Wind of Change: German China Policy After the Election

After three years of division and disarray in Germany’s policy toward Beijing under Chancellor Olaf Scholz, an election on February 23 will bring a change of government in Berlin and a new tone on China. In recent weeks, conservative frontrunner Friedrich Merz has lumped China together with Russia, North Korea, and Iran in an “axis of autocracies” and warned German firms that investing in China comes with “great risk.” Will this tougher rhetoric translate into substantive change, after more than a quarter century of policy continuity on China under chancellors Gerhard Schröder, Angela Merkel, and Olaf Scholz? This will depend in part on whether Merz—if his comfortable lead in the polls holds—ends up in a coalition with the hawkish Greens or dovish Social Democrats, and how US-China and transatlantic ties evolve under Donald Trump.

Our top takeaways are:

• In recent years, European leadership on China policy has shifted from Berlin to Brussels, with the European Commission pushing a de-risking agenda, which for now remains incomplete. A sustainable EU strategy depends on Germany, which is torn between rising competition with China and the dependence of some of its biggest firms on the Chinese market.
• We expect a Merz-led government to adopt a more critical tone on China, particularly if he ends up in a coalition with the Greens. In the short term, however, skepticism toward key parts of the de-risking agenda—including economic security and trade defense measures—will remain high.
• In the long run, we believe Germany could reach a tipping point on China as industrial competition with Chinese firms intensifies, leading to job losses at home and declining profitability in China. This “China shock” could force Berlin to embrace a more comprehensive set of tools, including tariffs, FDI conditioning, and industrial policies.
• The outlook for German and European policy toward China will also hinge on how US-China and transatlantic ties evolve under Donald Trump. A sharp deterioration in US-EU relations would push Berlin and Brussels into geopolitical hedging mode.

A German cacophony

When the three-party coalition of Chancellor Olaf Scholz came to power in December 2021, after 16 years of conservative rule under Angela Merkel, a shift in Germany’s approach to China seemed possible, even likely. In the coalition agreement sealed between the Social Democrats, Greens, and Free Democrats, sensitive issues like Taiwan, Xinjiang, and Hong Kong were broached for the first time. The coalition parties promised a comprehensive new China strategy and support for a common EU approach based on the three-pronged description of China as a partner, economic competitor, and systemic rival.

In reality, however, the government was deeply divided on China policy from the start. Scholz, like his predecessor Merkel, was risk averse, susceptible to Chinese threats, and strongly influenced by German companies that have invested heavily in China in recent decades and continue to depend on the market for their bottom line. Even after declaring that Russia’s invasion of Ukraine in February 2022 necessitated a major turning point in German foreign policy, Scholz continued to play down growing links between Moscow and Beijing. In Scholz’s mind, Germany’s Zeitenwende was about Russia, not China.

His coalition partners, the Greens, saw it differently. They pushed through a toughly worded China strategy in July 2023 after months of wrangling with the Chancellery. The strategy stressed the need to de-risk, diversify, and reduce German dependencies on China. Government actions, however, told a different story. Scholz overruled the Greens on the three biggest China-related decisions of the past three years: greenlighting Chinese shipping giant Cosco’s purchase of a stake in a terminal at the Hamburg port, sealing a closed-door deal with telecommunications providers that could preserve Huawei’s outsized role in the German 5G network, and voting to oppose EU duties on imported electric vehicles from China.

All three decisions, but particularly the vote against EV duties, dealt a blow to Europe’s pursuit of a common approach to China. Instead of leading Europe toward a more clear-eyed policy in response to growing economic and security risks, Scholz aligned Berlin with Hungary, Slovakia, and Malta in pushing back against the European Commission. In Brussels and Paris, Germany is seen these days as the biggest impediment to a united European policy toward Beijing. In recent years, European leadership on China has shifted from Berlin to Brussels, with European Commission President Ursula von der Leyen pushing a de-risking agenda, making aggressive use of the EU’s trade defense and level playing field tools, and encroaching on the turf of member states by unveiling an economic security agenda.

