The China Conundrum: Germany’s Complacency Threatens Its Industrial Base

A recent report by the Centre for European Reform has shed light on the alarming trade imbalance between Germany and China, eerily reminiscent of the devastating “China Shock 1.0” that ravaged the US in the early 2000s. The world’s fourth-largest economy is teetering on the brink of deindustrialization, yet Berlin seems hesitant to acknowledge the crisis at its doorstep.

The report highlights a staggering $94 billion trade deficit for Germany in 2025, with China’s surplus doubling from $12 billion to $25 billion between 2024 and 2025. European industry leaders have expressed fears that they will be “cannibalized” by China’s relentless export drive. The notion of Europe becoming a mere province of China is a chilling prospect, one that Germany’s complacency is allowing to materialize.

Germany’s Mittelstand, the backbone of its industrial ecosystem, is particularly vulnerable to Beijing’s “10,000 little giants” policy project, which targets these middle-sized suppliers and firms. While German politicians bicker over high energy prices and bureaucracy, they seem oblivious to China’s profound pressure on Germany’s industrial base.

The Centre for European Reform attributes this economic imbalance to a trifecta of issues: dampened domestic demand in China; an undervalued yuan by up to 30% against the euro; and Beijing’s ruthless targeting of Germany’s core industries. The thinktank warns that waiting for the shock to correct itself is akin to letting deindustrialization run its course, with devastating consequences.

Looking back at “China Shock 1.0” in the US reveals that this phenomenon was not just an economic disaster but also had profound social implications. The loss of up to 2.5 million jobs led to increased rates of suicides, divorce, and drug use in affected towns. An eerie warning shot is being fired across Germany’s bow, cautioning against a similar fate.

Germany’s industrial leaders would do well to heed the Centre for European Reform’s call for Berlin to go on the offense, supporting Paris in pushing the IMF and G7 to confront China’s currency undervaluation and one-sided trade model. The clock is ticking, and it’s imperative that Germany wakes up from its admiration of Beijing’s success before it’s too late.

The Centre for European Reform identifies three key factors contributing to this economic imbalance: dampened domestic demand in China has led to a surge in exports, further exacerbating the trade deficit; an undervalued yuan by up to 30% against the euro provides an unfair competitive advantage to Chinese exporters; and Beijing’s targeted policy of “10,000 little giants” directly attacks Germany’s Mittelstand, leaving it vulnerable to cannibalization.

Germany’s failure to diagnose the problem resembles the “phantom pain” of an amputee – a painful reminder that export demand has been chopped off by China’s pressure on Germany’s industrial base. It is time for Berlin to acknowledge the elephant in the room and take decisive action.

The China Conundrum is not unique to Germany; it is a symptom of a global economic imbalance. As the world’s largest economies struggle to adapt to shifting tides of trade, it is imperative that leaders come together to address this crisis.

Germany must take a bold stance against China’s unfair trade practices and protect its industrial base. The world is watching; will Germany act?