Germany’s export-driven economy was hit hard when the United States and the EU reached a trade agreement on 27 July 2025, imposing a 15% tariff on most EU goods. While this agreement averted the threatened 30% tariff, it effectively raised the tariff on EU goods from 1.2% last year to 17%. By July 2025, data showed that the German economy was already stalling. Real GDP growth turned slightly negative in Q2, with German GDP contracting by 0.1% quarter-on-quarter as the surge in Q1, driven by the anticipation of tariffs, unwound. Indeed, Capital Economics notes that GDP remained no higher than pre-pandemic levels. The Bundesbank and government advisory bodies are predicting near-zero growth for 2025, followed by a modest rebound in 2026. These forecasts explicitly reflect the drag from Trump’s tariff policy: Germany’s Council of Economic Experts has warned that US tariffs will ‘deal a major blow’ to the export sector, predicting that Germany ‘will flatline at zero growth’ thanks largely to the tariff war. In Germany’s new draft budget statement, Finance Minister Lars Klingbeil candidly admitted, ‘I have no illusions… it is rather growth-weakening’ for Germany. In short, the deal brought stability by avoiding the worst-case 30% rate, but this came at the cost of markedly weaker output.
The immediate effects can be seen in the trade figures. As the United States was Germany’s largest trading partner, the 15% tariff has hit German exporters hard. German export volumes have faltered; for instance, Destatis reports that exports in May 2025 fell by 1.4% compared to April. More significantly, exports to the US plunged by 7.7% on a seasonally adjusted basis and were 13.8% below year-earlier levels. Reuters observed a comparable trend: following a 14.7% year-on-year increase in Q1, due to forward-ordered shipments, German car exports to the US plummeted by 23.5% in April–May, when a 25% tariff came into effect. German exports to third countries dipped slightly and the trade surplus narrowed. Overall, higher U.S. tariffs have effectively reversed much of the export growth seen in early 2025. Capital Economics estimates that raising the US tariff to 15% will reduce EU GDP by around 0.5 percentage points, and analysts agree that Germany, with its focus on exports and manufacturing, will be hit harder than most other countries.
Domestic demand has only partially cushioned the blow. In Q2 2025, German business investment fell as exports slowed down, despite an increase in private consumption and government spending. Inflation in Germany has actually slowed towards 2% by summer 2025. Tariff-driven price shocks are modest for German consumers since US tariffs on EU goods do not directly affect domestic prices. However, policy uncertainty and weakening demand contribute to a softer inflation outlook. International capital flows are also being reshaped: the deal includes a political commitment for EU firms to invest around $600 billion in the US over three years and purchase $750 billion of US energy. If realised, this large-scale reallocation of investment would represent an outflow from Europe that could further temper German foreign direct investment and domestic investment.
The automotive industry in Germany is a prime example of the sector-specific impact of the deal. The auto manufacturing sector is a national flagship, accounting for around 6% of GDP and directly employing approximately 780,000 people. Together, the three major German carmakers, Volkswagen, Mercedes-Benz and BMW, account for an estimated 73% of EU car exports to the US. The trade deal has maintained a 15% tariff on cars from the U.S., which is down from the 27.5% tariff imposed by Trump, consisting of a 25% surcharge plus the pre-existing 2.5% tariff. While this is a significant reduction from the threatened 30%, it still represents a substantial barrier. Data up to mid-2025 show that German car exports to the US were volatile: after booming in Q1, when importers rushed to buy ahead of higher tariffs, exports collapsed in spring. Destatis reports that, from January to May 2025, Germany exported €57.9 billion worth of cars, an increase of 0.4% year on year. However, sales in the U.S. market have weakened: Car exports to the U.S. fell 1.9% in January to May compared to a year earlier, and the April to May plunge in exports left U.S. shipments at their lowest recent levels. By contrast, exports to other markets saw smaller changes or even gains. Overall, the automotive export boom of 2024 to the U.S. appears to be reversing as the impact of the tariffs takes effect.
The auto sector’s supply chains and profits have been under pressure. Volkswagen revealed that it had taken a €1.3 billion hit to its profits in the first half of the year, which it attributed to U.S. tariffs. Mercedes-Benz has warned that, despite 35% of its US sales being produced in Alabama, it expects ‘significant increases’ in US prices going forward. Luxury brands have not been spared either: Porsche estimated that it spent around €300 million absorbing duties in Q2 in order to avoid raising prices, even as it announced job cuts and structural adjustments amid a decline in sales in the first half of the year. A Porsche executive admitted, ‘All of this is hitting us hard’. Suppliers are feeling the impact too: on 22 July, Bosch announced that it would be cutting up to 1,100 jobs at its Reutlingen plant due to a ‘rapidly worsening auto market’. Dealers in the US have already held back price hikes for the 2025 models, anticipating higher tariffs to come.
The strategic balance for Germany is mixed, but leans towards negative. On the one hand, German officials acknowledge that the agreement prevented a potential trade war and maintained market access. Chancellor Friedrich Merz described the averted escalation as “unnecessary” and said that it was a “big deal” that kept exports flowing. The feared 30% tariff was avoided, and certain ‘strategic’ goods were excluded, while tariff cuts on aircraft and cars were agreed. The pact also includes non-tariff commitments, such as the EU dropping its own 10% car duty, and large-scale purchase and investment pledges intended to balance the burden. In this narrow sense, it was better than no deal as it prevented a full-scale trade conflict that many feared would hit Germany’s economy even harder. As a Centre for European Policy Studies commentary notes, while the outcome is ‘a bad deal for the EU’, it is ‘still a positive development compared to the threat of 30% tariffs and a transatlantic trade war’.
However, evidence suggests that the deal leaves Germany worse off than before. The 15% tariffs are still ‘denting profits’ and raising costs for German firms. Germany’s economy is expected to grow significantly less than it otherwise would have; national forecasts now predict stagnation instead of modest growth. Higher unemployment, capital outflows and political problems loom. Crucially, the deal was one-sided: the US maintains a 50% tariff on steel, while many of the EU’s retaliatory options were discarded. Germany has surrendered considerable leverage. As one analyst observes, the pact ‘falls short of the EU’s zero-tariff proposal’ and reflects US interests over Europe’s. German industry leaders are uniformly scathing. Finance Minister Klingbeil warned that it would be ‘growth-weakening’, and the Federation of German Industries warned of ‘immense negative effects’ on German exports.
In conclusion, while the July 2025 agreement prevents the situation from deteriorating further for German exporters, its actual terms are detrimental to Germany. It imposes a higher tariff than before the trade war, and the resulting data, sluggish GDP, plunging auto exports and lost profits, highlight a strategic setback. While the deal’s short-term benefit is preventing an outright trade war, it leaves Germany having ceded ground. As European analysts have noted, the agreement may have bought ‘stability and predictability’, but at a high cost to the German economy. Given quantitative indicators such as near-zero growth, export declines and higher unemployment, as well as evidence from the automotive sector, the consensus among experts is that the agreement is more detrimental than beneficial to Germany in its current form.
This article was written by Julian Schumacher.
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