Germany’s export-driven economy faces a complex landscape in early 2026, marked by surprising overall growth but significant shifts in key trading relationships. While German exports rose unexpectedly in 2025, driven largely by demand within the European Union, shipments to both the United States and China experienced substantial declines, exposing structural weaknesses and forcing companies to reassess their strategies.
The overall increase in exports – a one percent rise – provides a seemingly positive headline, but a closer examination reveals a more nuanced picture. The strength of the European market masked a worrying trend: a simultaneous weakening of demand from two of Germany’s largest export destinations. This dual slump is pushing Germany towards a record trade deficit with China, nearing €90 billion, and highlighting the fragility of its global trade position.
The decline in exports to the US is particularly concerning. According to data from the German Economic Institute (IW), shipments to the United States fell by 9.3 percent in 2025, totaling €146.9 billion. This reversal is largely attributed to the impact of US President Trump’s tariff policy, which has significantly increased the cost of German goods – particularly in the automotive, machinery, and chemical sectors – for American buyers. These three sectors alone accounted for more than two-thirds of the overall decline in exports to the US.
The situation in China is different, but equally challenging. Exports to China also fell by 9.3 percent, not due to tariffs, but to increasing competition from domestic Chinese manufacturers. China’s industrial policies, including substantial subsidies, have enabled its companies to rapidly expand their production capacity and compete directly with German firms in key sectors like automotive and engineering. This represents a “second China shock,” as described by the Centre for European Reform, a significant shift from the earlier period when China primarily exported consumer goods.
Companies like Lauda, a Baden-Württemberg-based manufacturer of temperature control systems for industries including pharmaceuticals and automotive, are navigating these challenges. While Lauda has managed to maintain its exports to the US at roughly the same level by passing on tariff costs to customers, its CEO, Gunther Wobser, acknowledges a competitive disadvantage on entry-level products against American rivals. The company relies on its ability to deliver premium, customized solutions to justify higher prices.
The broader trend is prompting German companies to rethink their production strategies. Many are considering establishing manufacturing facilities within key markets – including China and India – to reduce transportation costs and circumvent trade barriers. Jochen Weyrauch, CEO of automotive supplier Dürr, emphasized the need for closer proximity to customers, stating that “we have long been developing our products in secret. But we need to be closer to the markets, and they are no longer just in Germany, they are in China, all over the world.”
This shift towards localized production raises questions about the future of German manufacturing jobs. However, companies like Lauda are currently prioritizing expansion of their international workforce rather than reducing staff in Germany. Wobser stated the company aims for 15 percent growth in the current year.
The automotive industry, a cornerstone of the German economy, is particularly affected by these trends. Hildegard Müller, President of the German Association of the Automotive Industry, highlighted the significant investments being made to ensure future competitiveness, but also expressed concern about maintaining production within Germany. The industry is actively seeking new free trade agreements, such as those with India and Mercosur, to diversify its export markets.
Despite the headwinds, the strength of intra-European trade has provided a crucial buffer for German exports. Shipments to other EU countries reached €876.5 billion, offsetting the declines in the US and China. This underscores the importance of the European single market for German manufacturers.
However, economists caution that relying solely on European demand is not a sustainable long-term solution. Lars Feld, a Freiburger economist, argues that Germany needs to intensify trade relations with other regions of the world to overcome the challenges posed by the US-China dynamic. The pursuit of new free trade agreements is seen as a critical step in this direction.
The German export story in early 2026 is one of resilience and adaptation. While the simultaneous slowdown in demand from the US and China presents significant challenges, the strength of the European market and the willingness of German companies to adjust their strategies offer a glimmer of hope. The long-term success of the German export model will depend on its ability to navigate these complex geopolitical and economic forces and forge new trade partnerships.