One of the important lessons from the past three years of German China policy is that the chancellor counts. Regardless of the coalition makeup, the control of key ministries, or the strategy documents the government produces, the man or woman at the top ultimately sets the policy direction. Because it looks all but certain that German voters will oust Scholz in favor of Merz, the potential for change in Germany’s approach to China is real. The only question is how much change we will get.

Exit Scholz, enter Merz

With less than two weeks to go until the election, support for Friedrich Merz’s center-right bloc—the Christian Democratic Union (CDU) and Bavarian Christian Social Union (CSU)—is hovering around 30%, 8-10 points above the far-right Alternative for Germany (AfD) party and roughly 15 points ahead of both Scholz’s Social Democrats (SPD) and the Greens. While some movement in the polls is possible in the coming weeks, it is unlikely to be enough to derail Merz’s chances of leading the next government for two main reasons.

First, the three mainstream parties (CDU/CSU, SPD, and Greens) have ruled out entering a coalition with the AfD. This means that even if the far-right party were to see a surge in support on election day and come out ahead of Merz’s conservative bloc, the AfD would have no chance of running or being part of the next government. Second, neither the SPD nor the Greens appear to have a realistic chance of catching Merz’s conservatives, whose double-digit lead in the polls has remained steady for months.

Merz, therefore, is well positioned to become chancellor, atop either a grand coalition with the Social Democrats or a government with the Greens. There is also a possibility that neither of these two-way partnerships win a parliamentary majority, in which case Merz could be forced to consider a three-way coalition or even a minority government that relies on the support of opposition parties. Coalition talks are likely to drag on for at least two months, meaning a government is unlikely to be in place before late April.

Below we sketch out what the different coalition scenarios would mean for China policy:

Continuity Coalition (CDU/CSU + SPD)

We believe the most likely constellation is a grand coalition between Merz’s conservatives and the Social Democrats. This is a grouping that Germans know well: three of Merkel’s four governments were grand coalitions. It would be the coalition with the highest degree of policy continuity, although Merz is expected to set new accents, including on China policy. Outgoing chancellor Scholz would likely be replaced by popular defense minister Boris Pistorius as the senior Social Democrat in such a coalition. Pistorius, who could retain his defense post, has pushed Germany to play a more active role in the Indo-Pacific and was the driving force behind the government’s decision last year to send a warship through the Taiwan Strait for the first time in decades.

Under this constellation, Merz and Pistorius could push the government in a more hawkish direction than the outgoing Scholz coalition on security-related matters involving China. For example, we could expect more support for sanctioning Chinese firms for their support of Russia’s war effort in Ukraine and a growing willingness to call out China for shifting the status quo in the Taiwan Strait. We could also expect a tougher line on protecting critical infrastructure, after Scholz’s controversial positions on Cosco and Huawei and recent incidents of sabotage in the Baltic Sea.

Under a grand coalition, however, we would expect continued resistance to tougher export controls or outbound investment restrictions in relation to China. It is notable in this context that neither the CDU/CSU nor SPD election programs (see Table 1) make any mention of economic security, a term that is central to the Commission’s China strategy. Despite Merz’s recent warning to companies to be cautious about investing in China, we would expect German firms that rely on the Chinese market to continue to find a sympathetic ear in Berlin, with the SPD and Bavarian CSU acting as a counterweight to what could be a tougher Merz line. It is unlikely, for example, that a grand coalition would support the introduction of US-style restrictions on connected vehicles from China if German carmakers opposed them.

Hawkish Coalition (CDU/CSU + Greens)

A coalition of Merz’s conservatives and the Greens, the second most likely option, would be the most hawkish constellation on China policy. A so-called black-green coalition has never existed at the national level, although it is a tried and tested governing model in Germany’s federal states. The Greens were the driving force behind Berlin’s toughly worded 2023 China strategy and are the only party to call in their election program for a “new approach” to economic relations with China, encompassing economic security and trade, supply chains, and markets. They are also the only party to back the use of tariffs, including EU duties on Chinese EVs, to combat an influx of cheap Chinese goods into Europe.

