Why does Germany want a divorce from China?

German Chancellor Friedrich Merz said last month that Berlin would protect domestic steelmakers from Chinese competitors. His government has tightened restrictions Chinese components in mobile-data networks And it has indicated support for a “buy-European” clause for public tenders.

At its first meeting in November, Merz’s newly created National Security Council addressed the strategic risks of China’s dominance over several critical minerals. According to a German official, it is now working on diversification measures.

Germany’s isolation from China has been going on for some time. Helped by low production costs, a weak yuan and state subsidies, Chinese manufacturers are increasingly moving into sectors that until recently were dominated by German companies, not only in China but also in other markets, including Europe.

However, its timing has a lot to do with President Trump. a wave of cheap Chinese goodsEconomists and business executives say goods ranging from chemicals to car parts began to wash into Europe this year after being left out of the new U.S. tariff wall.

As a result, a country that once epitomized economic liberalism is finding itself moving toward tariffs, regulatory barriers, and other protectionist measures German politicians and officials had long criticized as misguided or, worse, too “French.”

“Germany is moving forward and becoming aware of the imbalances that affect it,” French President Emmanuel Macron told French daily Les Echos after his recent visit to China. “China is striking at the heart of the European industrial and innovation model.”

The disappearance of Europe’s most influential free-trade voice reflects how the global economy is fragmenting due to great power competition between the US and China and a backlash against globalization led by emerging populist forces in the West.

Germany’s pivot has still not reached all corners of its economy and government. The greater a company’s exposure to China, the more difficult it will be for it to change course. Some carmakers and chemical producers are still investing heavily in the country. German politicians are also looking over their shoulders as allies vacillate between confronting China and placating it.

However, the direction of travel is becoming clear, starting among businesses, later spreading through the country’s influential lobby organizations and more recently through the government.

The Federation of German Industries fired the opening shot in 2019, when it abandoned its China-friendly position in a report to call the country a “systemic competitor.” This year, the VDMA federation of machinery manufacturers—export-oriented business-to-business companies that form the backbone of Germany’s economy—accused China of unfair competition. It has called for anti-dumping measures and sanctions against Chinese exporters who ignore European law.

“We are free traders, but unfair trade policies can no longer be tolerated,” said Oliver Richtberg, VDMA’s head of foreign trade. “If China doesn’t play fair, we have to make it.”

The government, in addition to a new economic-security strategy it plans to publish next year, is “working on projects that address the growing economic, technological and security policy risks in dealing with China,” the German official familiar with the deliberations said.

German Foreign Minister Johann Wadeful said during his first visit to China this month that European companies needed better access to the Chinese market and resources produced in the country.

“The change in tone … is quite remarkable,” said Andreas Fulda, a professor of political science at the University of Nottingham and author of a recent book on Germany and China. “Now we need real policies to encourage de-risking and recovery.”

China’s progress from being a buyer to a producer of investment goods has been rapid. Between 2019 and 2024, Germany lost its global market share to China for power generation equipment and machinery, according to data from an upcoming report from Rhodium, a think tank.

Germany’s lead in chemicals and road vehicles is now paper thin, and it is lagging far behind China in the power-equipment market. This year, for the first time, Germany imported more capital goods from China than it exported there.

The trend is accelerating: According to the German Economic Institute think tank, in the second quarter of 2025, imports of manual gearboxes from China will increase almost threefold. German carmakers have seen their share of the Chinese market drop from half to a third in two years.

Total German exports to China have fallen by a quarter since 2019 while imports have increased. Germany’s trade deficit in goods and services with China is on track to reach a record 88 billion euros this year, equivalent to about $102 billion, according to German government data.

This has left deep scars. Germany’s manufacturing output has fallen 14% since peaking in 2017. According to consulting firm Ernst & Young, the industrial sector has lost about 5% of its jobs since 2019. The auto sector has lost about 13% positions in the same period.

One company feeling the heat is Herrenknecht. The family-owned business builds and operates some of the world’s most sophisticated tunnel-boring machines. There are tiny factories with 62-feet high excavators that can push their way through the toughest rocks while laying pipes, cables and cladding.

When China began to achieve world-power status, local officials turned to Herrenknecht for their largest infrastructure projects. Now, after a series of acquisitions, Chinese rivals dominate the global market.

“We are under increasing competitive pressure, especially from state-subsidized Chinese sellers,” spokeswoman Anja Heckendorff said.

The company is now exploring new markets like India and focusing on larger and more complex projects. At the same time, it is calling for anti-dumping investigations of Chinese rivals and a “Europe first” approach to public tenders that would favor local sellers, Heckendorff said.

The pressure is coming to a head in one of Germany’s primary chemical-industry clusters, centered on the East German city of Leipzig.

The former coal-mining region was the cradle of Europe’s chemical industry in the 19th century thanks to large local coal mines, which later became the center of East German industry. After the reunification of Germany the region closed mines and created a chemicals cluster powered by Russian gas. This year, Chinese chemicals have entered Europe, increasing their share of the market for polyamide 6, a plastic widely used in many industries, to 20% from 5% last year, said Vedran Kuzundzic, chief commercial officer of Domo Chemicals, a manufacturer with annual sales of about €1.3 billion in the city of Leuna.

“They are constantly present,” he said. He said they give an average 20% discount to European producers.

Christoph Günther, chief executive of one of Germany’s largest chemical parks, based in Leuna, said businesses were struggling to cope with the increase in Chinese imports.

“We feel it very strongly here,” he said. Businesses in the park can’t make money and are cutting costs whenever possible, including jobs. “They can only stay for a certain amount of time.”

Dow Chemical recently said it would close two plants in the area and eliminate more than 500 jobs. German chemical giant BASF and other producers have cut thousands of jobs across Germany in recent years by moving manufacturing to China.

In Leuna, Finnish forestry company UPM is building a €1.3 billion biorefinery on the site of a former BASF plant that will convert hardwood into chemicals. These are more expensive than fossil-fuel based chemicals, but customers value high-quality products in industries such as cosmetics, said executive vice president Harald Dialer.

Nearby, Stefan Scherrer, CEO of Frankfurt-based chemicals maker AMG Lithium, is building a lithium refinery that could eventually meet one-quarter of Europe’s needs. But Scherer said German consumers are scared off by higher prices.

That’s why innovation alone will not be enough to preserve Europe’s manufacturing capacity, said Dirk Schumacher, chief economist at Germany’s state-owned development bank KfW.

“As a country we need to decide what we are happy to source from China in the future and what we want to keep producing ourselves,” Schumacher said. “This may include erecting barriers to protect strategically relevant areas.”

“Europe is still open to Chinese investment, but (policymakers) want Europe to actually have an advantage in terms of know-how and jobs,” said Rhodium analyst Noah Barkin. The question is whether China will agree – and if not, whether Europe is willing to close its market to China.

Barkin says he cannot rule out Germany returning to the “Shanghai syndrome” – prioritizing the short-term benefits of appeasing China despite the long-term risks. That could happen if Berlin decides it needs to defend against the unpredictable Trump.

Norbert Röttgen, a conservative lawmaker and foreign-policy expert, explained the dilemma. “We need to reduce our dependence on China,” he said. “But if the US lets us down, it will affect how we define our relationship with China.”

Write to Tom Fairless tom.fairless@wsj.com and on bertrand benoit bertrand.benoit@wsj.com