The Week of September 21, 2026: Germany’s China shock, fiscal policy, healthcare, regulation, and much more.
The Week of September 21, 2026: Germany’s China shock, fiscal policy, healthcare, regulation, and much more.
In the previous Capital Letter, I discussed how Chinese imports were wrecking Europe’s commodity chemicals industry. I also touched on how German carmakers (and the engineers who cater to them) were facing a similar Chinese challenge. Automakers elsewhere in the EU have not been spared, but the spectacle of faltering German carmakers signals serious trouble. To take a couple of numbers, between 2015 and 2025, car production in Germany fell from 5.7 to 4.1 million vehicles. In the twelve months ended June 30, 2026, Germany’s auto workforce shrank by nearly another 6 percent to the lowest total since 2005.
It’s hard to say which is the most totemic German car company, but Volkswagen must be a contender, and it’s in crisis, or as its CEO put it in August, its position is “more than critical.” In July, The Daily Telegraph reported that the CEO had warned in an internal memo that VW’s current profitability was “by no means sufficient” for it to continue investing in “new technologies, new products and our locations.” The company is already well on the way to cutting 50,000 jobs by 2030 under a 2024 plan. Earlier this month it was agreed that another 50,000 would go by the end of the decade, about half in Germany, where, as at the end of last year, VW employed around 284,000 people. It employed just under 400,000 internationally.
Four factories in Germany, which together produced some 750,000 cars a year, are slated to lose their current production starting in 2031. There has been talk that one might be taken over by the defense sector, which raises a secondary question about Germany’s ability to rearm, with an important section of its industrial base in trouble. The spare capacity could come in helpful, but . . .
Some of VW’s problems are homegrown (or EU-grown), above all the damage to competitiveness created by Germany’s (supposedly) bright green energy policies. Industrial energy costs 50 percent more than in France and three times what it costs in the U.S. or China. Relatedly, the coerced “transition” to electric vehicles has proved very expensive and, as discussed below, given China an opening it is now exploiting. American tariffs and the effects of war in the Middle East have added to VW’s pain.
But of all the negatives, aggressive Chinese competition may now be the hardest to bear. It’s bad enough in Europe, but in China, a VW cash cow after the company moved there in the 1990s (and where its market share peaked at about 50 percent), the picture is even worse. The company’s profits in China (including joint ventures) have fallen by 80 percent in the last decade, as domestic automakers closed the gap with VW and then accelerated past it with cheap and increasingly sophisticated EVs. VW’s sales have tumbled there this year, buffeted both by competition and overall weakness in the Chinese economy.
VW’s stock fell earlier this month, as the company substantially reduced its guidance for the year, with Chinese competition among the culprits. The share now trades at €71, roughly where it was nearly twenty years ago. It spiked in early 2021, briefly crossing €300 after (this was the time of the green bubble) after it said it was on track to sell an annual three million EVs by 2025. That didn’t work out. Including plug-ins, VW eventually sold 1.4 million EVs that year. The stock has just been dropped from the Euro Stoxx 50, the Eurozone’s bluest-chip index. Inevitably, there is talk that VW could move or outsource most of its design and engineering expertise . . . to China.
VW’s story is worrying, and hardly unique. What makes it worse is that the writing has been on the wall for a long time, and that Western companies wrote quite a bit of it.
Earlier this month, the Wall Street Journal quoted Shane Tedjarati, a former executive with Honeywell and Deloitte in China, who explained why:
For three decades . . . Western corporations pursued a strategy that was rational quarter by quarter and cumulatively self-defeating: the systematic transfer of manufacturing capacity, operational know-how, engineering discipline, and indirect market access into China, in exchange for lower costs, higher margins, and short-term shareholder returns.” The painful result: “the construction of the very competitors now arriving at the door.”
And that construction was going on in plain sight. Writing for the Wall Street Journal in November 2006, Gordon Fairclough described an industry that was assembling the pieces (sometimes rather literally so) that would make it fit to take on global markets.
Thus:
Geely [then and now a large Chinese automaker] buys fuel-injection systems from Robert Bosch GmbH of Germany. Interior parts come from a Chinese company that also supplies Volkswagen AG and General Motors Corp. Its steel plate comes from the same mill that sells to Ford, GM and Volkswagen. Dies and other manufacturing equipment come from a Taiwanese company.
Fairclough noted how Chinese automakers were learning from joint ventures with international car manufacturers.
Additionally, as those companies moved to China:
. . . many of their main suppliers have followed them, and are now working for Chinese manufacturers too. The big car makers have also cultivated a host of suppliers and helped them get up to speed, something which has big spillover effects for local assemblers. [Emphasis added.]