The Greens, of course, would not be able to dictate China policy in a coalition led by the CDU/CSU. The CSU, which sees itself as a defender of German carmakers’ interests in China, would push back against a forward-leaning de-risking agenda. But over the past three years, the Greens have been a voice within the government for diversification, economic security, and trade defense measures—that would likely continue. The party would also likely have a more sympathetic ally in Merz than they had with Scholz.

We would expect such a coalition to be supportive of the European Commission’s use of level playing field tools, such as the foreign subsidies regulation, to address distortions in the European market arising from China’s subsidy-heavy industrial strategies. It could also be more open to imposing conditions on Chinese greenfield investments and restrictions on connected vehicles due to data and cybersecurity concerns. Crucially, a coalition that included the Greens would be more likely to embrace a “China shock” narrative that links the erosion of Germany’s industrial competitiveness to China’s non-market policies. We would not rule out a review of certain decisions taken by the outgoing Scholz government, including the deal struck with telecommunications providers on high-risk 5G suppliers. Embedding German China policy in a broader European approach would be a higher priority under a black-green coalition.

Nightmare Coalitions

One cannot rule out a scenario in which neither of the two-party governing partnerships listed above attain a parliamentary majority, forcing Merz’s conservatives to form a minority government or a cumbersome three-way coalition. These could include—if we follow the German custom of naming coalitions according to the national flags that correspond to party colors—a black-red-yellow “Germany” coalition (CDU/CSU, SPD, and the liberal Free Democrats), a black-green-yellow “Jamaica” coalition (CDU/CSU, Greens, and FDP) or a black-red-green “Kenya” coalition (CDU/CSU, SPD, and Greens).

These constellations will come into play if the mainstream parties underperform on election day and/or several smaller parties—the FDP, the far-left BSW or far-left Linke—receive enough support to enter parliament (all are currently hovering at or below the 5% threshold). This would be a nightmare scenario for Merz. Minority governments are highly unusual in Germany. And three-party constellations, as Scholz’s outgoing “traffic light” coalition demonstrated, can be unwieldy and unstable.

The risk of internal divisions would rise in these constellations, especially given the animosity that exists between the SPD, Greens, and FDP after three years of coalition infighting. Merz would set the tone as chancellor, but the risk of lowest-common-denominator policies or paralysis, including on China, would rise. This would be especially true if the FDP, which brought down Scholz’s government, were part of the coalition. On issues like trade defense, economic security, industrial strategy and China-Russia ties, Berlin would likely remain a problem child, sending conflicting signals to its partners in Europe and beyond.

Deconstructing Merz

Although the make-up of the next German government will be important in determining the shape of China policy, the lesson from the outgoing coalition is that the views of the chancellor play a paramount role. Friedrich Merz, 69, has been involved in German and European politics since the 1980s. He was elected to the European Parliament in 1989, became a member of the Bundestag in 1994, and led the CDU from the opposition benches in parliament in the early 2000s before losing a power battle to his arch-rival Angela Merkel and leaving politics for 12 years. During this time, he worked in the private sector as a lawyer, board member, and head of US asset manager BlackRock’s operations in Germany.

Merz made his return to German politics when Merkel’s 16-year reign came to an end in 2021, rejoining the Bundestag and becoming leader of the CDU in 2022. Despite his lengthy political resume, his foreign policy views are not well understood, in part because he never served in government and spent 2009-2021 in the political wilderness. Nevertheless, he is seen as a strong believer in the transatlantic relationship, having spent years as head of the Atlantik-Brücke, a non-profit that promotes closer business ties with the US. He also describes himself as a committed European, having spent half a decade as a member of the European Parliament.

