China’s increasing technical sophistication, its political commitment to invest in, and subsidise, advanced manufacturing and its low level of demand pose a clear challenge to all advanced economies – the US as much as Germany. For all the talk about deglobalisation and the need for supply chain diversification, the global economy – including the large European countries – is becoming more, not less, reliant on Chinese supply in key sectors.³

Donald Trump’s re-election is likely to create new points of tension between the EU and the US. Trump’s concerns about China’s surplus with the US are likely to result in measures that exacerbate the threat that China’s imbalances pose to EU industry.⁴ If the US imposes widespread sizeable tariffs on China – as Trump says he intends to do – even more of China’s excess production will be redirected to the European market. 

But Germany’s politics have still not caught up with the risks that its economic model is facing. Rather than recognising Chinese  industrial policies in clean energy sectors as a clear threat to Germany’s industrial leadership, it opposed EU tariffs on Chinese electric vehicles. The EU’s targeted countervailing duties – a modest, ‘within the rules’ response compared to trade practices employed by both the Trump and Biden administrations – passed thanks to support from more far-sighted members of the Union like the Netherlands, France and Ireland. Such countervailing duties are specific tariffs imposed to offset the effects of foreign government subsidies on imported goods. 

Without German support, the EU may struggle the next time it tries to stand up to Beijing. Doing so in collaboration with Washington will be challenging under Trump, who is aggrieved by Germany’s bilateral trade surplus with the US. But fundamentally the US and EU share the same concern about Chinese overcapacity. If Germany wants to avoid rapid deindustrialisation, with significant, geographically concentrated losses in jobs and productivity, its new government must urgently rethink its trade, industrial and fiscal policies. This paper looks at the causes and consequences of China’s surpluses, and sets out what Germany needs to do to mitigate their effects. 

Industrial production in the EU’s largest economy has been declining for over five years, a source of profound angst in a country where manufacturing contributes around 5.5 million jobs and 20 per cent of gross domestic product (GDP).

Germany is starting to realise that China’s new automotive, clean technology and civil aviation industrial base directly competes with Germany’s manufacturing foundation. China’s macroeconomic imbalances now directly infringe on German industrial interests.

Since the property bubble burst in 2021, China has doubled down on directed investment in priority manufacturing sectors, despite a lack of internal demand for much of its output. The result has been a turn back toward export-led growth, with Chinese exports (in volume terms) wildly outperforming global trade in 2024, while German exports in capital and durable goods shrank.

Germany was relatively sheltered from the initial China shock immediately before and after the country’s accession to the World Trade Organisation (WTO) in 2001. Then, China’s exports were in consumer electronics, furniture, apparel and household appliances – not the automotive and engineering sectors at the heart of the German economy. Wage restraint and the cost-savings from expanding supply chains to Central and Eastern Europe created a German competitive export sector able to benefit from Chinese and American demand for machinery.

That is no longer the case: China’s economy is much larger; its industry now produces the same goods as Germany and its export-biased growth is cutting into Germany’s European and global export markets.

Cars represent the tip of the spear. China was not a net exporter of vehicles in 2020, the year of the pandemic. It now exports 5 million more vehicles than it imports. The comparable number for Germany is 1.2 million, down by half from its pre-pandemic peak. Germany’s green industry, the largest in the G7, equally faces a growing competitive threat from Chinese green industrial policies.

To weather the China shock, a new German government must rethink its policies:

• First, Germany should abandon its past opposition to scrutiny of large trade surpluses. It should join the US and the other large G7 economies in encouraging the International Monetary Fund (IMF) to prioritise policies to reduce China’s surplus – starting with a serious examination of how China’s $1 trillion goods surplus largely disappears in the reported current account data. This means supporting some historically un-German policies, notably pressing Beijing to use the central government’s fiscal space to lift domestic demand.
• Second, Germany should support EU protection of viable European industrial sectors facing an onslaught as a result of China’s active industrial policies. At the same time, it should allow cheap imports in areas where Europe has little to no manufacturing. China’s widespread use of subsidies creates ample scope for WTO-consistent duties, such as the ones the EU pursued for electric vehicles (EVs).
• Third, Germany and other EU countries should equip existing and new subsidy schemes with de facto buy-European requirements to offset China’s own local content requirements. The EU currently lacks sufficient common funding for an ambitious industrial policy, but it can tighten single market regulation to ensure EU countries align their national subsidies, for example by linking them to environmental and labour standards which China cannot meet.
• Fourth, Germany should lead on designing a unified EU industrial policy. Customs income already belongs to the EU and the growing tariff revenue from Europe’s trade defence instruments could be earmarked to fund a common policy.

Germany, with its low debt levels and endangered industrial base, has both the policy space to act and the most to lose if it does not. But it cannot act alone against the new Exportweltmeister. As Henry Kissinger once quipped, Germany is “too big for Europe and too small for the world.”