Germany’s dilemma over strategic recalibration with China

As the US doubles down on its strategic competition with China — likely to be accelerated under the second Trump administration — European firms must make difficult decisions about where and how to position themselves. Against this backdrop, German corporates and the incoming government will face a set of strategic choices with long-term consequences. Navigating them successfully will require not just tactical responses, but a deep understanding of the economic reordering already underway. The old model of engagement is no longer sustainable.

In key sectors such as automotive, machinery, and chemicals — longstanding engines of the German export economy — China is no longer simply a lucrative sales market or low-cost production site. It is an increasingly formidable competitor and driver of innovation. The sense of complementarity that once defined Germany-China economic ties has given way to head-to-head competition, not only within China but in third-country markets worldwide and deepened dependencies.  

The evolution of German-China economic ties has far-reaching implications not only for the two countries involved, but for the global economy more broadly. Germany remains China’s largest trading partner in the European Union (EU), accounting for over 30% of total EU goods exports to China. In 2024, trade with China reached €246 billion, trailing only the US after seven consecutive years as Germany’s top trading partner. German direct investment in China continue to reach record levels in recent years, driven in part by industrial giants hedging against deglobalization risks by localizing production. 

But the depth of the relationship also exposes Germany — and by extension, the EU — to concentrated vulnerabilities. As the largest European economy and a key architect of Europe’s economic integration, Germany’s strategic orientation toward China plays an outsized role in shaping the EU’s collective China policy. The traditional model of globalization, built on liberal economic integration and geographic neutrality, is being tested and undermined by both China and the US — and Germany is at the frontline of its consequences. 

From engagement to pragmatic balancing 

Unlike others that suffered from the "China Shock," Germany’s manufacturing sector thrived by supplying China with machinery, chemicals, and automobiles essential to China’s industrialization. As China’s economy grew, Germany became the main European beneficiary, accounting for nearly half of the EU’s exports to China. In 2020, China overtook the US as Germany’s largest export market, helping to power Germany’s economic recovery after the 2008–2009 global financial crisis.  

Crucially, the economic relationship remained relatively insulated from political turbulence. Unlike Japan, which faced serious fallout from Tokyo’s disputes with Beijing, Germany experienced only minor political frictions, such as the suspension of the rule-of-law dialogue in 2007 after Chancellor Angela Merkel met the Dalai Lama — the exiled Tibetan leader whom Beijing describes as a dangerous "splittist" of the Chinese state. This absence of major disputes delayed Germany’s recognition of the emerging vulnerabilities in the relationship. 

However, starting around 2016, concerns grew as Chinese acquisitions of German high-tech firms raised alarm about the loss of strategic technologies to China. Optimism about endless economic complementarity gave way to a more sober view as China’s industrial policies evolved. By 2019, both the European Commission and the Federation of German Industries (BDI) publicly redefined China as not just a partner, but also a "systemic rival," acknowledging the challenge China poses to European and German competitiveness. ‘De-risking,’ rather than ‘decoupling,’ became the EU's new China strategy. 

Contested corporate recalibration 

This evolving political context is mirrored — and in some cases resisted — by corporate strategies on the ground. From the perspective of many German executives, the new regulatory instruments implemented by the German government and the EU including tighter investment screening, supply-chain scrutiny, carbon-border adjustment, and anti-foreign subsidy regulations still pose a more immediate threat to German business interests than Beijing’s industrial policy ambitions.  

In practice, de-risking for many German companies has largely translated into an "in China, for China" strategy. Rather than pulling back, German firms are embedding themselves more deeply into the Chinese economy to shield their operations from external political shocks and potentially benefit from the next wave of globalization of Chinese firms. In the German Chamber of Commerce’s 2023/24 annual business confidence survey, over 90% of interviewees indicated they intended to maintain their operations in China, with more than half planning to increase investments over the following two years. 

The corporate approach indicates a preference for pragmatic engagement over disengagement, highlighting the complexities of balancing economic interests with geopolitical considerations. The turbulent first months of the second Trump administration reinforced this pragmatism. With transatlantic relations strained and protectionist rhetoric rising, many German firms view China not just as a growth market but increasingly as a predictable and stabilizing partner amid global volatility, overriding any other concerns stemming from China’s geopolitical or industrial policy agenda. 

New structural realities 

German firms are increasingly positioning themselves not just to compete in China, but to become partners in the globalization of Chinese companies. But this sense of optimism is far from universal. While the German Automobile Association remains largely committed to continued engagement and market access, the German Engineering Federation has warned of risks of losing Germany’s dual-use technologies and calls for coordinated strategies on export controls, especially in sectors with security-sensitive applications.  

Given the scale and complexity of China’s economy, it is unsurprising that German views on future business prospects are diverse. Yet, as economic ties pivot toward innovation-led collaboration, the immediate economic benefits for Germany, and by extension, Europe’s industrial base, may become less tangible. A new economic reality is already rapidly unfolding for German companies in China. While German firms and exports have avoided backlashes other industrial countries have encountered earlier on, the tides started to turn around 2020 with key figures beginning to slip. 

China’s and Germany’s revealed comparative advantage, an econometric index of efficient production, is converging, a trend particularly visible in machinery. In 2024, Germany’s export share to China declined to 5.8%, its lowest level since 2015 and broadly in line with levels in the early 2010s. A significant rebound seems unlikely in the near term, if at all. Notably, the current weakness in the Chinese economy is concentrated in the consumer and real estate sectors, while industrial production, the segment most relevant to German exporters, remains relatively strong. This suggests that the drop in German exports is not merely cyclical but indicative of deeper shifts in trade dynamics.

A new corporate-policy alignment 

The global environment in which German companies operate is undergoing a profound transformation. External risks are compounding a long list of internal weaknesses. In this global environment of systemic uncertainty, German firms will face a far more complex reality: managing fragmentation and risk, rather than simply leveraging globalization for growth. In parallel, German policymakers will have to rethink industrial, technological, and foreign economic strategies to safeguard national competitiveness and resilience. 

De-risking cannot succeed as company-by-company improvisation; it requires clear strategic guidance, coordinated investment, and common standards for risk assessment. Beyond national adaptation, Germany will also need to take a leadership role in shaping the new phase of contested globalization. A passive approach will leave German firms reacting to rules defined by others. As Germany work towards defining its national interest in foreign economic engagement, a much closer alignment between corporate strategies and government policy will be necessary. 

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