Berlin. The EU summit this Thursday could be a historic one. The heads of state and government are likely to initiate a U-turn in their China policy. The EU wants to adopt tough defense instruments to protect the European economy against cheap Chinese imports.
A new short study by the employer-related Institute of the German Economy (IW), which is available to the Handelsblatt, shows how strongly this “China Shock 2.0” is particularly affecting the core sectors of German industry. According to the study, the German trade deficit with China is likely to rise to more than 100 billion euros for the first time this year. Compared to 2019, that would be an increase of around 90 billion euros.
The majority of the increase is attributable to the three core sectors of German industry: automobile, electrical industry and mechanical engineering. “The core of the German economy is therefore severely affected by China Shock 2.0,” writes IW researcher Jürgen Matthes.
Contrary to what is often claimed, energy-intensive sectors do not make a central contribution to the decline in exports to the Far East. “This is another indication of the severity of China Shock 2.0,” concludes Matthes. He demands: “To counteract this, countervailing duties against Chinese distortions of competition should be a central part of the economic policy response.”
The domestic economy in China has been weakening for years. Chinese companies produce significantly more than they can sell in their own country. That is why the People's Republic has changed its business model for some time and tried to compensate for the weakness of the domestic economy with a strong export economy.
According to economists, however, China is resorting to unfair distortions of competition. The Chinese state supports the economy with gigantic subsidies and an artificial undervaluation of the Chinese currency, which makes exports even cheaper.
With this help, Chinese companies are penetrating the European export market with competitive prices - and are putting pressure on German industry in particular. According to the Federation of German Industries (BDI), up to 15,000 industrial jobs are lost in Germany every month; economists speak of the “China shock”.
The new IW figures make it clear how much German-Chinese trade relations have reversed. In the last decade, Germany experienced a long upswing thanks to steadily increasing exports to China; economists speak of a “golden decade” for the German economy.
But China now exports much more to Germany than the Federal Republic to the People's Republic. According to IW calculations, in 2026 German exports are likely to be around 25 percent below the 2019 level. Imports from China, on the other hand, rose by 62 percent in the same period. In 2026, the trade deficit will probably grow to more than seven times the 2019 value. At that time the deficit was only 14.1 billion euros, but was already high compared to other countries.
The largest contribution to the increase in the trade deficit comes from the auto industry, accounting for almost a quarter. The previously high German surplus in car trade with China of more than 23 billion euros in 2019 is unlikely to exist in 2026.
The electrical industry contributes a good fifth of the trade deficit. While this was only 4.8 billion euros in 2019, according to IW projections it will reach more than 24 billion euros in 2026.
Mechanical engineering is another core industry affected by the China shock. While Germany had an export surplus of almost ten billion euros with China in 2019, a small deficit of a good one billion euros is likely to arise for the first time in 2026 if the development of the first half of the year continues until the end of the year.
Trade imbalances are not uncommon in world trade. Germany also had a high current account surplus for years. Higher deficits and surpluses are not always objectionable. “But if they are so extraordinarily high and also increase so much in a short period of time, there is much to suggest that this development should be viewed critically,” says the IW study.
According to IW researcher Matthes, there is no argument from the Chinese side to justify the high trade imbalance. China argues that high energy costs in Europe contributed to China Shock 2.0. This means that EU products are significantly more expensive than Chinese ones and the European economy is less competitive. However, the three core sectors mentioned are not energy-intensive sectors, although higher energy costs represent a certain additional burden, according to the IW study.
A look at German-Chinese foreign trade in energy-intensive sectors such as chemicals, paper, glass or metal also shows that energy costs do not play a central role, it goes on to say. Taken together, they only contributed four billion euros to the increase in the trade deficit since 2019. In addition, exports of energy-intensive products to China fell significantly below average compared to other sectors and imports rose below average.
