China-Germany Economic Relations 2025: What Merz’s Leadership Means for Trade and Investment

Under Chancellor Friedrich Merz, Germany relationship with China is entering a phase of cautious recalibration in 2025. Merz’s administration aims to reduce strategic dependencies on China while preserving strong economic ties—a policy framed as “de-risking without decoupling.” Despite this stance, economic interdependence remains substantial. In 2024, bilateral trade reached approximately EUR 246 billion (US$279 billion), and over 5,000 German companies operate in China, with most planning to maintain or expand their investments.

The bilateral relationship between China and Germany is once again entering a period of adjustment, as political leadership changes in Berlin bring a renewed emphasis on economic resilience and strategic autonomy. Under Chancellor Friedrich Merz, Germany is expected to deepen its “de-risking” agenda vis-à-vis China, while still preserving channels for cooperation in key sectors that are critical to both economies.

For over a decade, China and Germany have maintained close economic ties, with China serving as Germany’s largest trading partner since 2016 and Germany consistently ranking as China’s top trade partner in the EU. However, evolving geopolitical dynamics, growing industrial competition, and shifting EU policies have all contributed to a more complex landscape for bilateral trade and investment.

As the new German government takes shape, investors and businesses are closely monitoring potential policy continuity or shifts that may impact bilateral engagements—particularly in strategic sectors such as automotive, green technology, pharmaceuticals, and advanced manufacturing. Against this backdrop, understanding the outlook for China-Germany relations in 2025 and beyond is essential to mitigating risks and capturing new opportunities.

In this article, we assess how the Merz administration’s emerging policy direction may shape trade and investment flows with China. Drawing on recent data and policy announcements, we examine the future of bilateral cooperation in high-priority industries and provide insights into regulatory developments, market access, and geopolitical considerations likely to define the next phase of this important strategic partnership.

Germany’s new government and China Policy

Germany’s political landscape shifted significantly in the first half of 2025, following snap elections held in February. The elections led to the formation of a grand coalition between the center-right Christian Democratic Union/Christian Social Union (CDU/CSU) and the center-left Social Democratic Party (SPD). Friedrich Merz, leader of the CDU, assumed the Chancellorship on May 6, 2025, marking the first conservative-led government since 2021.

The Merz administration campaigned on a platform centered around restoring Germany’s global competitiveness and economic resilience, encapsulated by the coalition’s campaign slogan: Wieder nach vorne (“Forward again”). With structural economic headwinds mounting and Germany’s export-driven model under strain, the new government has signaled a more assertive stance on economic policy—particularly concerning critical dependencies.

In its coalition agreement, the government formally commits to a strategy of “de-risking” and enhancing “economic security,” specifically identifying China as a “systemic rival.”

Chancellor Merz has reiterated his view that German firms must reduce their reliance on China, emphasizing that future trade relationships should be anchored in markets perceived as more stable and secure, such as the United States and Latin America. Notably, he cautioned that the government would not intervene to support German companies facing losses from “risky” China investments—marking a clear departure from the more protective posture of his predecessor.

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This contrasts with the approach taken by former Chancellor Olaf Scholz, who had often prioritized economic pragmatism in managing relations with China. Scholz, for instance, opposed the EU’s proposed tariffs on Chinese electric vehicles (EVs) in 2023, citing potential risks to Germany’s automotive exports and overall competitiveness. Under Merz, however, the tone is expected to be more aligned with broader EU concerns around industrial subsidies, market distortions, and national security.

Still, despite the tougher rhetoric, both governments have taken steps to ensure a stable bilateral relationship. Chinese President Xi Jinping sent a formal congratulatory message to Merz upon his appointment, calling for a “new chapter” in the comprehensive strategic partnership and reaffirming the principles of mutual respect and win–win cooperation. Chancellor Merz’s office responded in kind, highlighting the importance of fair competition, reciprocity, and continued dialogue.

Meanwhile, China has expressed concern that Germany’s de-risking agenda should not come at the expense of cooperation. Chinese officials have urged Germany to maintain its long-standing role as a stabilizing force in the EU-China relationship and avoid measures that could disrupt bilateral supply chains or undermine business confidence.

Taken together, these developments suggest that while Germany under Merz is likely to adopt a firmer stance on economic security and reduce exposure to perceived geopolitical risks, it will also seek to maintain pragmatic engagement with China—particularly in sectors where cooperation continues to deliver mutual benefits. This dual-track approach reflects the broader EU consensus that China remains simultaneously a partner, competitor, and rival, depending on the policy domain in question.

