Germany Faces a “China Shock” as Trade Dynamics Shift

Germany is grappling with a significant economic shift as China’s industrial dominance grows and trade imbalances escalate. What was once a mutually beneficial relationship is increasingly characterized by competition and dependency, prompting a reassessment of Germany’s economic and strategic approach.

The Rising Trade Deficit and Shifting Economic Landscape

2025 marked a turning point, with Germany recording a record trade deficit of €87 billion with China – a €20 billion increase from the previous year. German exports to China are declining, even as the United States, France, the Netherlands, Poland, and Italy have surpassed China as key export markets for German goods. China now accounts for approximately 30% of global industrial production, a substantial increase from the 6% recorded at the beginning of the century.

China’s economic model is increasingly focused on achieving global dominance in sectors traditionally strong for Germany, including automotive, mechanical engineering, and chemicals, as well as emerging industries like robotics and biotechnology. This is fueled by economies of scale, substantial investments in research and development, and the leveraging of state capitalism to provide competitive advantages to Chinese companies.

China’s Ambitions and the Impact on German Industry

Beijing aims for self-sufficiency in the production of all relevant industrial and high-tech goods. As noted by the Asia editor of the Financial Times, Robin Harding, China intends to produce everything “better and cheaper” and eliminate reliance on foreign suppliers. This ambition is reflected in the dramatic increase in Chinese vehicle exports, rising from fewer than one million in 2020 to seven million in 2025.

The consequences for German industry are significant. German companies operating in China have increasingly localized production, reducing imports from Europe. Simultaneously, Chinese companies are displacing German competitors in third markets. Price advantages of up to 30% in sectors like mechanical engineering, driven by lower production costs, state subsidies, and currency management, are putting intense pressure on German firms. Germany has even experienced a trade deficit with China in capital goods.

Deindustrialization and Job Losses

This situation threatens massive deindustrialization in Germany, with over 200,000 well-paid industrial jobs lost since 2019 and hundreds of thousands more at risk. Municipal corporate tax revenues are declining, particularly in industrial regions. Concerns are growing that Germany could face a fate similar to Detroit if these trends continue.

Dependencies and Weaponization of Critical Resources

Germany is as well facing dependencies in critical raw materials, supply chains, and critical infrastructure, such as 5G networks. China dominates the market for rare earth processing, controlling 91% of global processing capacity and around 60% of extraction. Heavy rare earths, crucial for Europe’s defense sector, are mined almost exclusively in China, Myanmar, and Laos.

In October 2025, China announced tightened export controls, requiring licenses for the export of critical raw materials and even goods containing as little as 0.1% rare earths, with no licenses issued for the defense industry. This move, framed as safeguarding “world peace and regional stability,” is seen as an attempt to control the global industrial production chain and exert influence over European economies.

The Nexperia Crisis and Supply Chain Vulnerabilities

The Nexperia crisis, where China halted semiconductor exports after Dutch government intervention, highlighted Germany’s vulnerability to supply chain disruptions. Production lines in Germany were shut down due to the lack of alternative suppliers and insufficient inventories.

A Long-Term Phenomenon and Collective Failure

The “China shock” is not a sudden event but a long-term trend that has been developing for over a decade. It represents a collective failure of German elites, stemming from arrogance, flawed incentives, and a failure to recognize China’s clearly communicated intentions. Despite warnings as early as 2010 regarding China’s use of rare earth dependencies for political leverage, and the publication of the “Made in China 2025” strategy outlining China’s industrial ambitions, the risks were largely underestimated.

The Need for a New Approach: Systemic Competitiveness

Germany and Europe need to move beyond a narrow focus on competitiveness and embrace a new model of “systemic competitiveness” that strengthens prosperity and security. This requires reducing dependencies, protecting core industries, and investing in new strengths. Cooperation with like-minded partners, such as Japan, South Korea, Australia, Brazil, and Canada, is crucial. A European approach is essential, recognizing that the costs and coercion are unevenly distributed across the EU.

Germany and Europe must understand their leverage and be prepared to use it against coercive measures. Investing in economic statecraft and rediscovering an appetite for shaping the future are essential for navigating this new era.