_ J.C. Kofner, Economist, MIWI Institute. Munich, January 29, 2025.
Introduction: A Federal State in Economic Turmoil
Bavaria, once celebrated as Germany’s export powerhouse and a European economic giant, is now grappling with a foreign trade crisis. While the state had long benefited from a strong export surplus, recent figures tell an entirely different story. The trade deficit in goods has reached alarming record levels, the balance of services remains chronically negative, and capital flows indicate a systematic exodus of investments. The reasons behind this lie in a dangerous mix of economic shocks and self-inflicted political missteps. The following analysis provides a detailed examination of the situation and identifies the key issues that Bavaria’s foreign trade strategy must urgently address.
The State of Bavaria’s Foreign Trade: Goods, Services, Capital
Goods Trade: From Export Champion to Net Importer
According to BayStat, Bavaria has recorded a trade deficit in goods since 2018, peaking at -€33.3 billion in 2022. While 2024 saw a slight recovery to -€2.1 billion, the negative trend persists. Bavaria’s key exports, as identified by OEC—motor vehicles (21%), machinery (8%), and automotive parts (7%)—have lost their dominant market shares due to soaring energy costs and bureaucratic hurdles that undermine competitiveness. On the import side, machinery, electronic devices, and motor vehicles dominate.
Trade in Services: A Chronic Deficit
Estimates from the ifo Institute and the IHK indicate that Bavaria has long suffered from a persistent services trade deficit, ranging between €50 billion and €70 billion annually. While exports such as insurance services and business-related services remain in demand, their surplus has significantly declined in recent years. At the same time, rising tourism and ICT service imports have further burdened the balance.
Capital Flows: Investment Flight
Germany’s net capital outflows have amounted to €636 billion since 2013, according to the IW Cologne. Bavaria, too, has suffered from businesses increasingly investing abroad while foreign investments into the state remain stagnant. This trend suggests that many German entrepreneurs prefer to establish production sites abroad, whereas few foreign investors see Bavaria as an attractive investment destination. This is also reflected in the decline of equipment investments, such as machinery in production halls. The primary destinations for these capital flows are the United States, while China—despite media alarmism—plays a subordinate role.
Reasons for Bavaria’s Poor Foreign Trade Performance
Economic Factors
Bavaria’s import costs have skyrocketed due to the energy transition and sanction policies. Following the destruction of the Nord Stream pipelines in 2022 and the subsequent shift away from Russian natural gas, gas prices soared thirteenfold from €15/MWh to €200/MWh before stabilizing at €50/MWh—still three times higher than pre-crisis levels. LNG from the United States, which, according to BDEW, now accounts for 45% of Germany’s gas imports, is on average 50% more expensive than Russian pipeline gas.
Structural Factors
Bavaria’s deindustrialization is evident. Since 2018, industrial production has fallen by a quarter relative to its potential level (Destatis). Simultaneously, exports have declined as production costs soared due to policies implemented by the established political parties. The ifo Institute estimates that 80% of Bavaria’s trade deficit stems from this development. Between 2022 and 2025, 42,000 jobs in the manufacturing sector were lost, including 16,000 in the automotive industry alone. Moreover, according to a recent IHK survey, 40% of industrial companies are considering relocating abroad.
Self-Inflicted Errors
The CSU and Free Voters have severely burdened the economy with their energy and tax policies:
- Energy Transition: The so-called “energy transition” has drastically increased electricity and heating costs. The CSU initiated the phase-out of nuclear energy and introduced the CO₂ levy, while the Free Voters failed to prevent the decommissioning of nuclear power plants. Bavaria, once a net electricity exporter, has become an importer with a supply gap of 3 gigawatts. Meanwhile, the federal government has imposed a heating ban and inflicted lasting damage on the gas infrastructure. In industrialized nations, economic survival is only possible with sufficient affordable energy. The nuclear phase-out as part of the green energy transition has led to significant cost increases and an energy supply shortage in Bavaria. Since 2011, industrial electricity prices in Bavaria have risen by a quarter, from 14.4 to 17 cents per kilowatt-hour, while household electricity costs have surged by two-thirds, from 25.3 to 41 cents per kilowatt-hour (BDEW). Germany now ranks among the countries with the highest electricity prices worldwide (Global Petrol Prices). These price hikes not only burden private households but also constitute a massive competitive disadvantage for Bavaria’s economy.
- Excessive Tax Burden: Unit labor costs in Bavaria are 20% higher than in the United States and three times higher than in China. Nearly 50% of an industrial worker’s income is consumed by taxes and social contributions, placing Germany second highest within the OECD. Companies face a 30% corporate tax rate—one of the highest globally. The overall tax-to-GDP ratio is nearly 40%, while government expenditure as a share of GDP approaches 50%, significantly exceeding China’s level.