Those assemblers learned by doing, copying and importing. Writing in The Spectator in 2023, I noted that:
Chinese companies have used imported capital goods to create a manufacturing base capable of making higher-value-added products of a type previously beyond their capabilities, opening up new markets in which they are now competing, first domestically, then internationally with, among others, German businesses.
As a result, the German engineering sector is under a double-pronged attack. It is hit indirectly by weakness in the German auto sector. According to Germany’s VDMA, car manufacturers still account for around 10 percent of the engineers’ value-added (roughly speaking, sales net of input costs) and around 10 percent of the sector’s one million jobs.
And it faces head-on competition, too. Germany now runs a trade deficit with China in capital goods.
From the most recent Capital Letter:
Germany’s Machinery and Equipment Manufacturers’ Association reckons that Chinese companies now control one-third of global production in the machinery sector. That will grow. The Journal reports that “under its ‘10,000 Little Giants’ initiative, the Chinese government funneled massive subsidies, tax breaks and state resources into thousands of specialized midsize firms, explicitly designed to replace Germany’s famed “hidden champions.”
All indications are that the Chinese advance will continue. In The New York Times last week, James Paton reported that in 2025 China accounted for almost three out of five robots deployed globally. Tellingly, the number of robots installed in Germany fell, and the decline is expected to continue this year. A decade ago, China’s installations of robots outnumbered Germany’s by 3 to 1. Today, it is 14 to 1.
It hasn’t hurt that in 2016, the Chinese company Midea bought Germany’s Kuka, a world leader in robotics, in a deal approved by European regulators, nuts, given what was already known about China’s ambitions.
From Reuters, in May 2016:
Kuka is one of the world’s largest producers of industrial robots and a poster child of Germany’s drive to upgrade its manufacturing sector to master the industrial internet. It is the latest in a series of German industrial groups to be targeted by Chinese buyers as the world’s second-largest economy tries to make the transition from a low-cost factory location into a high-tech industrial hub.
The underestimation by Western leaders of China’s ability to compete was partly fueled by complacency about the immutability of Western, and in this case, German, industrial and technological pre-eminence. But it was reinforced by a teleological faith in the ultimate victory of Western economic liberalism, the same faith that led them to believe China’s meaningless promises and admit it to the WTO. Beijing was never going to play by those rules.
In an article published in The Spectator on September 21, Ian Williams related that:
. . . the Organization for Economic Cooperation and Development (OECD) [had] calculated in a June report that nearly 60 percent of China’s gains in global manufacturing market share between 2005 and 2024 were driven by state subsidies. It says that Chinese companies in sectors including solar panels, cars and steel, received up to eight times more government subsidies than their peers in OECD countries over the two decades to 2024.
Writing in the same magazine some weeks before, Matthias Döpfner, the CEO of German media group Axel Springer:
For decades Germany’s industrial giants banked on cheap manufacturing and lucrative consumer markets in China. In doing so, they failed to grasp the difference between good business relations and strategic dependence. The friendly cooperation ended the moment China acquired the requisite know-how to launch a heavily subsidized assault on the German car industry, even as Chinese domestic markets were quietly closed off. It was a Chinese masterclass in expansive geopolitics carried out by capitalist means. [Emphasis added]
Also in The Spectator, but in 2023, I noted how the German approach to China, which was actively encouraged by the various Merkel governments, combined an eye for a business opportunity and another aspect of this same teleological conviction:
The notion that closer trade connections with the West will necessarily set less enlightened nations on a course toward prosperity and liberty is nonsense, but convenient nonsense. Germans have a phrase for it — Wandel durch Handel, change through trade — often given as a justification for their business dealings with Russia and China. Unfortunately, the change they triggered was in Germany. In one case it has been for the worse; in the other it appears to be headed that way.
“Appears to be” was too generous.
Back in 2006, the Wall Street Journal’s Fairclough had quoted Bill Ford Sr., then Ford’s chairman, warning that America had not appreciated the extent of the coming challenge from China. But Ford also said that while it was easy to build a car, it was “harder to build a brand.”
