German Chancellor Friedrich Merz paid a highly instructive two-day official visit to China last week, his first as the head of government of Europe’s strongest economy. President Xi Jinping and Merz, who appear to have established a good rapport, have hit the reset button for amicably pragmatic ties between the world’s second and third largest economies.
In Beijing, the nation’s political nerve centre, Merz met with Xi, Premier Li Qiang, and Vice-Premier He Lifeng, and – visibly astonished – visited a host of high-tech enterprises in Hangzhou, the nation’s AI hub. It is also astonishing that Germany is the world’s third-largest economy, considering that among the world’s top five economies, it has the smallest population and area.
However, Germany is in trouble, as Merz acknowledged, just one day after concluding his China trip, stating in a speech at a regional election rally in the small Hessian town of Volkmarsen on Friday that Germans “are simply no longer capable enough” to create prosperity. He pointed out, quite rightly, that upon returning from China, “ladies and gentlemen, you get an even clearer feeling that [growing demands for] ‘life balance’ [he used the English word] and a four-day work week can no longer sustain prosperity in our century; we really need to do a bit more now.”
Merz hit the nail on the head. Ultimately, I am convinced, prosperity can only be achieved through hard work – both manual and intellectual.
The crux of the problem is that an increasing segment of Germany’s ageing 84-million population (about the number of people living in Sichuan Province) seems to regard full-time work as a kind of unpleasant phenomenon that interferes with their aim of achieving “life balance.” In economics, the most fundamental question remains: who pays the bill?
Eco-fundamentalism, combined with anti-industry activism and extreme wokism, are factors that are harmful to Germany’s future economic prosperity. While “life balance” is a nice ideal, I consider regular work as an integral part of achieving “balance” in life. Moreover, I believe that working at least five days a week for eight hours a day is a realistic way of generating prosperity not only for oneself but for civil society.
It is obvious that Merz, a former judge and lawyer, was deeply impressed by the Chinese people’s strong work ethic and the country’s extraordinary economic progress, which is, to a certain degree, similar to Germany’s post-WWII “economic miracle.”
Winding up his intensive two-city visit, Merz praised China for its impressive economic performance capability and described China-Germany relations as a “success story.” He also stated that cooperation between the two countries “is good.” However, he acknowledged “difficult issues” between the two economic giants that needed to be addressed openly. “Above all, there are issues relating to competition. China has high capacities, some of which are now also posing a problem for Europe because they far exceed market demand,” he told the media covering his visit.
Beijing has repeatedly dismissed EU accusations about overcapacity, calling them “entirely unfounded” and stating that China’s strengths in areas like renewable energy support common global goals, including the green transition.
In his meeting with Merz, Xi made three propositions on further developing bilateral ties. Firstly, both countries should be reliable partners that support each other. Secondly, both countries should be innovative partners that champion openness and win-win results. Thirdly, both countries should be partners that understand each other and share close bonds through cultural and people-to-people exchanges.
Li also made three proposals in his meeting with Merz. Firstly, Li called for the basic foundations of traditional cooperation to be strengthened. Secondly, regarding new opportunities for future development, the two countries should support enterprises and scientific research institutions to promote the two-way flow of innovative resources and explore third-party markets together. Thirdly, Li urged the creation of a favourable environment for investment and business.
China was, once again, Germany’s number-one trade partner last year, supplanting – unsurprisingly – the US. In 2025, trade in goods between China and Germany totalled nearly US$218 billion, which was a 5.2 percent year-on-year increase, with a growth rate 1.4 percentage points higher than China’s overall foreign trade expansion for the year, according to the General Administration of Customs in Beijing. However, German exports to China fell by 9.7 percent to US$96 billion last year, according to German media reports.
China-based German businesspeople have told me for years that the trade imbalance between the two countries is also caused by the “unhealthy” predicament that German enterprises face one of the highest corporate tax burdens among major industrial nations, with an effective rate of around 29 to over 30 percent, nearly 10 percentage points above the EU average. The unsavoury fact is that Germany has become a high-tax country. For an export-dependent economy, that’s poisonous.
Much ado about China’s trade surplus and ‘overcapacity’
Before and during his visit, Merz repeatedly raised the issue of Germany’s yawning trade deficit vis-à-vis China and China’s perceived overcapacity. Last year, the BBC pointed out, Germany shifted from being accused of creating trade imbalances to being a victim of them, now facing a massive trade deficit with China rather than a surplus, according to data from 2025-2026.
