FEB 26 – During his first official visit to Beijing, Germany’s Chancellor Friedrich Merz said that a yawning trade imbalance between his country and China is “not healthy”.
Imports into Germany from China were more than double the value of those exported back last year, according to federal statistics.
Merz said he wanted to find ways “to reduce this trade deficit” which had “quadrupled” in five years.
Merz said he’d also asked Beijing to use its influence with Moscow to help end the war in Ukraine.
However, the huge trade gap loomed large over the talks with the Chancellor, who was followed by a big business delegation.
China once again took the top spot as Germany’s biggest trade partner in 2025, supplanting the US.
Behind that headline is a stark and worrying imbalance for Germany, the EU’s largest economy.
In 2025, goods worth €170.6 billion (£148.8bn; $200.9bn) came from China into Germany – an 8.8% annual increase – while German exports to China fell by 9.7% to €81.3 billion.
The situation “is eroding the core of German industry, especially in the car, machinery and chemicals sectors,” warns Jürgen Matthes at the German Economic Institute (IW).
Matthes, the IW’s head of International Economic Policy, believes distortions are chiefly down to “massive” Chinese subsidies and currency under-valuation.
Chinese price advantages “cannot just come from more innovation and efficiency,” he told the BBC.
Beijing has previously said its subsidy policies are transparent and fully consistent with international trade rules.
In response to past allegations of unfairly controlling its currency’s value, China said it is committed to implementing a floating exchange rate regime, based on market supply and demand, but managed where necessary.
The bloating trade deficit, that’s hitting the EU as a whole, is being dubbed the latest “China shock”.
The trend was partly caused by the pandemic and Russia’s full-scale invasion of Ukraine which led to rising production costs in Europe, according to Brussels-based economic think tank Bruegel.
“During the same period, China entered a prolonged deflationary phase, stemming from over-investment in manufacturing, creating the overcapacity we see today.”
It has left leaders weighing how best to offset the impact of cheap Chinese goods.
That is as the continent has already been rocked by the turbulence of US President Donald Trump’s tariff policies.
“No one in Europe wants a two front trade war with the world’s two superpowers,” says Noah Barkin, a visiting senior fellow at the German Marshall Fund.
Europe does have leverage, says Barkin, who’s also a senior adviser at the Rhodium Group: “China needs somewhere to sell its goods. It has a real problem with over-capacity.”
But the arrival of these goods is sparking acute angst in Germany – the traditional engine of Europe but one that’s been stuttering, economically, for years.
Notably, its once mighty car industry is shedding jobs in what’s become a bumpy transition to electric vehicles – a field China dominates.
Business groups in Germany urged Merz to send a clear signal during his inaugural trip to China as chancellor.
He must address problems including “distortions” in competition and export controls on critical rare earths – according to the Federation of German Industries.
While the German Engineering Federation says Europe should act to “restore fair competitive conditions” if necessary.
According to the Chancellor, China will buy up to 120 aircraft from European aviation giant Airbus.
But Merz’s instincts, as a free-trade trans-Atlanticist, have sat uneasily alongside current global realities.
“France is behind a protect agenda while Germany is more sceptical,” says the GMF’s Barkin.
The EU has launched numerous anti-dumping cases against China while there are proposals to boost domestic production and curb foreign dependencies.
“I think where the Commission struggles is classic trade defence tools like tariffs,” says Barkin. “Unlike the US, which can use tariffs much more flexibly.”
For Berlin, the headache spells yet another strategic defeat for its past approach of “change through trade” with countries like China and Russia.
Former long-serving Chancellor Angel Merkel faced frequent accusations of brushing aside human rights concerns in favour of deepening economic ties with Beijing.
Such deep ties – and dependencies – are now not easily discarded.
Speaking to reporters, Merz said the relationship opens up opportunities, “but also entails risks.”
“We want to further strengthen our partnership… However, we will of course also protect our interests,” he said, after earlier stating that trying to decouple from China would be a mistake.
By BBC
