German exports to China drop as trade tensions rise

German exports to China in May suffered one of their biggest falls, underlining the faltering trade between the two countries even before escalating tensions threatened higher tariffs on key shipments.

The Federal Statistical Office said on Friday that German exports to China dropped 14 per cent to €7.5bn in May from a year earlier, underlining how what was once a major source of growth for Europe’s largest economy has become a source of vulnerability.

The decline was announced as German economy minister Robert Habeck set off on a three-day visit to China seeking to defuse a brewing trade spat between Beijing and Europe after Brussels imposed higher tariffs on Chinese electric vehicle imports.

Germany was critical of the EU’s decision to increase tariffs on imports of Chinese EVs to as high as 48 per cent in response to an investigation that found evidence of massive state subsidies by Beijing.

Officials in Berlin fear Germany’s vast carmaking industry, which relies heavily on the Chinese market, makes it particularly vulnerable to any retaliatory measures by Beijing. China has announced its own anti-dumping investigation into EU pork products.

Habeck has played down the chance that his visit will resolve the trade dispute. “There is no chance of the conflict being resolved in China,” he said in comments reported by Reuters on Friday during an initial stop-off in South Korea.

“I hope that it will be to set up solution-orientated formats in the near future,” he said. “If my trip can make a contribution to this, that would be good.”

Economists, however, cautioned against reading too much into the sharp fall in German exports to China, because monthly trade data can be lumpy and the latest drop followed a 13 per cent annual rise a month earlier.

In the first five months of this year, total German exports to China have fallen only slightly to €40.3bn, down from €40.7bn last year. But last year’s figures were more than 10 per cent lower than 2022 levels.

“It probably has a lot to do with the car sector,” said Holger Schmieding, chief economist at German bank Berenberg, pointing out that Chinese motor vehicle sales rose only 1.6 per cent in May, a slowdown from 12 per cent annual growth in the first quarter.

“Germany is facing stiffer competition in a softer Chinese market,” he said, adding that the German carmakers’ association VDA reported an 18 per cent annual drop in production in May, down from growth of 24 per cent in the same month last year.

The decline in German exports to China more than offset a 4.1 per cent rise in the country’s shipments to the US, its biggest export market, and led to an overall 6.4 per cent decline in its exports to non-EU countries.

Oliver Rakau, an economist at consultants Oxford Economics, said: “Averaging recent monthly readings, it still looks more like export levels are stabilising at low levels. It doesn’t look like this reading is the start of a new downtrend.”

But he said there were a number of potential explanations for the latest decline, including weak demand in China and congestion in German ports “as a lagged impact of the Red Sea blockage with container ship routes being messed up”.