks in. Leaders can build structures to contain the damage, or they can deny reality until it imposes itself through force.
The choice must be made soon.
Thanks for reading!
Best
Adrian