True, but not so true if the brand is based on a “new” technology and can be developed on the back of a potentially enormous domestic market, with no need to maintain capital discipline and with extensive government support. The Beijing regime had long shown interest in EVs. It wanted a much larger auto sector, but, given its strong autarkic streak, it feared added dependency on imported oil. It was also wrestling with pollution as industrialization roared ahead. What’s more, electrification could give it a fast lane to overtake Western automakers. Its incumbency rested on the internal combustion engine; EVs, by definition, did not. Progress was initially slow but took off with the help (to list a few examples) of generous subsidies and tax breaks, rapid take-up by the public sector (buses and so on), the nurturing of a battery industry and, later, via China’s dual-credit system, some stick as well as carrot.
Tesla was then encouraged into China, essentially to stir up the local EV ecosystem, or, put more colorfully, to try to create a “catfish effect.” The inducement for Tesla was that, under Chinese rules, it could operate in China as an EV manufacturer through a wholly owned subsidiary. By contrast, makers of internal combustion engine cars had to establish themselves in China through joint ventures. Foreign EV manufacturers were also eligible for (some) Chinese subsidies on Chinese-made EVs. This combination worked as both a lure and a trap: Once in, locked in, as a practical matter, if not legally. Being in China has worked well for Tesla (for now) and for China.
Writing for MIT, Zeyi Yang in 2023:
China has gained a lot from Tesla as well. The company has been responsible for imposing the “catfish effect” on the Chinese EV industry—meaning it’s forced Chinese brands to innovate and try to catch up with Tesla in everything from technology advancement to affordability.
And then comes the punch:
And now, even Tesla needs to figure out how to continue being competitive in China because domestic brands are coming at it hard.
That was in 2023, when Tesla sold 604,000 cars in China, a 7.8-percent market share, second to China’s BYD in the country’s ‘new energy vehicle’ category, which includes plug-hybrids. In 2025, Tesla sold 626,000 cars, but its share had shrunk to about 5 percent (of, to be fair, a larger market), and it ranked fifth after four Chinese manufacturers (BYD was still in the lead), although GM has a 44-percent share in one of those four, SAIC-GM-Wuling. EVs from German manufacturers are attracting fewer buyers, having never made much of an impression in the first place.
As mentioned above, China helped develop its EV industry by focusing on battery technology, and its position in batteries is still proving valuable. EV production outside China has picked up, but as a recent IEA report suggests, China’s grip on the sector has not eased as much as a superficial glance would suggest. That’s because (according to IEA estimates) over 70 percent of all EVs produced outside China rely on Chinese batteries. And even EV batteries made outside China will require some components — cathodes, anodes, and so on — that are typically produced in China are not easily supplied from elsewhere. Moreover, the share of the market accounted for by made-in-China batteries is boosted if, as it arguably should be, the total made in Chinese-owned factories is included.
China had enough of a market to make a success of EVs at home. But it was another piece of central planning, the forced switch to EVs in the West, especially in Europe, that created the potential demand for Chinese EVs that promises to pay Beijing both political and economic dividends. Left, so to speak, to their own devices, Western car manufacturers might well, if they thought the demand was there, have followed Tesla’s lead and developed EVs of their own and at their own pace.
Instead, climate policymakers embarked on the process of forcing or bribing Western manufacturers to make, and trying to “encourage” consumers to buy, EVs before the technology (or backing infrastructure, such as chargers) was ready for prime time. The result for those automakers has been a costly fiasco. Meanwhile, Chinese manufacturers, playing by different rules, readied themselves to launch a foray into the “market” that Western policymakers were building for them. Western incumbents had spent huge amounts on the production of cars that not enough consumers wanted to buy.
Western automakers, with the Europeans in the lead, were subjected to a regulatory regime designed to push them out of the manufacture and sale of products at which they excelled and to compete instead in a market in which their long experience was of far less reputational or technological value. In the U.S., however, high tariffs, first introduced during the Biden years, have effectively blocked imports of Chinese EVs and, with some wrinkles in the states, the forced transition to EVs has ground to a halt since Donald Trump’s election in 2024. That’s not how it has worked out in Europe.
By volume, China has been the world’s largest car exporter since 2023. By value, Germany still leads. In 2023, Chinese exports accounted for a little over 2 percent of European new car sales. By 2025, that had risen to some 6 percent, and is rising sharply, to around 9 percent in the first half of this year, a clear sign of the direction of travel, as is the fact that Chinese imports accounted for some 20 percent of new EV (including plug-in) sales. This surge is not going to stop of its own accord any time soon. Overcapacity in China, a feature rather than a bug to the Beijing regime, means that Chinese automakers have to export, and to do so at very low prices. Beijing did not want the scale of the current collapse in domestic demand, but it has only increased pressure to export. In the first half of 2026, BYD, China’s largest automaker, reported a sharp fall in domestic sales, but a sharp increase abroad.
