German Chancellor Friedrich Merz considers action on €360B trade deficit with China

Europe’s trade gap with China just hit a number that’s hard to ignore. The EU’s goods trade deficit with China reached €360 billion in 2025, a nearly 20% jump from the prior year, and German Chancellor Friedrich Merz is signaling he’s done watching from the sidelines.

Germany alone accounts for roughly €90 billion of that deficit, a figure that surged 33% year-over-year.

The yuan problem and a historical playbook

Merz has zeroed in on what he sees as the root cause: China’s currency. He estimates the yuan is undervalued by as much as 30%, a figure notably more aggressive than the IMF’s own estimate of roughly 16%.

His proposed solution carries some historical weight. Merz is pushing for international dialogue on currency valuations, drawing comparisons to the Plaza Accord. The Plaza Accord was a 1985 agreement among five major economies to deliberately weaken the US dollar against the Japanese yen and German mark.

Germany’s total bilateral trade with China exceeded €250 billion in 2025, making Beijing one of Berlin’s most important commercial partners.

The auto sector caught in the crossfire

German car exports to China have fallen roughly 66% from their 2022 peaks, a collapse driven largely by Chinese EV overcapacity flooding both domestic and global markets. The EU has been moving toward stricter measures targeting China’s industrial subsidization, particularly in the EV sector.

German automakers are raising the alarm about retaliation. Companies like BMW, Mercedes-Benz, and Volkswagen still generate substantial revenue from Chinese consumers. Any tit-for-tat escalation could see Beijing restrict market access for European brands, a scenario that would compound the damage already inflicted by declining export volumes.

Political timeline and EU coordination

Merz took office on May 6, 2025. He visited the Chinese capital in February 2026, though the trip didn’t produce a full alignment with broader EU proposals on trade protection.

EU leaders are scheduled to debate protective instruments at a summit in June 2026. Germany’s position within those negotiations carries outsized influence as the EU’s largest economy and China’s biggest European trading partner.

Merz appears to be advocating for systemic reform on currency valuations while stopping short of endorsing blunt tariff measures that could trigger a full-scale trade war.

What this means for investors

European automotive stocks face continued pressure as the China export story deteriorates. Technology and industrial sectors with deep Chinese supply chain dependencies could see margin compression if protectionist measures escalate on either side.

If Merz’s push for coordinated yuan intervention gains traction, a 30% revaluation of the yuan, even if achieved gradually, would represent one of the most significant currency events in decades. The June 2026 EU summit will be a key catalyst for whether leaders coalesce around aggressive protective measures or produce communiques with little enforcement mechanism.

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