German industry adrift in the ebb of the "China dividend": Structural choices before the EU summit

The "Bleeding" of Germany's Industrial Heartland

When EU heads of state gather again in Brussels this week to discuss foreign trade and economic policy, Berlin is no longer facing a simple question of choosing sides. According to an expert analysis released by the Dutch strategic research institute HCSS, Germany has been fully mired in trade deficits since 2023 in the three industrial sectors—automotive, machinery, and chemicals—known as its "heartland," with a cumulative net deficit of approximately $60 billion by 2025. At this moment, the future of German industry depends not merely on a single summit, but on whether it can confront an industrial logic that is collapsing.

From Complementarity to Confrontation: The Qualitative Shift in Sino-German Industrial Relations

For decades, Germany's global industrial competitiveness was built on a seemingly solid complementary structure: the Chinese market provided massive demand, while Germany supplied high-end manufacturing equipment and precision products. But this structure is being dismantled by the proactive adjustment of China's industrial policy. The Chinese government encourages public procurement and state-owned enterprises to prioritize domestic substitutes in key areas, and markets such as smartphones and communications equipment have already seen a clear trend of domestic substitution. Meanwhile, EU companies operating in China face market access barriers and procurement contract obstacles. The annual business confidence survey by the European Chamber of Commerce, cited by HCSS, also confirms this trend.

The deeper structural change is that China is no longer merely a "product exporter," but has become a direct competitor to German exports in high-tech fields where tariff protection is effective, such as new energy vehicles, communications equipment, and electronic products. A decade ago, the EU still had a significant surplus in motor vehicle and machinery exports, and the chemical industry also briefly held a small surplus, but 2023, after the pandemic, became a decisive turning point. Passenger cars, heavy machinery, auto parts, harvesters, chemical precursor materials, and batteries began flooding into the EU's internal market on a large scale, and this trend continued to intensify from 2024 to 2025.

This is a typical "China Shock 2.0"—unlike the shift of low-end manufacturing more than a decade ago, this competition is occurring in the high-value-added fields that German industry is most proud of.

The Dilemma of German Manufacturing: Market Dependence and Competitive Pressure

Logically speaking, when core industries face such obvious competitive pressure, Germany, as the largest host of these industries, should be the most active force pushing the EU to adopt stronger trade defense measures. However, Berlin is behaving unusually hesitantly. German Chancellor Merz, on the one hand, personally visits Beijing, meets with Chinese President Xi Jinping, and brings a business delegation along; on the other hand, he describes EU-China trade relations as "unhealthy" in his remarks. This wavering reflects the deeply entrenched dual dependence of German industry: China is not only a sales market, but also a production base and supply chain hub for many companies.But the dividends of this dependence are rapidly disappearing. On the one hand, China's appeal as a "huge demand market" is waning: under the high-quality growth model, domestic substitution policies have reduced opportunities for foreign companies to win bids. On the other hand, Germany's economic growth has been nearly stagnant since 2022, its export engine has stalled, and GDP growth is weak. HCSS notes that the economic downturn could become a breeding ground for the far-right Alternative for Germany (AfD) to gain ground, thereby affecting political stability across Europe. As economic issues and geopolitical topics compound each other, Germany's room for industrial policy is being rapidly squeezed.

Industry Policy's "European Moment": Germany No Longer Goes It Alone

The plight of German industry is also the plight of the European supply chain. If Germany cannot reshape its economic relations with China in a coordinated manner at the EU level, other member states can hardly expect a unified and strong EU industrial policy. In fact, many European countries are already under pressure from their own political polarization, and if Germany turns inward due to economic pressure, it will directly weaken the EU's overall decision-making capacity.

Therefore, the significance of this EU summit lies not in whether a specific measure targeting China will be introduced, but in whether Germany is finally willing to shift from "market logic" to "strategic logic." In its analysis, HCSS calls for Europe to experience an "economic turning point" (Zeitenwende), and Germany should be the leader rather than the one applying the brakes.

The Next 3-10 Years: Industrial Restructuring Is Inevitable

Even if this week's EU summit achieves some consensus, the deep-seated adjustment of German industry cannot be accomplished overnight. It is foreseeable that in the coming years Germany will have to confront the following long-term trends:

• Accelerated supply chain restructuring: "De-risking" of key links will continue, but at the cost of higher production costs and greater investment in supplier diversification.
• Rise of industrial policy: The EU level may introduce more explicit industrial subsidies and trade protection tools to safeguard the core competitiveness of "Made in Europe."
• Industry 4.0 and new manufacturing models: Germany will have to accelerate its digital transformation, using smart manufacturing to offset disadvantages in labor costs and market size. Technological changes in areas such as machine tools, automation, and industrial AI may become a window for Germany to regain competitive advantages.
• Energy costs and green transition: Energy prices and the pace of decarbonization will affect the overall competitiveness of German industry, especially in energy-intensive sectors such as chemicals and steel.
• Multipolar global competition: In addition to China, the United States, Southeast Asia, and other regions are also strengthening their manufacturing layouts. German companies' globalization strategies will shift from "single-market dependence" to "diversified network layouts."Ultimately, the future of German industry depends not on a single summit, but on whether it can clearly recognize that the old model of “trading market for technology and driving growth through exports” is no longer effective. Future-oriented competitiveness must be built on the cornerstones of technological innovation, industrial sovereignty, and strategic coordination. For the EU, a Germany that dares to make strategic decisions is far more valuable than a wavering one.

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Source: Expert Analysis | Germany’s Industrial Future hangs in the balance at this week's EU Summit - HCSS