Merz heads to Beijing as Germany Inc. reels from ‘China shock’

BERLIN — China was once the promised land for German industry. Now it’s a massive strategic headache for Chancellor Friedrich Merz, who departs on his inaugural visit to Beijing on Tuesday.

For years, Berlin was the driving force behind closer EU relations with China — brushing aside human rights concerns to lobby for a landmark investment deal in 2020. Closer trade relations with China, German leaders argued, would have a moderating effect on the regime in Beijing, a justification encapsulated with the mantra Wandel durch Handel, or change through trade.

For a long time, it was also good for business. Germany was one of the few EU countries to run surpluses with Beijing, supplying the vital components and machinery that fueled China’s economic ascent. Its industrial giants like carmaker Volkswagen and chemical company like BASF made huge investments to harness the Chinese market.

But that all-in approach to China now increasingly appears to be a historic policy miscalculation on par with Germany’s misguided energy dependence on Russia before the Kremlin’s full-scale invasion of Ukraine four years ago.

In public, Merz hasn’t admitted the scale of the challenge. Last week, he told fellow conservatives that he is traveling to China to forge closer cooperation.

“We have a strategic interest in finding partners around the world who think like us, who act like us,” he said.

But many German industry leaders are now urging the chancellor to take a far tougher line and are howling over what they call the “China shock.” Since the Covid pandemic, the trade relationship has flipped to an eye-watering deficit — €90 billion in 2025 — and China is widely blamed for much of the hemorrhaging of jobs in Germany’s all-important manufacturing sector — now running at roughly 10,000 job losses per month.

Frustratingly for the reflexive transatlanticist Merz, pivoting to President Donald Trump’s U.S., which is locked in an unpredictable tariff showdown with Europe, is hardly a viable option.

That means Merz has to find some way to engage with Chinese leader Xi Jinping. Jörg Wuttke, a long-time China watcher who briefed the chancellor on Feb. 17 ahead of his visit, said he was surprised by how “well prepared he was.” For close to two hours, Merz took notes from a group of six China experts, saying little beyond asking questions. His priority, Wuttke said, was conveying the problems in a way that would connect with Xi.

“He realizes he is possibly the most important politician for China in Europe,” Wuttke said.

But China seems to have the best cards. Germany has over time become reliant on critical raw materials imported from China, giving Beijing the power to shut down German plants almost at will even as Berlin tries to pursue a longer term policy of reducing such dependencies or “de-risking.”

That goal will take years to realize, however. By then, a growing number of German industry leaders are arguing, much of the damage will have been inflicted as German companies buckle due to massive Chinese price advantages resulting from subsidies, deliberate dumping and an undervalued currency.

Merz himself admits that Germany should hold no “illusions” about China and its ambition to “define a new multilateral order according to its own rules.”

“Merz is going at the worst possible time in terms of the impact of the China shock on the German economy,” said Andrew Small, director of the Asia program at the European Council on Foreign Relations. “The numbers are obviously absolutely horrible, with no projection that they’ll get better.”

Who has the leverage?

In many ways, the trip will look like those taken by chancellors in the past, when China’s vast and fast-growing market was considered the hope of German industry. Merz is traveling with a delegation of some two-dozen business executives. Over the course of three days, with stops in Beijing and the tech hub of Hangzhou, he will dine with Xi and visit the Forbidden City as well as outposts of Mercedes Benz and Siemens Energy.

But few expect any sweeping deals will be reached. German industry leaders are instead calling for more concrete and immediate progress to improve their circumstances.

“Our companies are coming under increasing pressure because key competitive conditions are being systematically distorted,” Thilo Brodtmann, the managing director of VDMA, said in a statement ahead of Merz’s trip. As a consequence, he said, German machinery exports to China fell by 8.5 percent during the first 11 months of last year, while machinery imports from China rose by 12.5 percent.

Brodtmann called on the chancellor to address Chinese export controls on rare earths and to end China’s practice of subsidizing loss-making “zombie companies” that offer cut-rate prices. “German companies are not competing with other companies, but with the Chinese treasury,” he said of subsidies more broadly.

The most powerful tool Merz has at his disposal is China’s growing dependence on the European market, which only increased as Chinese domestic demand has fallen. For Merz, a longtime free-trade purist, a push to threaten defensive tariffs within the framework of the EU is not only anathema — it’s potentially reckless at time when Germany is also dealing with the fallout of Trump’s trade wars.

Trump’s attempt to confront China also provides something of a cautionary tale. In the midst of a trade feud between the U.S and China last year, Beijing announced sweeping export controls on rare-earth magnets and the raw materials needed to make them. Weeks later, Trump and Xi reached a detente, with Beijing agreeing to delay rare earth export restrictions for one year.

But Nicolas Zippelius, a lawmaker focusing on China relations for Merz’s conservatives, said Merz may be more forceful than he lets on in public.

“I would say that China and Germany can hurt each other very badly,” said Zippelius. “We must not underestimate Germany’s strong voice within the EU. And the EU has shown in the past that it has power, for example through tariffs and other measures.”

Such conversations would happen in private, Zippelius added.

“I don’t think it helps to take risks against each other in the open,” he said. “But in closed-door talks, you can communicate that very clearly. And there you definitely have leverage.”

To that end, Merz could choose to ally itself more closely with France, which has emerged as one of the loudest voices warning that China is steadily hollowing out Europe’s industrial base while the continent is distracted by Trump.

The only question is whether China would take Merz’s warnings seriously.

“The leverage is there,” said Small of the European Council on Foreign Relations. “But on the Chinese side, the assessment is that Europe is not willing to use it.”

Indeed, China knows the EU has backed off in the past over potential trade conflicts with Beijing in sectors such as solar panels and telecommunications due to fear of Chinese retaliation.

As Merz and other European leaders look for an answer, time is on China’s side, added Small.

“Unless there is more serious concerted action on the European side, China will calculate that it can get away with exactly what it’s doing at the moment and all of these problems will continue,” he said.

Nette Nöstlinger contributed to this report.