New German Chancellor – go hard or soft on China?

Mark O'Neill March 05, 2025 12:10

One of the first decisions for Friedrich Merz, the new Chancellor of Germany, is whether to go hard or soft on China.

Germany is the biggest European investor in China, especially in autos and chemicals. In the first half of 2024, German FDI accounted for 57 per cent of all EU investment in China, 62 per cent in 2023 and a record 71 per cent in 2022.

From 2016 to 2023, China was Germany’s biggest single trading partner. But last year it slipped into second place, behind the United States. Trade with China dropped 3.1 per cent to 246.3 billion euros and Germany’s trade deficit widened. Chinese imports were down 0.3 per cent to 156.3 billion euros and German exports fell 7.6 per cent to 90 billion euros.

In speeches before the German general election on February 23, Merz said that China was part of an “Axis of Autocracies”, with Russia, Iran and North Korea, that did not abide by “western rule of law standards.”

He warned German companies that investing there involved “great risk”. “My heartfelt request to all companies – limit the risk you take in order to avoid endangering your own company if it triggers an immediate write-off … Do not, under any circumstances, come to the state for help.”

In a report in January, the Centre for European Reform, a thinktank, said that Germany was starting to realise that China’s new automotive, clean technology and civil aviation industrial base directly competed with German’s manufacturing foundation. “Its export-biased growth is cutting into Germany’s European and global export markets,” it said.

It said that Merz should support EU protection of viable European industrial sector facing an onslaught as a result of China’s active industrial policies. “Germany and other EU countries should equip existing and new subsidy schemes with de facto buy-European requirements to offset China’s own local content requirements.”

But the German stake in China is very large. The market represents between a quarter and almost half of sales for VW, BMW and Mercedes, even though that share is falling, especially in Electric Vehicles (EVs). In 2024, the share of German automakers in EV sales in China was just four per cent, according to the German Association of the Automotive Industry.

Last October, the European Commission imposed tariffs of up to 45 per cent on Chinese EV imports after a big surge in sales, saying they received unfair subsidies. These tariffs are opposed by Germany’s automakers.

Ola Kallenius, the head of Mercedes-Benz and president of EU car industry body ACEA, said that the EU should encourage Chinese carmakers to open more plants in the bloc as part of a deal to drop punitive tariffs.

“Do not accelerate protectionism because we have much to lose,” he said. “When we went to China, policymakers said: industrialise here if you want to capture the market.” Europe is saying the same thing to Chinese firms. “China has become an integral part of the global automotive supply chain,” he said.

BYD plans to build vehicles in Hungary and CATL has agreed to build a US$4.1 billion lithium battery factory in Zaragoza, Spain with Stellantis.

A recent guest of Merz, at the China Club in Berlin, was Joerg Wuttke, a partner at DGA-Albright Stonebridge in Washington and who spent years in multiple stints as president of the EU Chamber of Commerce in China. During a three-hour conversation, Merz asked for his advice on China policy. Wuttke does not expect much change in policy.

“I pointed out that China’s importance for Germany and Europe had decreased to an extent that a shift to a more hawkish policy was unlikely. German exporters sold more goods to Poland last year than to China, in part because the Chinese are more often using goods from their own production. Europe exports three times as much as to America than to China, and the U.S. is even more important in terms of investment flows.

“Our conversation made me assume that he will assume the China issue pragmatically. Although the Chinese side is always extremely nervous when having to deal with a new chancellor, Germany’s China policy has actually been consistent throughout all chancellorships since the 1980s.

“China remains hugely important for sourcing and sales of chemicals, cars and semiconductors. Europeans want to learn from the Chinese. The technology transfer has seen a turnaround. President Xi Jinping is looking at the expansion of Chinese car manufacturers to the West with good will – and at the same time wants to keep control. The Chinese government is less powerful than you think in the West. The sway of the European sales market is strong for the Chinese car companies,” he said.

He said that Merz had a strong personal connection with America, having worked for investment company Blackrock and as long-serving chairman of the influential lobby group Atlantik-Brucke (Atlantic Bridge).

“The Trump administration’s stance in extremely anti-EU. That is why Merz will have to deal with relations with the U.S. rather than China,” he added.

Mark O'Neill

A Hong Kong-based writer, teacher and speaker.