German Chancellor Merz heads to China seeking openings as global pressure builds

By Andreas Rinke

BERLIN, Feb 24 (Reuters) – German Chancellor Friedrich Merz visits China this week as the latest European leader seeking to reset relations with Beijing after a year that laid bare the crumbling of their alliance with the U.S. and exposed vulnerabilities in their supply chains.

Merz, making his first visit to China as chancellor, leads a delegation of some of Germany’s most senior business leaders, including the heads of the carmakers Volkswagen, BMW and Mercedes-Benz.

Along with European peers, their companies have been hit by a double whammy of suffocating competition from China’s booming electric vehicle makers and U.S. tariffs that have added billions in extra costs.

The visit, beginning on Wednesday, will be followed by a trip to Washington next week and comes after Merz warned that Europe now faces a world where advanced technology, raw materials and manufacturing supply chains have become weapons in a new era of great power rivalry.

TRADE PATTERN CHANGING

China was Germany’s largest trade partner last year and German manufacturers have been embedded in China’s economy for decades but the pattern of trade has shifted dramatically over the past five years.

Chinese exporters, helped by what German officials consider an undervalued yuan, have reversed years of German surpluses, leaving Europe’s major industrial power with a yawning trade deficit with China of almost 90 billion euros ($106 billion) in 2025.

“The trade imbalance has reached alarming proportions,” said Mikko Huotari, executive director of the Merics think tank in Berlin.

“Ultimately, this means that the economic and business outlook for German companies in China has deteriorated for a large proportion of them.”

DUE TO SIGN ECONOMIC AGREEMENTS

Merz will meet President Xi Jinping and Prime Minister Li Qiang and is expected to sign a number of economic agreements during a visit that will also take in stop-offs at a Mercedes-Benz electric vehicles plant and a Siemens Energy facility.

China has been at pains to present itself as a reliable global partner in a geopolitical environment roiled by U.S. President Donald Trump’s unpredictable swings. Its huge consumer market as well as the technical sophistication of its manufacturers make it an indispensable partner for Western companies.

But they have found the environment increasingly challenging and Germany’s main industry association appealed to the chancellor to address what it called “overcapacity, competition distortion and export controls on strategic commodities”.

China, which produces over 90% of the world’s processed rare earths and rare earth magnets, last year tightened export controls in a move that caused shockwaves among Western manufacturers. Meanwhile Chinese manufacturers have increasingly pushed foreign competitors out of the domestic market.

“We see pricing pressure, we see new competitors and entrants in nearly every segment, and thus, heavy shifts in what used to be the structure of the market,” Mercedes-Benz’s China boss Oliver Thoene said this month.

Relations have not been made easier by EU efforts to protect its local market from what it says are underpriced Chinese imports, including by raising tariffs on Chinese-made electric vehicles that are shipped back to Europe.

The EU is also moving to protect struggling steelmakers by lowering import quotas and raising tariffs, following years of sector lobbying against Asian rivals.

($1 = 0.8488 euros)

(Additional reporting by Christoph Steitz, Liz Lee and James Mackenzie; Editing by Alison Williams)