Job losses in Germany are mounting. Overall unemployment now stands at around 6.4 percent, the highest level since the pandemic, and that promises trouble in a treacherous political environment. The Chinese leadership will have been delighted (as will Moscow) by the success of the populist-right AfD in elections in Saxony-Anhalt and Mecklenburg-Vorpommern. That owed almost everything to voters’ concerns about the economy, their sense (in two regions once in East Germany) of being “left behind” and immigration. The AfD’s “helpful” attitude toward Moscow and Beijing will have counted for little with the voters, but that alignment cannot be wished away.
Germany is not going to find it easy to counter the threat that Chinese mercantilism poses to its auto and engineering sectors and, by extension, its broader economy, a threat that will, given Germany’s economic weight, reverberate throughout the EU and, as Chinese companies look for business elsewhere in Europe, is being replicated throughout much of it. That’s not a happy thought. The auto sector alone accounts for about 7 percent of Europe’s GDP and supports some 14 million jobs.
German Chancellor Friedrich Merz is undertaking some welcome (and overdue) steps to improve Germany’s competitiveness, some tax cuts here, some deregulation there, but being in a coalition with the center-left SPD limits what he can do, as do the constraints imposed by the EU. Tackling the hobbling of Germany’s more energy-intensive industries by the Energiewende and Net Zero won’t be easy. Reversing the first would (still) be politically contentious and, in the case of a return to nuclear power, would take time. Support for Net Zero is fraying, but not (yet) by enough to scrap it or agree to a revised target date (in Germany, currently an eager-to-please the zealots 2045) that would make a difference. To achieve that necessary goal, Merz would — even if he wants to — not only have to win the argument within Germany, but, if he were to push it beyond 2050–the bloc’s target date–within the EU too, no easy task.
A good intermediate step would be to end the coerced transition to EVs, a move that would attract widespread support in Germany and the electorates of many EU states. Sadly, at the EU level, which is where such a change would have to be approved, that matters less than it should. The other move should be the introduction of far heavier tariffs on imported Chinese EVs and, more selectively (for now), engineering goods. Free trade is by far the better basis for trade between nations, but when one trading partner is a hostile, mercantilist would-be hegemon, different rules should apply. Adam Smith recognized that national security should take priority over free trade. He would have seen China for the menace it is.
Brussels has taken some steps to stem the Chinese inflow. Since October 2024, tariffs on imported EVs can be as much as 45 percent (prompting retaliation from China on EU exports of cognac, meat and dairy). The higher tariffs slowed the increase in Chinese EV imports, but Brussels left the tariff (10 percent) unchanged on hybrids. The FT’s Andy Bounds and Joe Leahy explained what happened next (It’s not hard to guess):
Imports of hybrids have grown more than 10-fold from 3,800 vehicles in October 2024 to 50,000 in July 2026 while average prices have fallen.
The EU would now like Beijing to agree to a “voluntary” 15 percent cap on China’s share of its hybrid market, down from about a third today. Bounds and Leahey quote an EU official as saying that “this is about stopping deindustrialization. We have to act.”
Indeed, but imposing even higher tariffs on Chinese EVs will bring retaliation. The effect could be dramatic, given China’s importance to the European supply chain (rare earths might only be a preview). If it turns out that the EU is caught in a trap, and if China decides to continue its export drive at its current pace (there are self-interested reasons why it might not), this crunch is going to get much nastier, and it will not “just” be confined to Germany or the auto and engineering sectors.
The Capital Record: Sound & Vision
We released the latest in our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, hosted by financier David L. Bahnsen, makes use of two formats to deliver Capital Matters’ defense of free markets. The original podcast continues, but if you want to watch David talk, please click on the YouTube link.
No One is a Libertarian Now (Podcast/YouTube)
One of the craziest things that has worked its way into the folklore of our age is that the new-found appreciation for a heavy role of government in our personal and economic lives is replacing what was previously this broad moment of “libertarianism,” wherein society ran off of a very limited role of government in matters of economic regulation. Not only did I miss the memo on when that period was to have taken place, but today, some of yesterday’s loudest proponents of a small government are actually screaming for the government to tell you what you can eat. My, how the Tea Party has fallen.
A Choice, Not a Socialist Echo (Podcast/YouTube)
We are living in a period when the greatest political opportunity I have ever seen for either party is being squandered. For the Democrats, it is understandable. For the Republicans, it is unforgivable. In today’s Capital Record, David looks at this current moment, where true conservatives have a chance to present an actual contrast — a choice — to the left-wing socialist nonsense of our day.
