World News: Germany Faces Dilemma Over China Trade Ties

What is more dangerous mercantilism for Germany: China's or USA, considering that Germany is worse in building future AI based economy than both of them?

 

China's mercantilism poses a more direct, existential threat to Germany's industrial core (auto, machinery) in the short-to-medium term through manufacturing competition and declining trade, while U.S. mercantilism (like the IRA) challenges its long-term future in AI and green tech. However, with German exports to China falling steeply and a €87 billion deficit in 2025, China's "innovation mercantilism 2.0" is the immediate, more dangerous economic threat.

 

Why China's Mercantilism is More Dangerous for Germany

 

    Direct Industrial Attack: China is shifting from a consumer market to a competitor, with German auto exports to China declining sharply. China’s, "innovation mercantilism 2.0" aims to dominate advanced industries, including EVs and AI-driven manufacturing, directly challenging Germany's traditional strengths.

    Declining Trade & Dependence: German exports to China hit a 10-year low in 2025, and the trade deficit reached a record €87 billion.

    Manufacturing Vulnerability: Unlike the US, which threatens high-tech dominance, China threatens to hollow out the manufacturing base that forms the backbone of the German economy.

 

Why USA's Mercantilism is Also Dangerous

 

    AI/Future Tech Gap: The U.S. is "forging ahead" in AI and the digital economy, while Germany struggles, creating a long-term technological dependency.

 

    Protectionist Subsidies: U.S. policies like the Inflation Reduction Act (IRA) attract German investment away to the U.S. due to better incentives for green tech and AI development.

 

Conclusion

While U.S. policies make it harder for Germany to develop a future AI-based economy, China’s mercantilist policies are actively undermining Germany's current economic foundation, making China's approach more dangerous to Germany's immediate economic stability.

 

“BERLIN -- Long dependent on the U.S. for its security and on China for its growth, Germany is trying to chart its own path. But a pair of high-stakes visits by its new leader to Beijing and Washington in the next week shows the process will be neither easy nor fast.

 

The trips highlight the dilemma facing many middle powers that are seeking to reduce their dependencies on rival great powers, while not exposing their defenses or hurting their economies in the short term.

 

Germany's reliance on U.S. protection has been thrown into question by President Trump's criticism of allies.

 

And China's pursuit of mercantilist policies has emerged as a profound threat to Germany's economy, which for years hitched itself to China's explosive growth.

 

In Beijing on Wednesday for his inaugural visit, German Chancellor Friedrich Merz, long a China skeptic, will try to set a new tone with its biggest trading partner. Less than a week later, he will travel to Washington to seek clarity about future trade relations between the U.S. and Europe in the wake of Trump's bruising trade policies, German officials said.

 

Merz will be sketching a new, twin-track approach this week, the officials said.

 

Merz will avoid confronting Chinese leader Xi Jinping and Trump with public demands and criticism to preserve crucial relationships.

 

At home, he will redouble investments in the military, ensure that vital manufacturing supply chains aren't overly dependent on one country and court alternative trade partners around the globe.

 

"Any smart China policy starts at home," Merz said late Tuesday before boarding his flight. He said Germany is seeking a more balanced relationship with China but added, "It would be a mistake to link this with a decoupling from China."

 

A recent procession of leaders visiting Beijing -- Britain's Keir Starmer, Canada's Mark Carney, France's Emmanuel Macron and Spain's Pedro Sanchez -- has fed talks of a reset between these countries and China to balance an increasingly hostile U.S.

 

But Germany shows how hard it is to rewire relations with China. Germany's carmakers, machine-tool manufacturers and chemicals producers -- critical industries that have sunk huge investments into China during the past three decades -- are fighting brutal competition in a Chinese market where significant overcapacity is leading to deflation and eroding profits.

 

Volkswagen, which once made up to 40% of its sales -- and even more of its profit -- in China, has seen its market share there collapse, forcing it to implement its biggest job cuts and the first plant closure at home in its nearly 90-year history.

 

"From the Chinese point of view, it's Europe that should be making the concessions and seeking closer economic support from China because it's in a weak position," said Noah Barkin, an analyst with Rhodium.

 

"They don't see a need to drive a wedge in the trans-Atlantic relationship because that wedge is already being driven by the Trump administration."

 

Now just under a year in office, Merz has broken with a long tradition of China-friendly chancellors, particularly Angela Merkel, who did much to push German industry to deepen ties with China.

 

China is a revisionist great power that is challenging the global world order, Merz wrote in an article for Foreign Affairs magazine this month. Germany shouldn't sever ties with the country but it should substantially reduce its dependence on it, he said.

 

Meanwhile, Merz has warmed to European Union proposals to curb Chinese imports through tariffs and local content rules for clean technology and cars.

 

Some German officials say they might even support requirements for Chinese direct investors in Europe to share their intellectual property with local joint-venture partners -- a rule that applied for decades to foreign manufacturers in China.

 

The China shock is a brand new reality for Germany. For most of the 21st century, the two countries were symbiotically linked. By selling to China the vehicles, factories and infrastructure that the Asian giant needed to supply the world with cheap consumer goods, Germany could latch on to the country's supercharged growth.

 

This symbiosis has now ended. Imports of Chinese goods to Germany rose 8.8% in 2025, while German exports to China fell 9.7%, sending Germany's trade deficit with China up 33%.

 

Parts of the German business lobby and trade unions, long enthusiastic supporters of free trade, are pushing Berlin to erect barriers to Chinese imports. But Berlin can't afford -- yet -- to burn its bridges.” [1]

 

It seems that Berlin is cutting more and more economic links to Russia, United States and China and dragging EU into economic vacuum, since Germans can’t compete in the world markets without ties with these economic centers. Tanks don’t produce milk and butter, and don’t win wars in drone era. Berlin is running out of ideas what to do next.

 

Germany is experiencing a profound, challenging economic transition, characterized by stagnation and a strategic shift away from reliance on Russian energy and high dependency on Chinese markets. While it is not "cutting all links"—China remained Germany's largest trading partner in 2025—the model of buying cheap energy from Russia and exporting high-value goods to China has broken, leading to a period of industrial restructuring, weak growth (+0.2% in 2025), and rising insolvencies.

Key Aspects of the Current Situation:

 

    Decoupling/De-risking: Trade with Russia has undergone a "dramatic decoupling," with German imports from Russia dropping by nearly 89% as of late 2025. Simultaneously, Germany is attempting to "de-risk" its relationship with China due to unfair competition and trade imbalances, despite Chinese goods still flowing into Germany.

    Economic Performance & Pressures: Germany has suffered from high energy prices, excessive bureaucracy, a skilled worker shortage, and the need for digitization that is not satisfied because of America’s competition for capital and expensive energy in Germany. The economy has been largely stagnant for two years, with high-quality manufacturing jobs declining.

    Shifting Strategy: The government is shifting toward a "new growth cycle" involving massive state investment in infrastructure and defense, aiming for 1.4% growth in 2026. This includes a shift towards "greening" industry, such as investing in hydrogen that also doesn’t fly since the green hydrogen is so expensive.

 

    EU Impact: Germany’s industrial decline and reduced purchasing power have had a dampening effect on the broader EU economy, though its role as the largest EU economy remains.

 

Future Outlook:

Experts project a slow recovery starting in 2026, driven by public spending, but the structural transformation of German industry is expected to be a long-term challenge. No good news for EU.

 

1. World News: Germany Faces Dilemma Over China Trade Ties. Bertrand, Benoit.  Wall Street Journal, Eastern edition; New York, N.Y.. 25 Feb 2026: A7.