GERMANY: China shock – Rivalry tests Merz and German economy

First automakers, now China is taking on Germany’s other major export industries – Image: Sina Schuldt/dpa/picture alliance

Chancellor Friedrich Merz is scrambling to defend German industry from the economic upheaval caused by intense rivalry from China. Momentum is building to impose new trade barriers to stop unfair trade practices.

China’s rise from poverty to the world’s second‑largest economy rewrote the rules of globalization. Now Beijing’s push into high-end technology is unfolding at an even faster pace.

While the United States and United Kingdom had decades to absorb the first China shock at the turn of the century, those confronting the second — above all Germany — have had far less notice.

An obvious sign that Beijing’s huge investments in high-tech were paying off emerged shortly after the first Chinese electric vehicles (EVs) rolled off transporters across Europe in 2023.

While few believed they would make serious inroads against Germany’s legacy carmakers, just over two years later, China’s rivals have become a disruptive force in the European market.

Germany loses ground in world’s biggest car market

The likes of Volkswagen, BMW and Mercedes-Benz have recently issued profit warnings as sales come under pressure, both in China and closer to home. German vehicle exports to China have plummeted by two-thirds since 2022, data from the EU’s statistics agency Eurostat shows.

The rivalry, which has spread from carmaking to other industrial sectors, is visible in Germany’s broader trade performance. Last year, goods exports to China fell by 9.3% to €81.8 billion ($97 billion), their lowest level in a decade, while Chinese imports surged.

“Germany is at the heart of the second China shock,” Andrew Small, director of the Asia program at the European Council on Foreign Relations (ECFR), told DW. “The two economies used to be complementary; they’re now functioning as competitors.”

German exports to China in a ‘structural decline’

This month, the Rhodium Group, a New York-based research house specializing in China, warned that Germany’s outbound trade with China has entered a “structural decline” and that, unless industry finds alternative markets, the wave of bankruptcies and job cuts Germany is witnessing “is likely to accelerate.”

In its research paper “Germany’s ‘China Shock’ Revisited,” Rhodium noted that Chinese rivals are capturing market share from German producers in machinery, chemicals and power-generation systems.

“The Chinese market used to be a goldmine for German multinationals,” the paper’s co-author and Rhodium’s senior advisor on China, Noah Barkin, told DW. “But in the last three years, a quarter of German exports [to China] have disappeared.”

China was for many years Germany’s largest or second-largest export destination, but in 2024 it fell to fifth place and was forecast by Germany Trade & Invest (GTAI) to drop to seventh last year.

Chinese rivals threaten non-EU markets

The pressure on German industry is no longer confined to China. Competition in third markets from Chinese rivals has also intensified. Barkin noted how in parts of Asia, Latin America and Africa, China is “making huge gains against German companies … [by] offering much cheaper products.”

As Germany’s chancellor, Friedrich Merz, makes his first official visit to China this week, he’s expected to walk a fine line between reaffirming China’s importance to German industry while urging Beijing to address longstanding concerns over market access and overcapacity.

Both sides are seeking a reset in bilateral ties, which have been strained since the pandemic highlighted Germany’s dependence on Chinese parts and raw materials. This sparked several years of de-risking from some Chinese suppliers.

China’s BYD increased electric vehicle sales in Germany by more than 700% last year – Image: DW

Merz’s visit aims to stabilize ties, with warnings

Stefan Messingschlager, an expert in Chinese history at Hamburg’s Helmut‑Schmidt‑University, thinks a full reset will be “difficult,” telling DW that the “plausible objective is managed stabilization.”

“The key is to reduce [China’s] coercion leverage [over rare-earth minerals] and single-source exposure for battery materials, chips, pharmaceutical precursors and key industrial software,” Messingschlager said of Merz’s priorities in Beijing.

China has a chokehold on rare earths, controlling about two-thirds of global production and 90% of refining capacity. Last year, Beijing placed export curbs on the critical minerals to the EU and the US, disrupting production in the auto industry on both sides of the Atlantic.

Rather than tackle the many issues bilaterally, including Chinese overproduction and Beijing’s huge industrial subsidies, Messingschlager thinks Merz will utilize EU support through anti-dumping and anti-subsidy duties, among other penalties.

EU moves to increase economic firepower

At last week’s competitiveness summit in Belgium, EU leaders backed a tougher industrial agenda for the bloc, including a “Buy European” policy for public sector procurement, while also promising measures to tackle unfair competition from China.

In January, the European Commission, the bloc’s executive arm, announced new probes and trade‑defense steps aimed at overcoming market distortions linked to Beijing’s industrial policies.

The EU is also pushing ahead on trade deals with India and key Latin American economies, which should help German exporters find new growth markets.

The Rhodium paper noted that German industry continues to perform well across the EU, the UK and Turkey, due to proximity and preferential trade deals. But the research group warned that Chinese producers could quickly take the lead in these markets unless trade barriers are erected.

Merz, who will hold talks with President Xi Jinping, will take a large German business delegation to China next week – Image: Li Xueren/Xinhua/-,Yauhen Yerchak/Zuma Wire/picture-alliance

EU urged to rally like‑minded partners

Small from ECFR agreed that “diversification without defense isn’t enough” and urged the EU to work with other countries keen to protect their own industries from Chinese rivals. A strong response from multiple trading partners would send the right message to Beijing, he said.

“This will have to be done discreetly due to nervousness about being seen to gang up on China,” he told DW. “But there is a real interest beyond the EU in putting in place defensive measures in strategic sectors,”

Many economists have compared the assault on German industry with Detroit, once the beating heart of US carmaking, which has struggled through decades of economic decline and depopulation.

Rhodium’s Barkin spoke of “panic” in some German industries at China’s rapid advance and lamented that the tough political rhetoric in Berlin has so far not been matched by action.

The research paper warned that “without a credible threat to restrict access to the European market, China would have little incentive to rein in its exports,” while German industry would continue to “struggle against a much larger competitor who is not playing by the same rules.”