Germany contemplates action to address €360B deficit with China

The EU’s goods trade deficit with China hit €360 billion in 2025. That’s a 20% jump from the prior year.

Germany, Europe’s largest economy and historically China’s most important trading partner on the continent, is feeling the squeeze more than most. Its bilateral deficit with China nearly doubled to around €90 billion, a 33% year-over-year increase that has Chancellor Friedrich Merz searching for answers.

The numbers tell a lopsided story

German exports to China fell 9.7% to €81.3 billion in 2025. Meanwhile, imports from China surged 8.8% to €170.6 billion over the same period.

Merz has described this imbalance as “unhealthy,” noting the deficit has quadrupled since 2020.

The industries taking the biggest hit read like a who’s who of the German economy: automotive, machinery, and chemicals.

German automakers like Volkswagen, Mercedes-Benz, and BMW sit in a particularly awkward position. They’re being undercut at home by subsidized Chinese competitors, yet they depend heavily on the Chinese market for sales.

Diplomacy first, then what?

Merz visited Beijing in February 2026, and came away with commitments from Chinese officials to increase imports of high-quality German goods. EU leaders remain deeply skeptical.

At the core of the EU’s frustration is what it views as unfair trade practices: overproduction fueled by state subsidies that allow Chinese companies to flood European markets with goods priced below what domestic manufacturers can compete with.

As of mid-2026, EU leaders are actively debating tougher trade defenses. But internal divisions within Merz’s own coalition are making consensus difficult.

What this means for investors

Volkswagen, Mercedes-Benz, and BMW face a scenario where tighter EU trade defenses could invite retaliatory measures from Beijing, potentially restricting their access to the Chinese consumer market. These companies have been lobbying against aggressive action.

The broader machinery and chemicals sectors face similar exposure. Any escalation in trade tensions could create volatility across German and European industrials more broadly.

For investors watching this space, the key variable isn’t whether Europe acts, but how China responds. Beijing’s willingness to follow through on import commitments, or its decision to retaliate against any new safeguards, will likely determine whether this remains a slow-burn policy debate or turns into something that moves markets.

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