Germany Seeks to Reset Relations with China Amidst Global Shifts

German politician Friedrich Merz emphasizes the importance of ties with China.

Photo by Florian Wehde

German Chancellor Friedrich Merz, on his first visit to Beijing on February 25, 2026, told Chinese President Xi Jinping that he wants to deepen the "comprehensive strategic partnership" between Germany and China. This visit occurred against a backdrop of a widening trade deficit, which has quadrupled since 2020, with German imports from China more than double the value of exports. In 2025, Germany imported goods worth €170.6 billion from China, an 8.8% annual increase, while German exports to China fell by 9.7% to €81.3 billion.

Merz aims to address what he considers unhealthy trade dynamics, including overcapacity and market-distorting subsidies. He encouraged Chinese firms to increase investments in Germany, while also pointing out supply chain vulnerabilities exposed when China tightened export controls on basic chips and vital rare earths last year. Despite these concerns, a joint statement indicated that the visit injected new impetus into the partnership, with China agreeing to buy up to 120 aircraft from Airbus.

Premier Li Qiang expressed China's willingness to cooperate in sectors like automobiles, chemicals, artificial intelligence, and biomedicine, and to address the reasonable demands of foreign-invested enterprises from Germany. Five documents were signed, covering climate change, green transition, animal disease prevention, a poultry products protocol, and sports collaboration. This visit is relevant for UPSC aspirants as it highlights the evolving dynamics of international trade, the challenges of trade imbalances, and the strategic importance of economic partnerships in a multipolar world, particularly concerning GS Paper II (International Relations) and GS Paper III (Economy).

Key Facts

Friedrich Merz, a German politician, is seeking to reset ties with Beijing.

Merz's visit comes amidst shifting global dynamics and concerns about China's human rights record and trade practices.

The article highlights the economic interdependence between Germany and China.

Maintaining stable relations is strategically important for Germany.

UPSC Exam Angles

GS Paper II (International Relations): Evolving dynamics of international trade and diplomacy.

GS Paper III (Economy): Impact of trade imbalances on domestic industries and economic growth.

Potential questions on trade agreements, economic partnerships, and supply chain resilience.

Friedrich Merz, a German politician, has hailed the importance of Germany's relationship with China as he seeks to reset ties with Beijing. Merz's visit comes at a time of shifting global dynamics and growing concerns about China's human rights record and trade practices.

The article highlights the economic interdependence between Germany and China, as well as the strategic importance of maintaining stable relations. Merz's efforts to reset relations with China reflect Germany's desire to balance its economic interests with its values and security concerns.

Expert Analysis

The visit of German Chancellor Friedrich Merz to China highlights the complexities of international trade relations and the strategies countries employ to navigate them. Several key concepts are crucial to understanding the dynamics at play.

The Trade Deficit, which has quadrupled between Germany and China since 2020, is a central issue. A trade deficit occurs when a country's imports exceed its exports over a given period. In 2025, Germany's imports from China amounted to €170.6 billion, while its exports to China were only €81.3 billion. This imbalance can lead to concerns about domestic job losses, erosion of industrial competitiveness, and increased dependence on foreign economies. Germany's efforts to reduce this deficit involve negotiating fairer market access and addressing issues like overcapacity and subsidies.

Market-Distorting Subsidies are another critical factor. These are financial aids provided by governments to domestic industries, which can give them an unfair advantage over foreign competitors. Jürgen Matthes at the German Economic Institute (IW) believes that "massive" Chinese subsidies contribute to the trade imbalance. While Beijing claims its subsidy policies are transparent and consistent with international trade rules, concerns persist that these subsidies distort competition and create overcapacity, leading to cheaper exports that undercut German industries.

Derisking is a strategy aimed at reducing strategic dependence on specific countries, particularly in critical sectors. This approach has gained traction among German businesses concerned about supply chain vulnerabilities. The tightening of export controls by China on basic chips and rare earths last year exposed these vulnerabilities, prompting Germany to seek diversification of its supply chains and encourage domestic production. Merz's visit included discussions on encouraging Chinese firms to invest in Germany, but also emphasized the need for clear-eyed assessments of risks.

Comprehensive Strategic Partnership is the term Chancellor Merz used to describe the desired relationship with China. While this signifies a commitment to deepen ties and cooperation, it also acknowledges the need to manage risks and protect German interests. The partnership involves dialogue on various issues, including trade imbalances, market access, and supply chain security. The signing of five documents covering climate change, green transition, and other areas reflects the breadth of this partnership.

