Why are China's exports weakening and how is trade with the US and the EU developing?

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Published on: September 8, 2025 / Updated on: September 8, 2025 – Author: Konrad Wolfenstein

Why are China's exports weakening and how is trade with the US and the EU developing? – Creative image: Xpert.Digital

Weak domestic demand | Chinese exports in freefall: What the 4.4% figure really means | US boom over: Why China's exports to the US plummeted by 33%

China's changing trade flows: Impact of US tariffs and new markets

China's export sector is under considerable pressure. In August 2025, Chinese exports rose by only 4.4 percent year-on-year, significantly below Bloomberg's expectations of 5.5 percent. This slowdown marks the lowest export growth in the last six months and reflects ongoing challenges in international trade.

The most dramatic decline is evident in trade with the United States. China's exports to the US plummeted by 33 percent year-on-year in August, following a drop of over 21 percent in July. This massive slump is a direct result of the trade tensions between the two nations that have been simmering for months.

China's trade balance also fell short of expectations in August, reaching $102 billion, although it was higher than the previous year. Particularly noteworthy is that imports rose by only 1.3 percent, compared to 4.1 percent in July, indicating weak domestic demand.

What role do US tariffs play and how is the trade conflict developing?

The trade dispute between the US and China reached its peak in April 2025. US President Donald Trump imposed drastic tariffs on Chinese goods, which at times exceeded 145 percent. China responded with retaliatory tariffs of up to 125 percent on US imports.

In mid-May 2025, both countries agreed in Geneva to a temporary easing of tariffs. Tariffs were reduced to 30 percent for Chinese exports to the US and 10 percent for US goods to China. This tariff moratorium has been extended several times, most recently in August 2025 for another 90 days until November 10, 2025.

According to Trump, current negotiations between the two nations are going “pretty well,” and the relationship with President Xi Jinping is “very good.” Nevertheless, the situation remains fragile, as Trump has already threatened 200 percent tariffs on certain Chinese goods.

How is China shifting its trade flows to Europe and Germany?

While exports to the US are plummeting, China is managing a remarkable redirection of its trade flows. Chinese exports to the European Union rose by more than 10 percent in August. Exports to Germany increased by 7.5 percent, underscoring the growing importance of the European market for Chinese manufacturers.

This trend is also reflected in Germany's trade balance. In the first five months of 2025, Germany imported around 10 percent more goods from China, while German exports to China fell by 14 percent. Germany's trade deficit with China has more than tripled compared to 2020.

The trade in metal products developed particularly dramatically: While German exports to China shrank by 25 percent, imports from China rose by the same percentage. German exports of motor vehicles to China even fell by 36 percent, while Chinese imports of machinery and pharmaceutical products to Germany increased by 19 percent each.

What does this development mean for the German economy?

The shift in trade flows is hitting the core of German industry. China is no longer Germany's most important trading partner, having been overtaken by the USA for the first time since 2015 in 2024. Trade volume between Germany and China amounted to €246 billion in 2024, compared to almost €300 billion in 2022.

This development reveals a problematic asymmetry: German companies are losing market share in China, while Chinese products are increasingly conquering the German market. This trend is exacerbated by the undervaluation of the Chinese yuan against the euro, which gives Chinese manufacturers an additional competitive advantage.

Jürgen Matthes, an expert in foreign trade at the German Economic Institute (IW), warns of a “China shock” and demands that EU trade policy take a more comprehensive approach to combating Chinese distortions of competition through subsidies and currency manipulation. The EU's countervailing tariffs on Chinese electric cars are already having an effect: Imports of Chinese electric vehicles have fallen by 38 percent.

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Trade diversion and its consequences: What Germany and Europe now expect

Where is China shifting its exports to as an alternative to the USA?

China is pursuing a targeted strategy of geographically diversifying its export markets. This redirection has been particularly successful in Southeast Asia, where exports to ASEAN countries increased by 22.5 percent. Japan recorded a 6.9 percent increase in Chinese imports.

