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Home World News Asia

A New Mindset for the China-Germany Economic Partnership – The Diplomat

June 5, 2025
in Asia
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For decades, German and Chinese firms had a complementary and mutually beneficial partnership. China offered German businesses access to a vast market, while Chinese firms benefited from German technology and knowledge transfers, fueling growth in both economies.

Today, the character of this once-thriving partnership has shifted. China’s rapid ascent up the value chain has transformed it from a manufacturing hub into an emerging competitor in industries once dominated by German firms. Meanwhile, German firms have struggled to keep pace with the technological frontier, as the country’s economy remains anchored in mid-tech sectors and faces challenges in sustaining its export-led growth model. While the share of high-tech manufacturing goods in China’s exports to the EU surged from 51 percent in 2000 to nearly 73 percent in 2022, high-tech goods as a share of German exports declined to 61 percent.

These developments have already shifted German political sentiment toward more protectionist measures, such as higher tariffs and constraints to foreign investment. But to date Germany has struggled to define a clear and unified path of action. A change in perspective is needed – one that takes an honest look at Germany’s economy, to understand where protection is necessary and where cooperation with China is beneficial. The formation of a new government in Germany provides an opportunity to change perspectives and reshape the narrative.

Reactions in Germany

Understanding Germany’s response to China’s rise requires examining the complex interplay between business interests and geopolitical caution, which has led to divergences in the country’s political and business landscape.

On the political front, the former Scholz government, in alignment with Brussels, adopted a “de-risking” approach that aims at reducing strategic dependencies, as outlined in its China Strategy released in July 2023. This has had practical implications, with investment guarantees for projects in China dropping from 745.9 million euros in 2022 to just 51.9 million euros in the first eight months of 2023 – a decline that disproportionately affects small and medium enterprises (SMEs). Government-sponsored participation in trade fairs in China fell from 44 in 2022 to 30 in 2023. 

Despite this strategy, there continued to be significant misalignment between the coalition’s more dovish Social Democratic Party (SPD) and the critical Christian Democratic Union (CDU). With that in mind, the direction of the new coalition remains to be seen. While political comments by new Chancellor Friedrich Merz of the CDU have lumped China together with Russia, North Korea, and Iran in an “axis of autocracies,” the recently developed coalition agreement suggests more pragmatism, acknowledging the need for cooperation where there are shared interests and global challenges to face.

On the business front, there is a notable divergence between firms and sectors. Large firms are doubling down on local operations in China, particularly in the automotive and chemicals sectors. According to a survey by the German Chamber of Commerce in China, 92 percent of German companies plan to continue their operations in China, adopting a “in China for China” mindset in order to remain competitive. For instance, Volkswagen is investing 2.5 billion euros in Hefei to establish its largest R&D center outside Germany, while BMW is boosting its investment in its Shenyang plant by 20 billion yuan. Earnings reinvested into China by companies like Volkswagen and BASF have reached record levels, with automotive sector investments tripling since 2010 to 26 billion euros. 

This continued economic interest was also evident at the recent China Development Forum, a charm offensive organized by China’s top leadership and attended by 86 CEOs of major companies, including from Germany. In contrast, anecdotal evidence suggests that SMEs are becoming increasingly cautious about their involvement in China. While these SMEs depended on Chinese inputs for their manufacturing processes, they now face head-on competition on final goods and are largely in favor of reducing their reliance in China.

Defining a New Mindset

These diverging dynamics have made it challenging for Germany to settle on a unified response. This challenge is becoming increasingly urgent, especially given the potential for a sharp deterioration in German-U.S. trade relations due to the Trump administration’s trade policies, which would necessitate exploring beneficial partnerships with other existing partners. This involves crafting a clearer, more unified strategy on China, with a candid evaluation of areas where trade with China can be advantageous, and where it may undermine Germany’s long-term economic interests. The challenge lies in striking a balance, where trade between now more equally matched economies can mutually reinforce growth, while ensuring countries remain adaptable and realistic about their comparative advantages.

Germany needs China not only for its market but increasingly for its expertise in certain sectors. While German carmakers like Volkswagen, Mercedes-Benz Group, and BMW generate more than a third of their revenue in China, more than two-thirds of German automotive companies acknowledge that Chinese competitors are leading in innovation, particularly in battery technology and integrated vehicle software (this number is 55 percent for companies across all sectors). On the other hand, China continues to see Germany as a role model when it comes to ways of operating and standard-setting. Beijing also requires access to the large European market as well as allies in the face of the evolving geopolitical landscape.

Against this background, both countries should seize the opportunity to lay the foundations for a different kind of relationship, adapting to new realities and finding new areas of complementarity that will allow both economies to claim a unique edge in the global economy. One approach could be revitalizing a signature partnership instrument that brings Chinese innovation to European soil, particularly in targeted innovation sectors, such as EV supply chains. This could include special economic zones or R&D clusters around EV battery development, hydrogen power, or AI-enabled manufacturing. 

An example of such collaboration is CATL’s battery manufacturing plant in Erfurt, Germany. This facility, CATL’s first factory in Europe, represents a significant investment of 1.8 billion euros and aims to produce up to 14 GWh of battery capacity annually. The plant strengthens CATL’s position in the European automotive market by supplying key clients like BMW and Volkswagen and fosters collaboration with local partners. Projects like “BattLife” and “BattForce,” undertaken with the Fraunhofer Institute for Ceramic Technologies and Systems, focus on battery lifetime modeling and innovative production methods, enhancing knowledge transfer between CATL and German institutions. CATL’s battery plant currently employs approximately 1,700 people and is expanding its workforce through apprenticeships. 

In conclusion, Germany’s strengths, including world-class engineering and know-how, robust institutions, and strong values, remain potent assets. Now is the time to take an honest look at where collaboration brings benefits, and where protection is necessary. The balance of economic power has shifted but so has the potential for new forms of collaboration. Now is the time for strategic renewal. Pragmatism is the path forward.

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