The European Union’s goods trade deficit with China hit €360 billion in 2025. That number climbed nearly 20% year-over-year, and it has German Chancellor Friedrich Merz in a politically uncomfortable spot.

Germany alone accounts for nearly €90 billion of that shortfall, a figure that jumped 33% in a single year. Merz has publicly called the imbalance “unhealthy,” noting it quadrupled over five years.

The automaker problem

Bilateral trade between Germany and China exceeded €250 billion in 2025, making China one of Germany’s most important trading partners by sheer volume. German car exports to China have fallen roughly 66% from their 2022 peaks.

The European Commission has been pushing tougher measures aimed at countering Chinese overcapacity and subsidies, particularly in sectors like electric vehicles where Beijing’s state-backed manufacturers have flooded global markets with competitively priced products.

Merz hasn’t fully backed that approach. Volkswagen, Mercedes-Benz, and BMW have been vocal about their reluctance toward confrontational trade policies. If the EU slaps tariffs or restrictions on Chinese goods, Beijing retaliates, and German luxury sedans and SUVs become collateral damage.

The Beijing visit and coalition tensions

Merz traveled to Beijing in February 2026, where he raised the trade imbalance directly with Chinese leaders. He came away with assurances that China would increase imports of high-quality German goods.

The chancellor’s coalition government is divided on how aggressively to pursue the issue. Some members want Germany to align more closely with Brussels and take a harder stance. Others, influenced by the automaker lobby and broader business interests tied to Chinese markets, prefer a diplomatic approach.

As of mid-June 2026, Merz still had not clarified his support for the EU’s specific plans regarding Chinese subsidies. The EU summit scheduled for June 2026 will be a critical moment, where European leaders are expected to debate the bloc’s trade posture toward China.

What this means for markets

German automakers are already under pressure from declining Chinese market share, the EV transition, and weakening consumer demand in key markets. A trade escalation with China would add another layer of risk to an already difficult operating environment.

A €360 billion trade deficit represents a massive outflow of European purchasing power to China. Volkswagen, Mercedes-Benz, and BMW face a paradox: they need China as a market, but China’s own industrial policy is systematically reducing their relevance in that market. German car exports to China dropping 66% from peak levels looks structural rather than cyclical.