- There is a growing consensus a new China shock is reverberating across global goods markets. Nowhere is that shock more consequential than in Germany. Its manufacturers in core industries – cars, machinery, chemicals and aircraft – are being simultaneously squeezed out of China and other foreign markets, and at home.
- The shock is worsening. Analysts had estimated China would only export 10 million cars a year by the end of the decade. But China’s 2025 fourth quarter exports, annualised, already hit that mark. The car sector is not unique. In 2025, China’s overall export volumes grew at more than twice the pace of global trade. And they gained strength in early 2026, with first quarter export volume growth at 15 per cent.
- In its new five-year plan (2026-30), China shows no sign of changing course. It is committed to displacing imports in the few sectors where it still depends on foreign supply. China is set to continue expanding manufacturing supply even as household demand remains weak and the property drag persists, implying more exports.
- The textbook expectation – that an economy this large must eventually rebalance through stronger imports, currency appreciation or falling competitiveness – is not materialising. China is intervening to stymie currency appreciation, while its vast domestic savings mean it could plausibly sustain an external surplus of 10 per cent of GDP, with no hard limit on the foreign financial claims it can accumulate.
- The risk for Berlin, which already struggled to adjust when China’s surplus jumped from 2 to 5 per cent of GDP from 2022 to 2025, is acute. Much of the demand generated by Germany’s fiscal expansion, after relaxing the debt brake, could leak straight into Chinese imports and throttle Germany’s recovery. Global car, machinery and chemicals production could concentrate further in China, eroding innovation in traditional manufacturing centres and increasing China’s ability to coerce Berlin by threatening to throttle supply the way it did for rare earth minerals.
- For a long time, Berlin struggled to see the problem clearly. As the world’s archetypal surplus economy, Germany saw itself as part of a coalition of exporting nations and resisted scrutiny of policies underpinning large trade surpluses. But China’s surplus now dwarfs Germany’s. French diplomats have put China’s imbalanced growth model at the top of the G7 agenda and called for the EU to more strongly defend its home market.
- Germany remains hesitant, even as China has already eaten much of German industry’s lunch and is preparing to start on dinner. The EU has launched a scatter of product-specific trade defences and a piecemeal buy-European industrial policy. But China’s trade surplus with the EU is still growing at around 30 per cent annually, showing these efforts are too slow and too narrow.
- Germany faces a structural demand shock from a state-distorted rival that cannot be addressed like past competitiveness challenges: Berlin and Brussels must either bolster their trade defences and industrial policy or prepare to offset the social and economic costs of deindustrialisation at China’s hand.
About the author:
Sander Tordoir is chief economist at the Centre for European Reform. Sander works on eurozone monetary and fiscal policy, the institutional architecture of EMU, European integration as well as Germany’s role in the EU.