Germany’s Widening Trade Deficit With China Signals a Deepening Structural Crisis
Germany’s trade deficit with China is on a trajectory to hit a record high in 2025, driven by a sharp contraction in demand for German goods that analysts warn is unlikely to reverse in the near term. The widening gap, fueled by the erosion of Germany’s industrial competitiveness and aggressive Chinese localization strategies, risks triggering a severe protectionist backlash from Europe.
A Historic Imbalance
According to a forecast by the economic development agency Germany Trade and Invest (GTAI), China is set to increase its exports to Germany by 7.2% to €168 billion, while German exports to China are expected to plunge by 10% to €81 billion. This divergence will expand the bilateral trade deficit to €87 billion.
- Holger Goerg, director of international trade at the Kiel Institute for the World Economy, suggests that reversing this slide will be exceptionally difficult. While some attribute the disparity to recent Chinese overcapacity, Goerg argues that the narrative is often oversimplified.
- He points to long-standing structural woes within Germany, including years of underinvestment in technology and persistently high energy prices, as pre-existing conditions that have exacerbated the current crisis.
The Automotive Erosion
At the core of the deficit is the declining fortune of Germany’s vaunted automotive industry. Once the engine of the nation's export economy, the sector is facing a 3.2% decline in global exports this year. In the Chinese market, German auto exports fell by approximately 5% year-on-year during the first seven months of 2025.
- Chinese manufacturers of electric vehicles are aggressively challenging legacy German brands, not only within China but across emerging Asian markets.
- Consequently, European cars are vanishing from the top export lists. While three of the top 10 EU goods exported to China in 2024 were cars, only two made the list in the first ten months of this year, slipping to the ninth and tenth positions.
- Compounding the trade imbalance is a strategic pivot by German industrial giants. Companies like Volkswagen are increasingly localizing production under the mantra of “in China, for China.” Encouraged by Beijing, this strategy substitutes German exports with locally manufactured goods.
According to Goerg, German foreign direct investment in China is now primarily driven by reinvested earnings rather than new capital flowing from Europe. While this preserves market share for individual corporations, it severs the traditional economic benefits for the home country. Jacob Gunter, lead analyst at the Mercator Institute for China Studies, warns that while localization aids corporate balance sheets, it threatens domestic employment, tax revenue, and research and development capabilities traditionally housed in Germany.
The Risk of Backlash
The political ramifications of this shift could be severe. Gunter warns that if the current trend continues, Europe may move from a trading partner to a fortress. “If things keep on going this badly for another few years, there will eventually be such a backlash, and China will go from selling more and more to selling very little,” Gunter said.
- This tension is set against a backdrop of a massive Chinese global trade surplus, which hit an all-time high of US$1.076 trillion in the first 11 months of the year.
- With exports to the U.S. facing steep tariffs under President Donald Trump, much of that volume has been redirected to the European Union, piling pressure on a bloc that already recorded a €305 billion trade deficit with China last year.
The High-Tech Dilemma
Facing an unsustainable imbalance, European leaders are scrambling for leverage. French President Emmanuel Macron has urged Beijing to boost domestic consumption and recently floated a quid pro quo arrangement: lifting European export controls on lithography machines in exchange for access to Chinese rare earths.
- However, analysts view this as a dangerous gamble. Lithography machines—vital for semiconductor manufacturing—remain one of the few areas where Europe, led by Dutch firm ASML, holds a decisive strategic advantage.
- ASML currently sells equipment to China that is eight generations behind Western standards.
Gunter argues that trading away this technological lead to solve a short-term deficit would be a strategic error. “It is selling out the long-term strategic advantage that Europe has … in order to deal with the short-term problem,” he said. Furthermore, existing restrictions from the U.S. and Dutch governments make such a deal politically improbable.
Pricing and Procurement Barriers
Even in sectors where Europe retains a technological edge, such as pharmaceuticals and specialized machinery, gaining ground in China is proving difficult. Although pharmaceuticals now outsell cars as German exports to China, market access is hindered by Beijing’s preference for domestic alternatives and exclusion from public procurement schemes.
- Simultaneously, European machinery manufacturers are being undercut on price. Chinese competitors are increasingly producing machines that deliver 80% of the performance of German equivalents but at a significantly lower cost.
- For Chinese buyers, the superior engineering of a German harvester or machine tool often does not justify the price premium.
As Huang Gang, founder of Nongte Digital Agriculture, noted, unless European manufacturers find a compromise on price, “in the future the Chinese market might be lost to them forever.”
Disclaimer
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