On China, Merz has stood out in recent years for his critical tone. In April 2023, a position paper produced by the Merz-led CDU/CSU group in the German parliament described the rise of China as the “central, epochal challenge of the 21st century” and accused Beijing of pursuing a “hegemonic strategy” and a “Sino-centric world order.” In late January 2025, Merz went further in a foreign policy speech in Berlin, lumping China together with Russia, Iran, and North Korea in an “axis of autocracies” and warning German companies about investing in China. “I say to all members of German industry that the decision to invest in China is one that comes with great risk,” Merz said. These are not messages that we are used to hearing from outgoing Chancellor Olaf Scholz, who often played down China’s support for Russia’s war in Ukraine and made clear that it was up to companies to decide where to invest.

Merz is also promising a break from Scholz in how the government makes foreign policy decisions. He has announced plans to create a national security council to better coordinate policy between ministries. And he is promising to work more closely with partners like France and Poland to develop common European policy approaches. The proof will be in the pudding. But the signal is clear: Merz is determined to contain the damaging public fights over policy, in Berlin and in Europe, that marked the Scholz years. Whether the more hawkish tone and commitment to closer policy coordination will lead to significant changes in how Germany approaches its economic relationship with China is another question.

Merz’s top priorities as chancellor will be to get the German economy growing again, after more than two years of stagnation, and to ramp up German defense spending in anticipation of a reduced US military role in Europe. Against that backdrop, there is a distinct possibility, even in a coalition with the Greens, that de-risking from China is initially pushed to the back burner. That could change if the Trump administration is open to a deal with Europe that would avert broad-based US tariffs in exchange for tougher measures aimed at China. But the chances of that look slim following Trump’s announcement of 25% tariffs on steel and aluminum and threats of additional action on cars, chips, and pharmaceuticals.

If the US and Europe enter a trade war, a new German government’s appetite for aligning with the US on China policy will be limited. We would then expect it, along with other EU countries, to switch into economic hedging mode, in which it looks for any sources of growth it can find.

Tipping point and Trump

Looking further out, however, we believe pressure will build for a more fundamental reassessment of Germany’s relationship with China. In our February 2024 note “Tipping Point: Germany and China in an Era of Zero-Sum Competition,” we highlighted the shift from an economic relationship that in past decades was defined by a high degree complementarity, to one characterized by intense industrial competition (Figure 1).

This shift is already manifesting itself in job losses in Germany and declining profitability for German firms in China. The outlook for the German car industry in China will be pivotal. If Germany’s “Big Three”—BMW, Mercedes-Benz, and Volkswagen—are unable to regain their competitiveness in the Chinese market over the next two years as new China-built models roll off production lines, it will change how China is viewed by the German political establishment.

Continued weakness in the Chinese economy (see “After the Fall”) could also play an important role here, forcing the “chosen few” of German industry (see “Don’t Stop Believin”) to reassess their presence in the market. It is possible that a Merz-led government could then oversee a more far-reaching shift in Germany’s approach to China, focused on reducing dependencies, shielding industry from unfair competition, and mitigating security risks.

The big caveat to this scenario is Donald Trump. If the new US administration comes to be seen as a bigger threat to German and European interests than China (see “Trump and the Europe-US-China Triangle”) then we would expect Berlin to swing into hedging mode and, with the support of other European capitals, seek some sort of accommodation with Beijing. Europe could offer to keep its market open to China in exchange for pledges by Beijing to invest more, cooperate in the development of green technologies, and use its influence to contain Vladimir Putin.

To be clear, we believe the bar for a European pivot to China is high. We don’t see signs at the moment that China is prepared to address European concerns about the bilateral economic relationship or its partnership with Putin’s Russia. Nevertheless, a breakdown in transatlantic relations—driven not only by US tariffs but threats to end support for Ukraine, take control of Greenland, and weaken EU digital regulations—would affect Germany and Europe’s geopolitical calculus in profound ways.