China-Germany trade relations under the new German leadership

Germany’s trade with China remains massive but flat to declining. According to official figures from Germany’s Federal Foreign Office, total two‑way goods trade was roughly EUR 246 billion in 2024, making China Germany’s second-largest trading partner. This represented a slight drop (about 3 percent) from 2023 levels.

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In early 2025 the trend has continued: for example, Germany’s January 2025 exports to China fell 0.9 percent to EUR 6.7 billion (US$7.62 billion) while imports fell 2.8 percent to EUR 2.9 billion (US$3.3 billion). The slowdown reflects both weaker Chinese demand and stiff competition. Germany’s foreign‑policy strategy emphasizes that its China policy is “consistently European,” seeking “substantive and reciprocal” EU–China ties and greater EU unity on China, but economic ties remain close.

Sector breakdown of trade

Germany’s exports to China are concentrated in its traditional engineering and chemical strengths. Motor vehicles and parts are the top category (17 percent of all German exports), followed by machinery (14 percent) and chemicals (9 percent). In China specifically, German firms have long shipped cars (Mercedes, BMW, VW), heavy machinery, industrial equipment and specialty chemicals. One analysis notes China’s imports from Germany include “automotive products, machinery and chemicals”.

By contrast, German imports from China are led by consumer electronics, machinery and consumer goods. China supplies roughly 87 percent of Germany’s solar photovoltaic panels and cells – and more broadly the majority of electronics and textile imports. For example, one trade overview reports China supplies “electronics, machinery and textiles” to Germany, contributing to a large goods deficit.

In green technologies, Chinese EV and battery makers are rapidly expanding in Europe; meanwhile German carmakers have seen sales in China fall sharply (BMW and Audi sales in China fell over 10 percent in 2024) as local rivals gained share.

EU investigations and Germany’s stance

The EU has launched several trade defense investigations related to Chinese exports. In late 2023, the European Commission opened an anti‑subsidy probe into battery electric vehicles from China, with provisional duties up to about 38 percent applied in mid-2024 and a final decision due in late 2025. Similar investigations target Chinese PV panels, steel and other industries.

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Germany’s position in the EV case has been divided: under former Chancellor Scholz, Berlin was one of only five EU governments to oppose EV tariffs, citing industry concerns. By contrast, Chancellor‑designate Merz is widely viewed as more hawkish on China. APCO analysts note that Scholz “opposed EU duties on Chinese EVs” whereas Merz is “considered more hawkish” on China and security. Merz himself has emphasized the need for “fair competition and reciprocity” in economic ties with China.

We should expect Germany under Merz to continue advocating a level playing field: industry lobbyists (the BDI) have already signaled they would support protection if “conditions are met”, and the Foreign Ministry (Greens) has urged that the EU “not take tariffs off the table”.

In sum, Germany’s new government is likely to align with Brussels on upholding trade rules against unfair Chinese subsidies, even as it seeks to preserve investment ties.

Bilateral investment trends

German investment in China

Recent data gathered from Rhodium group German firms invested EUR 5.7 billion (US$6.48 billion) in China in 2024, accounting for 45 percent of all foreign direct investment (FDI) into China from the EU the UK. The automotive sector alone made up EUR 4.2 billion (US$4.78 billion), leading the share of total German FDI in China to rise from 56 percent in 2023 to 73 percent in 2024.

Notably, this surge was driven mainly by the auto sector and high-tech manufacturing, which seems to be continuing for the duration of 2025. For example, Volkswagen and its Chinese partner FAW signed agreement in March 2025 to develop 11 new VW/Jetta models (six of them electric vehicles) specifically for China. BMW likewise announced a China-focused digital ecosystem partnership with Huawei, underscoring the emphasis on local high-tech joint projects.

These flagship deals reflect a broader pattern: German companies are deepening localization in China to stay competitive. In a recent survey, 40 percent of German firms said they now manage their China operations more independently (a 12‑point jump) and 51 percent plan to raise investment there over the next two years. Reuters and industry sources note that much of the new German FDI consists of reinvested earnings (record profits being ploughed back into Chinese factories) rather than fresh equity. In other words, a small number of very profitable German firms (notably in autos and machinery) have been underpinning the rise in outflows to China.

