German SMEs Warn Forced China Decoupling Would Trade One Risk for Another

Why the Mittelstand Rejects a Forced Break With China

Two researchers from the Institut für Mittelstandsforschung (IfM) Bonn argue that German and EU policymakers are underestimating the business logic that keeps small and mid-sized companies tied to Chinese suppliers and partners. Friederike Welter, IfM president, and Markus Rieger-Fels, a research associate, say de-risking from China for the Mittelstand means trading geopolitical risk for business risk, not eliminating it.

The authors point to 2025 trade data showing German imports from China reached €171 billion, an increase of 8.8 percentage points compared with 2024, while German exports to China fell by 9.7 percentage points to around €81 billion. They also describe China's more aggressive industrial policy, which uses high subsidies to support domestic companies and treats access to raw materials and intermediate goods as a political lever. In response, the EU is examining how to counter Chinese trade practices, including possible diversification requirements for large companies — rules that, the authors warn, would also hit the smaller German suppliers feeding those companies.

The IfM authors acknowledge that Mittelstand firms are aware of geopolitical risks, citing their own late-2025 survey for the study "Abhängigkeit des Mittelstands von Zulieferungen aus China." But they argue that a politically forced break with Chinese partners would create real costs: firms invest heavily in selecting suppliers, value long-standing relationships, often receive practical help from Chinese partners on administrative and logistical problems, and may have no alternative sources. Those relocation costs, they note, can rarely be passed on to customers. Regulatory friction makes substitution harder still — switching active ingredients in medicines can trigger new approval procedures, and replacing Chinese raw materials with recyclates is constrained by rules on purchasing waste in large volumes. The authors want policymakers to accept this business logic and instead expand alternatives through trade agreements, raw material partnerships and lower recycling barriers.

Inside the Mittelstand's China Calculus

The IfM's Core Argument: De-Risking Has a Price

Welter and Rieger-Fels do not dispute that China poses geopolitical risks; they cite their own end-2025 survey to show that Mittelstand firms already understand them. Their interpretation is that mandatory diversification would force companies to absorb switching costs they cannot pass on, while alternatives may not exist. This is an argument against top-down decoupling, not against de-risking as a goal.

What the 2025 Trade Numbers Say

The figures presented — €171 billion in imports versus €81 billion in exports — are treated as verified facts by the authors. They illustrate an asymmetric relationship: Germany is the larger buyer, and Chinese imports are growing while German exports shrink. That asymmetry is likely a key reason EU regulators are considering action, but it also means German SMEs have more to lose if supply lines are severed abruptly.

Where Regulation Bites: Pharma and Recycling

The article identifies two concrete regulatory mechanisms. Replacing Chinese active pharmaceutical ingredients with non-Chinese alternatives may require new authorizations, including testing, reporting and approval steps. Similarly, substituting Chinese raw materials with recycled materials is held back because recyclers within and outside the EU cannot currently purchase waste in large enough volumes; recyclate costs only become competitive at scale. These examples show that diversification is not simply a supply-chain decision but a regulatory one.

What the Authors Want From Policy

Welter and Rieger-Fels call for trade agreements that lower barriers with third countries, more raw material partnerships worldwide, and a reduction of regulatory hurdles for recycling. They also argue that EU and national rules on environment, social and health issues can conflict with trade-diversification goals, and that SME perspectives should be built into legislation from the start rather than added afterward.

What Policymakers and SMEs Should Do With IfM's Findings

• Policymakers: when drafting EU diversification rules aimed at large companies, assess how they cascade to smaller suppliers — the IfM authors warn such rules would hit Mittelstand firms indirectly.
• Policymakers: review approval procedures for medicines when manufacturers switch active ingredients away from Chinese sources; the IfM notes new authorizations with testing and reporting obligations may currently be required.
• Policymakers: ease constraints on recyclers buying waste in large volumes inside and outside the EU, so recycled materials can reach the scale needed to compete with Chinese raw materials.
• Mittelstand firms in regulated sectors such as pharmaceuticals: factor re-approval, testing and reporting costs into any supplier-switch decision, since the IfM identifies these as current barriers to substitution.
• Mittelstand firms: use the IfM study "Abhängigkeit des Mittelstands von Zulieferungen aus China" to document real dependency and switching costs when consulting EU and national regulators on new trade rules.