The Capital Matters week that was . . .
Demographics
There are clear, and compelling, reasons not to fully embrace this conventional wisdom. Europe’s foreign-born population, now at a record of over 64 million, has not turned out to be a salve for its sluggish economy. Many countries with the highest per capita rates of immigration — the U.K., Canada, Germany, and France — also suffer from stagnant economies . . .
Artificial Intelligence
AI products that reduce my personal engagement with software and screens while still helping me experience the conveniences of instant communication — that’s a big win. And “you no longer have to put up with as much digital drudgery” is a much better sales pitch for the technology than the one we’ve heard from the frontier labs, OpenAI and particularly Anthropic, which — whatever the coders think of it — has been translated to the public as, “We are going to destroy education for your children, then make you redundant in your job, and then probably kill you all” . . .
Every few decades, a technology emerges that changes the balance of power among nations. The countries that master it gain extraordinary economic and military advantages. Those that fail to adapt fall behind and eventually find that the world has moved on without them.
The 14th-century Ottomans harnessed gunpowder; 16th-century Spain mastered navigation; 19th-century Britain harnessed industrialization. All rose to preeminence; all eventually lost it. Their failure to adapt to the next technological era contributed to their decline.
Today, the technology that could define the next century is AI, and the United States cannot afford to lose . . .
Regulation
The late Justice Antonin Scalia popularized the likely apocryphal story of Nero’s edicts, in which the bloodthirsty Roman emperor is alleged to have posted his laws on high pillars so that they would be “harder to read and easier to transgress.”
Yet today, in our republic, which prides itself on the rule of law, it may shock many to learn that this practice continues. Americans are subjected to thousands of new rules every year, many of which carry hefty criminal penalties. Additionally, through the practice of administrative “guidance,” ordinary people are expected to follow government edicts that are not even published in the Federal Register . . .
Health Care
Over the past few years, the American health-care sector has seen a real-time experiment in what happens when a revolutionary treatment runs outside traditional payment systems. Usually, when the FDA approves a new drug, its cost is quickly covered by employer-run insurance plans and the government through Medicare and Medicaid. Yet the makers of GLP-1 drugs, approved for weight loss, have had to compete for patients’ dollars more directly . . .
The Budget
A pair of House Republicans has introduced a bill, the Anti-Fraud Fund Act of 2026, to crack down on pervasive fraud in federal health-care programs such as Medicare and Medicaid. It would allocate $28 billion to the Health Care Fraud and Abuse Control Program, a joint initiative between agencies, over the next four years. The program, which already investigates fraud in health-care spending, currently receives less than $3 billion a year . . .
On September 2, President Trump signed a continuing resolution, keeping the federal government funded through December 11. The House passed the bill 370 to 48; the Senate passed it 90 to 6. Both parties got what they wanted: no shutdown before the midterms, no hard votes, and a fresh budget deadline conveniently scheduled for right after the elections. That is the trick behind every continuing resolution: Solve the political problem in front of you and leave the fiscal dilemma exactly where you found it . . .
Free Trade
My predecessor, Dominic Pino, wrote for NR last year that “free trade is how you live your life,” since international commerce is simply the economic specialization that people experience every day on a much larger scale. As Adam Smith elucidated in 1776, individuals in modern societies don’t grow their own food, make their own clothes, or build their own houses. We are driven by self-interest to do what each of us does best for others, and then we trade our work for the different fruits of everyone else’s labor . . .
Housing
Jim Geraghty writes today about why Austin, Texas, is thriving, having grown from the nation’s 27th most populous city in 1990 to its 12th largest today. He lists a relatively low tax burden, a friendly business environment, a top-notch research university, and an exciting culture as reasons for the attraction. I would add the factor most important to getting people to move to your city: actually letting them move in through an abundant, affordable housing supply . . .
The Next Municipal Budget Crises
Richard Morrison & Thomas Savidge:
A long series of poor fiscal choices by officials across the country means that a major state or municipal budget crisis may be only a few years away. Eventually, a state or big city will have a financial crack-up that cannot be papered over with short-term fixes. When that happens, a governor or mayor will hold a press conference calling for a federal bailout. Congress should start rehearsing its answer now: “Absolutely not” . . .
Minerals
A scan of news headlines warns readers of two seemingly unrelated dangers around the globe. One is a potential shortage of missiles, interceptors, and other weapons necessary for U.S. defense. The other is the growing Ebola epidemic in the Democratic Republic of Congo.
These two predicaments share a common cause that the United States can fix . . .
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