Trade Diversion Effects: China's Market Share Growth in Germany Post-Brexit

This paper investigates the impact of Brexit on trade diversion, focusing on the growth of China’s market share in Germany’s import sector from 2010 to 2024. Utilising high-frequency trade data from Eurostat and the German Federal Statistical Office, we employ a structural gravity model augmented with country and time fixed effects and robust controls for concurrent shocks such as the COVID-19 pandemic and the Ukraine conflict. Our econometric approach includes a structural break analysis to identify critical shifts in trade patterns following key Brexit-related events. Empirical results indicate a significant increase in China’s import share in Germany post-Brexit, particularly in machinery and electronics, where China’s share rose by nearly five percentage points. Sectoral analysis reveals a substantial surge in automotive imports from China, accompanied by a decline in imports from the UK and other EU countries. These findings are robust to a range of controls and alternative specifications. The study highlights the reconfiguration of German supply chains in response to Brexit, underscoring the importance of diversification and resilience in trade policy. Methodologically, the paper advances the application of gravity models by integrating dynamic breakpoint identification and counterfactual scenarios.