At a speech in Cologne last Monday, German Chancellor Friedrich Merz expressed his concerns about the undervaluation of China’s renminbi. Merz argued that the European Union (EU) could never win against a competitor that artificially manipulates its currency and urged China to “allow its own currency to float freely, including in the context of competition in the capital markets.” This isn’t the first time that Merz has raised the issue of China’s currency policies, but his remarks are striking because they mark a departure from Berlin’s unwillingness to publicly challenge Beijing on its trade behavior.
Germany is the latest major EU member state to question the bloc’s massive trade imbalance with China. On June 19—following pressure from Germany, France, Italy, and the Netherlands—the European Council called on the Commission to address “global macroeconomic imbalances” and consider policy responses to China’s export glut. Since the beginning of June, the EU has initiated nine additional anti-dumping investigations into products imported from China.
Apparently, China’s flood of redirected exports has finally tipped the political balance in Germany, pushing Berlin toward closer coordination with Brussels. After running a trade surplus with China for years, Germany is now experiencing the persistent trade deficits that much of the rest of Western Europe has faced since China’s rise as the world’s factory. But the EU will need to proceed strategically. After all, Beijing could use its expanding economic statecraft toolkit to complicate investigations, delay enforcement, and undermine the evidence needed to justify anti-dumping and anti-subsidy duties.
In many ways, Germany has embodied the export-led economic model, which helps explain its previous reluctance to criticize China’s market-distorting practices. For years, Germany exported more than it imported, maintained large trade surpluses, and supplied Europe and beyond with cars and advanced technology. Germany initially benefited more than many other European countries after China joined the World Trade Organization (WTO), supplying its rapidly growing market with German industrial goods.
But that dynamic has changed. During the COVID-19 pandemic, China ramped up its exports to shore up its own economy and, in doing so, undermined the foundations on which Germany had built its industrial base—particularly its automotive, chemical, and machinery sectors. This shift was accelerated after Russia’s invasion of Ukraine, and Germany fell into a persistent trade deficit with China for the first time.
The impact of China’s manufacturing overcapacity on Germany has been widely documented, and research has increasingly focused on how the EU could use tariffs, public procurement rules, or local-content requirements to protect its industries. The Commission’s willingness to consider these measures reflects the political shift underway in Berlin and a broader reassessment of China policy across the EU. At the same time, China has been preparing its own response to increased trade restrictions, setting the stage for a potential escalation in economic tensions.
The EU’s rule-abiding trade investigations meet China’s new defensive economic tools
In May, Beijing invoked its new Regulations on Countering Improper Extraterritorial Jurisdiction—an expanded framework for responding to perceived foreign economic overreach—to block an EU anti-subsidy investigation into Chinese security firm Nuctech. Both EU anti-dumping and anti-subsidy investigations require extensive cooperation and information sharing from exporters, creating a potential vulnerability that Beijing appears willing to exploit to delay or complicate enforcement efforts.
While these regulations have already been deployed against the EU, it remains unclear how frequently and aggressively China is prepared to use this new framework to counter Western economic tools. For now, their primary function appears to be deterrence. The regulations’ broad and ambiguous language creates a “self-policing” effect for both private companies and Western policymakers. But it would be a mistake to allow the threat of Chinese economic coercion to narrow Brussels’ options.
The European Commission is debating new trade restrictions, including a potential European equivalent of Section 301 tariff authority. Yet any such measure is unlikely to take effect before 2028. Until then, European industries will remain on a collision course with China’s export engine, and the EU cannot afford to allow its industrial base to erode further while grappling with broader competitiveness and innovation challenges. With additional retaliation paused until October following Chinese Commerce Minister Wang Wentao’s visit to Brussels, the EU should use this window to strategically leverage its existing trade defenses and prepare a coordinated response to China’s dominance in critical industries.
China has shown it is willing to test Europe’s limits and has developed new regulatory tools that directly challenge the EU’s rigorous, rules-based investigative process. Rather than discouraging action, this should bolster the case for a tariff instrument—such as a European version of Section 301 or Section 232 authorities—that does not depend on compliance from Chinese exporters. Germany’s stance on China has significantly shifted, and with Berlin now on board, the EU may finally have the political will to confront the long-term effects of China’s industrial overcapacity on European competitiveness and growth.
Jessie Yin is an associate director at the Atlantic Council’s GeoEconomics Center.
This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in receiving the newsletter, email JYin@atlanticcouncil.org.
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Image: Chinese electric vehicle manufacturer BYD presents its vehicles and charging technology at the Open Space Area during IAA Mobility in Munich, Germany, on September 13, 2025. Source: Michael Nguyen/NurPhoto.