The strategy goes far beyond mere trade relations. Chinese direct investment in its four largest Southeast Asian partner countries – Indonesia, Malaysia, Thailand, and Vietnam – has quadrupled in ten years, now averaging US$8.8 billion annually. These countries are now so deeply intertwined with China that bilateral trade accounts for an average of 19 percent of their gross domestic product.

In Latin America, China is already the second-largest trading partner, with a trade volume of US$518 billion in 2024. Over 20 Latin American countries have joined the Belt and Road Initiative, including Peru, Chile, and Argentina. China is strategically investing in key sectors such as lithium mining, copper extraction, and electric mobility.

How is China's engagement in Africa developing?

Africa plays a central role in China's global diversification strategy. China is already Africa's largest trading partner, with a trade volume of approximately €152 billion. At the 2024 China-Africa Forum in Beijing, President Xi Jinping pledged an additional 360 billion yuan (around €45 billion) in loans and investments over the next three years.

These funds will be channeled through various avenues: 210 billion yuan via loans, 80 billion via aid, and 70 billion via private Chinese companies. Over the past 25 years, China has built more than 1,000 bridges, nearly 100 ports, and 10,000 kilometers of railway lines in Africa.

However, the investment strategy has changed. While large infrastructure projects were previously the focus, China is now concentrating on “small but effective” sustainable projects and boosting local economies. At a summit, China announced tariff-free trade with several African countries.

What challenges arise from Chinese expansion?

The massive expansion of Chinese exports to developing countries is increasingly meeting with resistance. From Indonesia to Brazil, cheap Chinese goods are flooding markets and damaging local industries that are still recovering from the Covid-19 pandemic.

Fifty percent of Chinese exports now go to developing countries, leading to significant backlash against Chinese trade and investment practices. Experts warn that China will come under increasing pressure to ensure its exports do not become a major source of friction in its relations with Latin America, Africa, and Southeast Asia.

However, the relative weakness of Chinese domestic demand and the importance the country attaches to its industrial power mean that the influx of cheap Chinese goods abroad will not decrease in the foreseeable future.

How are other markets reacting to Chinese competition?

The EU has already taken concrete countermeasures. The countervailing duties levied on subsidized Chinese electric cars since autumn 2024 are having an effect: Imports of Chinese electric vehicles to Germany fell by 38 percent. The number imported decreased by 30 percent.

These measures are part of a broader EU strategy to combat Chinese distortions of competition. The German Economic Institute (IW) argues that EU trade policy must take a more comprehensive approach to combating Chinese subsidies and currency manipulation in order to restore a level playing field.

Resistance to Chinese trade practices is also growing in other regions. Several countries are considering or have already introduced protective measures against Chinese imports to safeguard their domestic industries.

What are the long-term effects of the trade diversion?

The redirection of Chinese trade flows is fundamentally changing global economic geography. China is systematically building new dependencies in developing countries, while traditional trade relations with the US and, to some extent, with Europe are weakening.

This development has far-reaching geopolitical implications. China is strengthening its influence in the so-called “Global South” while simultaneously reducing its dependence on Western markets. The Belt and Road Initiative is becoming an instrument of this strategy, even as large infrastructure loans decline.

This presents new challenges for the German and European economies. On the one hand, they benefit in the short term from increased Chinese imports, but on the other hand, they lose market share in China and must expect increased Chinese competition in third-country markets.

How might the situation develop by the end of 2025?

The coming months will be crucial for the further development of global trade flows. The extended tariff moratorium between the US and China, now in effect until November 2025, provides an opportunity for further negotiations. A meeting between Trump and Xi Jinping is possible, but not yet concretely planned.

Should the negotiations fail, tariffs could rise again to over 100 percent, which would further accelerate the diversion of Chinese exports. This could increase the pressure on European and other markets even more.

China is expected to continue its diversification strategy even if a trade deal with the US is reached. The trade relationships and investments already established in Southeast Asia, Latin America, and Africa cannot simply be reversed.

For Germany and Europe, this means they must prepare for a permanent shift in the trade landscape. The days when China primarily served as an export destination and a cheap production location are increasingly coming to an end. Instead, China is becoming more and more of a direct competitor in global markets, which necessitates new trade policy responses.