Germany's Trade Imbalance with China: A Looming Crisis

Germany's Chancellor has arrived in China as German businesses express grave concerns over a significant trade imbalance. According to federal statistics, imports from China to Germany were more than double the exports back last year. Friedrich Merz emphasized the need for a partnership with China that is balanced, reliable, regulated, and fair before his departure for Beijing. In addition to discussing trade, Merz is expected to urge China to leverage its influence with Moscow to help bring an end to the war in Ukraine. However, the vast trade gap casts a long shadow over these discussions, with the Chancellor leading a large business delegation. In 2025, China regained its position as Germany's largest trade partner, surpassing the United States. The figures paint a stark and troubling picture for Germany, the largest economy in the EU. Imports from China amounted to €170.6 billion, representing an 88% annual increase, while exports to China plummeted by 9.7% to only €81.3 billion. This alarming trend threatens the very core of German industry, particularly in the automotive, machinery, and chemicals sectors, warns Jürgen Matthes from the German Economic Institute IW. Matthes suggests that these distortions are largely a result of significant Chinese subsidies and currency undervaluation. He stated, 'Chinese price advantages cannot just come from more innovation and efficiency.' The Chinese government has asserted that its subsidy policies are transparent and compliant with international trade rules, while maintaining that it is committed to a floating exchange rate regime based on market supply and demand, albeit controlled where necessary. The burgeoning trade deficit affecting the EU has been referred to as the latest 'China shock.' This trend is partly a consequence of the pandemic and Russia's full-scale invasion of Ukraine, which have raised production costs across Europe, according to Brussels-based economic think tank Bruegel. During the same timeframe, China has grappled with prolonged deflation due to over-investment in manufacturing, leading to significant overcapacity. European leaders are now faced with the challenge of addressing the impact of affordable Chinese goods, especially as the continent continues to navigate the aftermath of U.S. President Donald Trump's tariff policies. Noah Barkin, a senior fellow at the German Marshall Fund, points out that no one in Europe desires a trade war between the world's two superpowers. However, he also notes that Europe possesses leverage—China needs a marketplace for its goods, particularly given its significant overcapacity issues. The influx of these goods is creating heightened anxiety in Germany, which has long served as the powerhouse of the European economy but has recently experienced economic difficulties. Notably, Germany's once-dominant automotive sector is undergoing challenges, losing jobs in its transition to electric vehicles—a sector where China currently holds a competitive advantage. Business organizations in Germany are urging Merz to deliver a clear message during his inaugural trip to China. They expect him to address issues such as competitive distortions and export controls on critical rare earths, according to the Federation of German Industries. Meanwhile, the German Engineering Federation is advocating for Europe to take action to restore fair competition conditions, if necessary. Merz's inclination towards free trade appears to be conflicting with the current global circumstances. While France is pushing for protectionism, Germany is expressing skepticism, as noted by Barkin. The EU has initiated numerous anti-dumping cases against China and is exploring proposals to enhance domestic production and reduce foreign dependencies. Barkin notes that the EU struggles with using conventional trade defense mechanisms like tariffs, which the U.S. employs more flexibly. This ongoing situation reflects yet another strategic setback for Germany's past approach of fostering change through trade with nations like China and Russia. Former Chancellor Angela Merkel faced scrutiny for prioritizing economic links with Beijing over human rights issues, a strategy now proving complex to navigate as past ties remain difficult to sever. As Merz prepared to board his flight on Tuesday night, he reaffirmed that Germany would persist with its broader derisking policy; however, he cautioned against the notion of trying to decouple from China altogether. Related Sources: • Source 1 • Source 2