Chinese investment in Germany

On the other hand, Chinese firms also remained a top source of FDI projects in Germany in 2024. According to Germany Trade & Invest (GTAI), 199 Chinese-backed projects were launched in Germany in 2024 (virtually unchanged from 200 in 2023), making China the third-largest investor country after the US and Switzerland. These projects are increasingly focused on advanced sectors, specifically:

• Electronics/automation (25%);
• Energy/raw materials (21%); and
• Transport/logistics (19%).

Notably, Chinese projects made up about 26 percent of all production and R&D projects in Germany (versus 20 percent overall) indicating a push into manufacturing and innovation rather than just sales or distribution.

Major corporate examples include Chinese battery makers CATL and Gotion: CATL’s first European gigafactory began output in Arnstadt (Thuringia) in late 2022, and Gotion broke ground on a German plant in Göttingen in 2023. Chinese EV firms are also eyeing Europe: XPeng has announced plans to expand into Germany (and other EU markets) in 2024, and Great Wall Motors has reportedly considered locating a new electric‑car plant in Germany.

Beyond autos, Chinese investors are active in green tech and high-end manufacturing: for instance, GTAI noted 31 new Chinese projects in renewable energy in 2024 (battery and solar firms, wind projects, etc.), and a growing share of Chinese investment in robotics, medical technology and software solutions.

In sum, China’s outward push has brought record projects into Europe, up 47 percent to approximately EUR 10 billion (US$11.38 billion) in 2024 across the EU/UK, and Germany has captured a significant slice in key industries even as some high‑profile EV deals stalled.

Strategic sectors spotlights

Automotive

German automakers have become deeply embedded in China’s automotive landscape, drawn by the sheer size and strategic importance of the Chinese market. Major brands such as Volkswagen Group, BMW, and Mercedes-Benz have long operated through joint ventures and continue to expand their presence with new electric vehicle (EV) plants. China, now the world’s largest EV market, remains a magnet for German investment. A case in point is Audi’s inauguration of a new EV factory in China in January 2024, while BMW and Mercedes are jointly developing a large-scale EV charging network in the country.

This deep commercial entanglement comes at a time of growing regulatory scrutiny in Europe. The EU’s anti-subsidy investigations into Chinese EVs and batteries signaled a shift toward more defensive trade measures. These probes reflect increasing concerns over state-backed competition from Chinese automakers, which are making rapid inroads into the European market, particularly in the lower-cost segment. For German producers, the dilemma is stark: while they share concerns about unfair Chinese subsidies and the competitive threat to Europe’s domestic industry, they are also heavily reliant on China for sales and revenue. As repeatedly noted, China accounts for a significant share of German car exports, underscoring the strategic imperative for these firms to remain engaged.

The stance of the German government may be evolving. While previous administrations were reluctant to support EU-level protectionist measures, largely out of concern for safeguarding Germany’s export volumes, the current government appears more open to targeted responses aimed at ensuring a level playing field. Still, any aggressive trade action must be balanced against the risk of damaging a key export market.

Meanwhile, Chinese EV production and exports are expected to rise steadily in the coming years. Although Chinese penetration into the European EV market remains relatively limited at present, German analysts anticipate a gradual increase, which could accelerate calls within the EU for more robust trade defenses. At the same time, German carmakers are cautiously optimistic that auto exports to China—particularly in high-end passenger cars and components—could see renewed growth as consumer demand recovers in the post-pandemic period.

Against this backdrop, the automotive sector continues to serve as a cornerstone of bilateral trade relations. German companies are pursuing dual strategies: on one hand, they are localizing production and innovation to better serve the Chinese market; on the other, they are lobbying for policy tools in Europe that address perceived trade distortions.

Green energy and climate tech

Germany’s energy transition has made it increasingly reliant on imports of green technology from China, positioning the bilateral relationship as both strategic and delicate. Today, over 90 percent of the solar panels installed across the European Union are manufactured in China, and Germany, as a climate policy front-runner, sources the vast majority of its photovoltaic (PV) cells, wind turbine components, and battery materials from Chinese suppliers. As Berlin accelerates efforts to build out its green infrastructure—ranging from renewable power generation and national EV charging networks to emerging hydrogen technologies—China remains an indispensable partner for cost-effective, scalable solutions.