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Bureaucracy: The CSU’s supply chain law forces companies to answer 437 compliance questions, with fines reaching up to €8 million. This drives up costs for raw materials and intermediate goods, affecting up to 7% of Germany’s imports. According to IfW Kiel, total costs amount to €77.3 billion—equivalent to €931 per capita. Additionally, the EU’s carbon border adjustment mechanism (CBAM), supported by the CSU, raises import costs for aluminum (+1.4%), steel (+1%), fertilizers (+2%), and cement (+3.7%), while significantly increasing export prices for German products (e.g., aluminum: +5%, steel: +4–16%, fertilizers: +31–45%, cement: +35–76%). The CBAM reduces real income by 1%, costing the average household around €1,000. Further burdens include the mandatory installation of solar panels, the ban on internal combustion engines, and excessive regulations such as the Whistleblower Protection Act, the Verification Act, and the CSRD directive, exacerbating Bavaria’s economic decline.
Bavaria’s Foreign Trade Strategy: Goals and Measures
Status Quo of the State Government
Despite the dramatic situation, Bavaria still lacks an official, coherent foreign trade strategy. Current measures focus on:
- Promoting the internationalization of Bavarian companies.
- Expanding energy and raw material partnerships.
- Diversifying supply and sales markets.
Each year, the state government invests around 20 million euros in representations, delegation trips, and trade fair funding. More than 25 foreign representations serve as local contact points for businesses. However, these efforts remain insufficient in light of systemic challenges.
Position of the vbw
The Bavarian Business Association (vbw) calls for a radical realignment of the strategy:
- Market diversification: Stronger orientation towards BRICS countries, Africa, and Latin America.
- Raw material partnerships: Establishing stable relationships with resource-rich countries.
- Securing skilled labor: Foreign trade policy must also include the recruitment of qualified workers.
- Infrastructure: Improvements in transport, education, and digital infrastructure.
Challenges for Bavaria’s Foreign Trade Strategy
Capital and Ownership Structures
65% of DAX-listed companies are owned by BlackRock and the Vanguard Group. A significant share of Bavarian industrial companies is in foreign hands, particularly under U.S. ownership. At the same time, Chinese investments in Bavaria are critically debated, as demonstrated by the takeovers of Kuka and Franka Emika. The challenge lies in assessing foreign investments in a differentiated manner—both in terms of economic benefits and potential dependencies or strategic risks.
Partnerships and Trade Relations
The shift of foreign trade competencies to the EU limits Bavaria’s direct influence. The key question is which economic policy instruments Bavaria can still use to promote independent trade relations and investment partnerships.
- Should Donald Trump normalize relations between Russia and the West, Bavaria must strategically assess whether a free trade zone between the EU and the Eurasian Economic Union (EAEU) would provide long-term benefits.
- The planned EU-Mercosur trade pact is unlikely to materialize. This raises questions about the economic impact on Bavaria’s industry and agriculture, requiring a clear stance towards federal and EU policies.
Raw Material Dependencies and Supply Security
Bavarian industry is highly dependent on critical raw materials from China. 95% of the rare earths essential for production come from there. A supply halt would have severe economic consequences. The challenge lies in diversifying supply chains and establishing alternative sourcing options.
Dependence on gas imports has shifted: while 40% of Germany’s gas came from Russia in 2022, according to the BDEW, 45% now comes from the U.S. This new unilateral dependence raises the question of whether it should be viewed just as critically and what strategies exist to minimize risk.
Trade Policy Framework and Global Competition
- The EU has imposed high tariffs (17–37%) on Chinese electric vehicles in 2024. This could result in significant economic disadvantages for Bavaria’s automotive industry, especially if China retaliates. The challenge is to effectively represent Bavarian interests at the EU level.
- The EU’s CBAM (Carbon Border Adjustment Mechanism) and supply chain laws from both the EU and the federal government increase costs for Bavarian companies and could undermine their competitiveness. The strategy must find solutions to mitigate these burdens.
- U.S. foreign trade policy under President Donald Trump could become more protectionist, potentially harming Bavaria’s export market. Bavaria must be prepared to respond to possible trade barriers.
Securing Skilled Labor and Demographic Trends
Since 2014, over 80,000 German citizens have left Bavaria on a net basis, including many highly qualified professionals. The challenge is to create targeted incentives for their return to combat Bavaria’s skilled labor shortage in the long term.
Conclusion
Bavaria’s foreign trade stands at a crossroads. A radical course correction is necessary to secure the Free State’s economic future. Otherwise, the loss of economic sovereignty and further deindustrialization threaten to become a reality.