Pump and Dump: German-Chinese economic and political relations

China is affirming its own ambitions, while Germany is aligning itself more and more with the U.S.’ geopolitical views. In the volatile context that emerged from the 2022 Ukrainian crisis, the United States supplanted China as Germany’s main trade partner. In 2024, bilateral trade between Germany and China amounted to $247 billion, while German-U.S. trade surged to $255 billion.

This shift underscores the economic turbulence Germany has faced since 2022, which the war in Ukraine and an evolving geopolitical landscape only exacerbated. The Trump administration’s announcement of tariffs on EU exports further compounds these challenges. The war in Ukraine has laid bare Germany’s economic vulnerabilities, exposing its dependence on external actors. Since 2022, Germany’s industrial base has struggled with the loss of cheap Russian energy, forcing a transition to more expensive alternatives. As a result, production costs have risen, eroding Germany’s competitive edge in global markets. Nowhere is this more evident than in the automotive sector, where China’s rapid advancements in electric vehicle technology have intensified competitive pressures.

The Perils of Sino-German Trade Dependence

Trade with China has long presented Germany with both opportunities and risks, as enumerated in a 2024 report by the Deutsche Bundesbank. These risks, expanded upon below, are multifaceted, spanning trade, finance, and geopolitics.

1. Trade Risks: A Strategic Dependence on China

Germany’s manufacturing rests heavily on the import of Chinese electronic components—most notably batteries—alongside raw materials and pharmaceutical ingredients. These inputs are essential to the country’s key export sectors. The vulnerability of these supply chains was laid bare during the COVID-19 pandemic, which disrupted global logistics and exposed Germany’s overreliance on Chinese imports.

2. Financial Risks: Unseen Exposure to China

Germany’s financial sector is not directly entangled with China, but its exposure is significant through corporate lending. German banks have substantial loan portfolios tied to domestic firms that rely on Chinese business. Any disruption to Sino-German trade could trigger a wave of loan defaults, eroding confidence in financial markets and exacerbating economic uncertainty.

The challenge lies in the opacity of this exposure. While no immediate crisis looms, the uncertainty surrounding indirect financial dependencies on China makes Germany’s economic position precarious. Should trade tensions escalate between China and the United States, German banks could face heightened risk as corporate defaults mount, diminishing financial stability.

3. Geopolitical Ambitions at Stake

Since 2022, Berlin has sought to mitigate the fallout from the loss of Russian energy supplies by reviving its traditional Mitteleuropa strategy—a policy rooted in strengthening economic and political influence over Central and Eastern Europe. Germany has ramped up investments in the region, integrating countries such as Hungary, Poland, and the Czech Republic into its industrial supply chains.

Yet, China has countered by increasing investments in these very countries, particularly in Hungary and Serbia. Meanwhile, Donald Trump has demanded that Europe increase its imports of U.S. goods—particularly in defense—or face punitive tariffs. If Germany is forced to choose between the American and Chinese markets, its influence in Central and Eastern Europe may wane.

This would create an opening for another regional power with both military ambition and economic aspirations: Poland. History is instructive. In the interwar period, Germany and Poland vied for dominance in Central Europe. A similar geopolitical contest could re-emerge, should Berlin’s economic leverage erode under external pressures.

China’s Calculated Pressure on Germany

Beijing is acutely aware of Germany’s dependence on Chinese trade and investment. German automakers, for instance, have placed nearly 30% of their foreign investments in China. The auto industry is particularly vulnerable: it relies on Chinese raw materials while simultaneously facing growing competition from rapidly advancing Chinese automakers.

Herein lies the paradox: Germany needs China, but Beijing has tightened restrictions on gasoline-powered vehicles, favouring electric models—particularly those from Chinese firms. Regulatory constraints have skewed consumer preferences in favour of domestic manufacturers. In Europe, German carmakers face a separate challenge: EU policy mandating the phase-out of combustion engines. With regulatory headwinds in both China and the EU, and restricted access to critical raw materials, German automakers face an existential challenge against their Chinese counterparts.

The broader implication is that if Germany’s auto industry falters, the entire economy—and by extension, Berlin’s political influence—will come under pressure. China understands this dynamic well. It sees Germany as a strategic lever to shape EU policy, using economic dependencies as a means of influence.

Germany is not China’s ultimate target; it is a conduit through which Beijing seeks to exert broader pressure on the European Union in its geopolitical rivalry with the United States. The coming years will determine whether Berlin can navigate these pressures while preserving its economic autonomy—or whether it will find itself increasingly squeezed between two superpowers.