However, this dependence is sparking growing policy reflection in both Berlin and Brussels. Rather than pursuing outright restrictions or import bans, the EU—backed by Germany—has opted to gradually strengthen its clean-energy industrial base. In April 2024, EU leaders agreed to expand support for domestic solar manufacturing, channeling funds toward projects aimed at reducing supply chain vulnerabilities. Still, they stopped short of imposing tariffs on Chinese-made panels. This calibrated approach is expected to shape Germany’s own policy stance: promoting local manufacturing of critical components such as lithium batteries and hydrogen electrolyzers, while continuing to import from China where necessary to meet ambitious climate goals.

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German think tanks, including MERICS, have flagged growing concerns about global overcapacity, particularly in green tech segments like electrolyzers. The rapid scaling of Chinese production is seen as both a strength, driving down price, and a risk, potentially undermining EU efforts to build a competitive clean-tech ecosystem. Nevertheless, market realities continue to drive cooperation. Chinese technologies remain cost-effective and widely available, allowing European countries to advance decarbonization objectives within budget constraints.

On the diplomatic front, climate cooperation is emerging as a relative bright spot in otherwise complex China-EU relations. Germany, in particular, is expected to push for tangible collaboration in 2025, especially around green hydrogen, where China’s manufacturing scale and Germany’s engineering capabilities are seen as complementary.

At the same time, Germany will remain firm on the need for reciprocal market access and fair competition. As the EU formulates new industrial strategies, Berlin will continue to advocate for policies that avoid full dependency, while acknowledging that pragmatic cooperation with China is essential for realizing its climate and energy targets in the near to medium term.

Technology and digital

Germany remains reliant on China for a range of electronic components, particularly in consumer electronics and industrial inputs. While the EU’s European Chips Act aims to double Europe’s global semiconductor market share to 20 PERCENT by 2030, implementation is gradual. Germany has pledged over EUR 10 billion (US$11.38 billion) in subsidies for domestic chip production (notably to TSMC, Intel, and Infineon), but near-term supply chains still depend heavily on Chinese inputs. Amid tightening US export controls on advanced semiconductors to China, the EU – including Germany – is gradually aligning for security reasons.

Meanwhile, bilateral innovation ties between Germany and China persist, particularly between research institutions and tech startups. Around 14 percent of German university R&D partnerships in AI, materials science, and biotech involved Chinese counterparts in 2023, though these are increasingly monitored under new IP and export rules. Berlin has expressed concern about sensitive technology transfers via joint research.

Future collaboration in these fields will likely depend on the broader EU-China regulatory context: the stalled EU-China Comprehensive Agreement on Investment (CAI) remains unresolved and could significantly shape future licensing, data sharing, and co-development projects if revived.

Conclusion: A strategic reset, not a break

Under Chancellor Merz, Germany’s China policy is entering a new phase defined by strategic pragmatism. While Berlin is moving away from the purely commercial engagement that characterized the Scholz era, it has stopped short of advocating for full decoupling.

Instead, the emphasis is on “de-risking”: tightening investment screening, aligning with EU and US export controls, and encouraging supply chain diversification. Trade and investment will remain substantial, particularly in autos, renewables, and high-tech sectors, but they will increasingly operate within a more controlled and politically sensitive framework. The China–Germany partnership is thus shifting from open-ended economic integration to a model of managed interdependence, where resilience, trust, and strategic selectivity guide decisions.

Bilateral investment flows reflect this recalibration. German investment in China surged in 2024, and while this growth began under the previous administration, the trend is expected to continue through 2025, particularly in EVs, industrial automation, and clean energy. However, once large-scale “In China, for China” factories are complete, outflows may plateau. Conversely, Chinese investment in Germany remains limited and carefully scrutinized—especially in sectors involving dual-use or critical technologies. Chinese firms seeking access to European markets will need to emphasize localization, transparency, and regulatory alignment. At the same time, both sides are grappling with global economic headwinds: overcapacity in China, Germany’s energy transition, and geopolitical tensions are constraining growth prospects. Trade between the two countries is forecast to grow modestly, with China remaining Germany’s second-largest trading partner but at a relatively stable level.

For businesses and investors, the outlook is one of cautious continuity. The fundamentals of the Sino-German relationship remain intact, but success now hinges on risk mitigation, regulatory compliance, and strategic flexibility. German and foreign firms should remain engaged in China’s vast market but diversify suppliers, localize key operations, and closely monitor regulatory developments. Likewise, Chinese firms operating in Germany must navigate a tighter investment climate by focusing on non-sensitive sectors and forging trusted partnerships.

In short, companies on both sides should prepare for a “new chapter” of managed engagement—where opportunity remains, but is increasingly conditioned by politics, security, and long-term resilience planning.

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