While Germany was historically criticised by its trade rivals for its high export-led trade surplus, which was viewed as a “problem” that supposedly suppressed domestic demand and hurt trade partners, the so-called “China shock” has reversed this dynamic. Historically, Japan has also faced accusations from its trade rivals regarding its perceived overcapacity, as did the US in the 1980s and again in 2024-2025. Obviously, if a country is particularly successful in its exports, like China has been for quite a while, it can expect to be accused of overcapacity by its competitors. India and Brazil will likely face similar accusations soon. It’s a deplorable home truth.
I have recently read some well-argued Chinese analyst reports about China’s 2025 trade surplus and the growth of its overseas assets, which I am summarising below.
In 2025, China achieved a record-breaking trade surplus of about US$1.2 trillion, a nearly 20 percent year-on-year increase driven by strong exports to the EU, Southeast Asia, and Africa – despite US tariffs. This surplus fuelled, alongside a 40 percent rise in overseas M&A deals to US$43.6 billion, the growth of China’s foreign assets.
Chinese analysts point out that their country’s trade surplus results from the evolution of the global industrial division of labour. They also insist that China never intentionally pursues a trade surplus. They highlight that the remarkable growth in China’s trade surplus last year was mainly driven by short-term factors, such as the United States’ threat of additional tariffs triggering an export rush. Moreover, China’s imports were hindered last year by rising protective measures, including export curbs imposed by some countries citing national security “concerns.”
The analysts also emphasise that in 2025, the export volume and trade surplus generated by foreign enterprises based in China accounted for 27.1 percent and 16 percent respectively of China’s total. They stress that China’s exports facilitate trade partners’ manufacturing development and energy transition, exemplified by a 13 percent growth in exports to the 11 ASEAN members.
Moreover, according to their research, China provides over 80 percent of photovoltaic modules and 70 percent of the world’s wind power equipment, significantly contributing to the global green transition.
Regrettably, there is something that is not widely known – China has large service trade and investment income deficits. Yes, it does! According to the analysts, in the first three quarters of last year, China’s service trade and investment income deficits together corresponded to over 30 percent of the country’s merchandise trade surplus.
China’s service trade deficit stood at US$200 billion last year, the world’s highest, according to the analysts. China’s investment income deficit amounted to US$143 billion in 2024 (the latest available figure), one of the highest in the world.
Last year, China’s merchandise imports reached US$2.38 trillion, a record high, making China the world’s second-largest importer for 17 consecutive years, the research shows.
I would like to add that China is the only country hosting national-level import fairs, and the China International Import Expo (CIIE) has been successfully held in Shanghai for eight consecutive years.
The analysts also emphasise that China’s external direct investment has strongly supported the economic development of destination countries. Among China’s non-reserve external assets, its direct investment assets stood at US$3.4 billion last year, accounting for 44 percent across 190 countries and regions worldwide.
The analyst research shows that Chinese overseas enterprises generated revenue of US$3.6 trillion last year, during which they paid US$82.1 billion in taxes at their investment locations and created over five million jobs, two-thirds of which benefited foreign employees.
According to the analysts, the scale of China’s external assets is reasonable, and their structure is robust, resulting in a more limited impact on global financial markets compared to major advanced economies. They also point out that China continues to strongly support global economic development and financial stability, based on China’s exchange rate policy remaining stable.
The analysts point out that China’s manufacturing sector enjoys strong global competitiveness, indicating that there is neither the necessity nor intention to gain a competitive advantage in international trade through currency depreciation. They also say that China’s merchandise trade surplus has achieved a “virtuous cycle” globally through its financial account, in line with the basic principle of a balanced budget and by strongly supporting global economic development and financial stability.
Vice-Premier He Lifeng said in Beijing last week during a meeting with Germany’s business delegation that accompanied Merz on his trip that “China is advancing its high-level opening up continuously to promote high-quality economic development, providing broad space and opportunities for China-Germany economic and trade cooperation.”
As an overseas German in China, I sincerely hope that commercial, economic and cultural ties between the two countries will continue to prosper and not be affected by attempts to interfere in China’s internal affairs, such as Taiwan and the South China Sea, or by efforts to impose “normative” European values on countries in the Global South. How would Europeans react to attempts to force Asian values on them? Surely, they wouldn’t appreciate it.
China and Germany, like the Far East and Europe anyhow, have very different cultural, religious, political, and societal backgrounds that should never be an impediment to developing friendly, pragmatic, and mutually beneficial relations. We can all learn from each other, as we are all so different. What matters is mutual respect. That’s how win-win outcomes can be achieved.
Furthermore, amicably pragmatic ties between China, Asia’s powerhouse, and Germany, Europe’s economic locomotive, can be expected to benefit relations between Brussels and Beijing as well.
I am pleased that the Xi-Merz meeting has finally hit the reset button for relations between their countries.
– Harald Brüning
