Germany is quietly working to identify vulnerabilities in China’s economy that Berlin could exploit if trade tensions escalate into open confrontation, reflecting growing anxiety in German policy circles over the country’s deepening economic dependence on Beijing.
From Trading Partner to Strategic Rival
The effort marks a notable departure from Germany’s long-standing approach to China, which for decades centered on “Wandel durch Handel,” or change through trade — the belief that deepening commercial ties would gradually encourage political liberalization. That doctrine has increasingly given way to a more defensive posture, as German officials have watched Beijing use its dominance over raw materials and manufacturing supply chains as leverage in disputes with the United States and, increasingly, with Europe itself.
Chancellor Friedrich Merz, who has struck a notably different tone than his predecessors, has spoken openly about risks posed by Chinese industrial overcapacity and acknowledged the need for tools like trade barriers, local content rules, and tighter cybersecurity policies. Yet even as that rhetoric has hardened, Germany’s economic entanglement with China has only deepened — bilateral trade reached roughly 251 billion euros last year, once again making China Germany’s largest trading partner and surpassing even the United States.
A Lopsided and Growing Trade Imbalance
The scale of Germany’s exposure is stark. Germany posted a record trade deficit with China of roughly 87 billion euros last year, larger than the previous record set in 2022. German imports from China have climbed toward 170 billion euros annually, while exports to China have stagnated at less than half that figure, reflecting both China’s growing self-sufficiency in sectors it once relied on German manufacturers for and the flood of competitively priced Chinese goods entering European markets.
That imbalance has translated into real pain for German industry. Business associations representing machinery and auto-parts suppliers estimate European firms face a cost disadvantage of up to 35% against Chinese competitors, warning that hundreds of thousands of European jobs could be at risk over the coming years. Even companies with deep investments in China, such as chemicals giant BASF, have urged Brussels to intervene more forcefully to protect European industry.
The Rare Earths Lesson
Much of Germany’s newfound urgency traces back to a bruising experience with rare earth elements, essential to manufacturing everything from electric vehicles to defense systems and semiconductors. When Beijing restricted exports of several rare earth elements and related magnets in 2025 in retaliation for U.S. tariffs, German industry was caught badly exposed, given that roughly 92% of the permanent magnets German companies import originate in China. The disruption caused production delays across multiple sectors and underscored how easily Beijing could weaponize its near-total dominance over rare earth processing, where it controls between 60% and 91% of global capacity depending on the material — prompting Germany’s finance minister to warn that Europe risks repeating the mistake it made with Russian energy dependence before the invasion of Ukraine.
Searching for Leverage of Its Own
It is against this backdrop that German officials are now working to catalog areas where China itself might be vulnerable to countermeasures, rather than relying solely on defensive strategies like supply chain diversification or subsidizing domestic rare earth processing. Analysts note that identifying genuine leverage is difficult, given China’s economy has grown increasingly self-sufficient across many sectors where Germany once held an advantage, and given Germany’s continued reliance on Chinese demand for its own manufactured exports, particularly automobiles.
Germany has already committed roughly a billion euros toward a raw materials fund aimed at building domestic processing capacity and diversifying import sources, including through partnerships with Australia, Canada, and the United States. But building genuine alternatives to Chinese supply chains, particularly in rare earth processing, is expected to take years, leaving Germany vulnerable even as it works to develop leverage of its own.
What Comes Next
With China’s exports continuing to grow and its share of global manufacturing output climbing past a third, Germany’s challenge is likely to intensify before any new strategy bears fruit. How aggressively Berlin is willing to act, and how much economic pain it can absorb along the way, remains one of the central open questions shaping its evolving relationship with its largest trading partner.