For UPSC aspirants, understanding these concepts is crucial for both prelims and mains. Questions may arise on the causes and consequences of trade deficits, the impact of subsidies on international trade, the strategies countries use to manage economic dependencies, and the nature of strategic partnerships in a multipolar world. These topics are relevant to GS Paper II (International Relations) and GS Paper III (Economy).

Visual Insights

Germany-China Trade Imbalance

Key statistics highlighting the trade dynamics between Germany and China, as of February 2026.

Germany's Trade Deficit with China (since 2020): Quadrupled
Imports from China vs. Exports to China: Imports > 2x Exports
Airbus Deal: 120 Aircraft

More Information

Background

Germany's economic relationship with China has evolved significantly over the past few decades. Initially, Germany pursued a policy of "change through trade," believing that increased economic engagement would lead to political and social reforms in China. This approach resulted in deep economic ties, with China becoming Germany's largest trading partner in 2025, supplanting the US. However, this close relationship has also created dependencies and vulnerabilities, particularly as China's economic power has grown. The growing trade deficit between Germany and China has become a major concern in recent years. This imbalance reflects structural issues such as Chinese subsidies, overcapacity, and currency undervaluation, which have made it difficult for German companies to compete. The pandemic and the war in Ukraine have further exacerbated these issues, leading to rising production costs in Europe and deflationary pressures in China. This has prompted a reassessment of Germany's economic strategy towards China, with a greater emphasis on derisking and diversification. The concept of "derisking" is now central to Germany's approach to China. This involves reducing strategic dependencies on China in critical sectors, diversifying supply chains, and promoting domestic production. This shift reflects a broader trend in Europe, where leaders are seeking to balance the economic benefits of engagement with China with concerns about security, human rights, and fair competition. Former Chancellor Angela Merkel faced criticism for prioritizing economic ties over human rights concerns, a legacy that Chancellor Merz is now trying to address.

Latest Developments

In recent years, the European Union has taken a more assertive stance on trade relations with China. The EU has launched numerous anti-dumping cases against China and is considering measures to boost domestic production and curb foreign dependencies. The EU is also grappling with the challenge of how to respond to the influx of cheap Chinese goods, particularly in sectors like electric vehicles and renewable energy. Germany, as the EU's largest economy, plays a key role in shaping the EU's approach to China. While some countries, like France, favor a more protectionist agenda, Germany has traditionally been more skeptical of tariffs and trade barriers. However, the growing trade imbalance and concerns about Chinese industrial policy have led to a shift in Germany's position. Chancellor Merz's visit to China reflects a desire to find a more balanced and sustainable economic relationship. Looking ahead, Germany and the EU are likely to continue to pursue a strategy of derisking, while also seeking to maintain economic engagement with China. This will involve a combination of measures, including diversifying supply chains, investing in domestic innovation, and negotiating fairer trade agreements. The success of this strategy will depend on the ability of Germany and the EU to balance their economic interests with their security concerns and values.

Practice Questions (MCQs)

1. Which of the following factors has NOT contributed to the growing trade imbalance between Germany and China?

A.Massive Chinese subsidies to domestic industries
B.Currency undervaluation by China
C.Rising production costs in Europe due to the Ukraine war
D.Increased German exports of high-value goods to China

Show Answer

Answer: D

Option D is the correct answer because German exports to China have fallen, not increased, contributing to the trade imbalance. Options A, B, and C are all factors that have contributed to the growing trade imbalance, as stated in the source material.

2. Consider the following statements regarding Germany's policy of 'derisking' in relation to China: I. It aims to eliminate all economic ties with China. II. It involves reducing strategic dependencies on China in critical sectors. III. It includes diversifying supply chains and promoting domestic production. Which of the statements given above is/are correct?

A.I only
B.II only
C.II and III only
D.I, II and III

Show Answer

Answer: C

Statements II and III are correct. 'Derisking' aims to reduce strategic dependencies and diversify supply chains, not eliminate all economic ties. Statement I is incorrect as the goal is not complete decoupling but rather reducing vulnerabilities.

3. In the context of international trade, what does 'market-distorting subsidies' refer to?

A.Taxes imposed on imported goods to protect domestic industries
B.Financial aid provided by governments to domestic industries, giving them an unfair advantage
C.Regulations that restrict the quantity of goods that can be imported
D.Agreements between countries to reduce tariffs and trade barriers

Show Answer

Answer: B

Market-distorting subsidies are financial aids provided by governments to domestic industries, giving them an unfair advantage over foreign competitors. This can lead to trade imbalances and concerns about fair competition.