China and Germany: The Trade Tide is Turning

China and Germany: The Trade Tide is Turning

While the two countries have historically enjoyed a strong complementary partnership, intensifying industrial competition is threatening German manufacturing in sectors where it once held dominance. Trade structures between Germany and China are changing, with exports as a share of GDP to China decreasing by nearly a third since its peak in Q4 2020. The German trade balance with China has been tilted for a long time but the German trade deficit has intensified over the last two years (Figure 6). Moreover, we find that Germany’s critical dependency on China has increased from 6 % of imports in 2004 to 22 % in 2022. This covers 212 product types, of which 74 are in the computers & telecom, electronics and household equipment sectors, while 44 products are in textiles and 33 in chemicals. The sectoral breakdown has shifted towards higher value-added industries over the years.

China is moving up global value chains, with global export market shares surpassing Germany in key sectors. China’s strategy of importing knowledge through cooperation and investing in highly innovative manufacturing businesses abroad has proven successful. It has steadily moved up the value chain and captured market share in advanced industrial sectors while simultaneously squeezing out European products from its domestic market. The impact is evident in shifting trade patterns. China’s global export market share has continued to increase from less than 4 % in 2000 to 14 % in 2022. Meanwhile, German global export market shares have stagnated around 10 % for a long time and settled at 8 % in 2022. More importantly, China’s global export share has surpassed that of Germany in three out of four main export sectors: machinery & equipment, chemicals and computers & telecom, electronics and household equipment. Highly specialized German machinery companies, manufacturers of combustion engine vehicles and producers of specialized chemicals are facing intense competition from Chinese rivals that are backed by price competitiveness and policy support from Beijing. Germany retains a lead in auto manufacturers and suppliers and transport equipment, but this has narrowed slightly in recent years. Indeed, while German exports of passenger cars to China rose by 38 % over the last decade, they have declined sharply by 10 % in the last two years. It is also interesting to differentiate between exports related to global value chains and those that go directly to the final market. China seems to be gaining ground much faster in traditional exports, probably reflecting two trends. On the one hand, at the earlier stages of industrialization, exports of goods that require less value-added and less sophisticated supply chains take off faster. On the other hand, more recently, China has been able to integrate long sequences of value chains domestically, thus providing goods that require less participation of other countries. This latter point is further supported by evidence in trade of intermediate products between Germany and China, which has slowed drastically in 2022 and 2023.