German exports dropped sharply in May as tariff talks with US loomed

German exports fell by 1.4% in May, outpacing expectations, as trade with the US slowed amid ongoing tariff negotiations. The decline adds to the economic challenges facing Germany, even as the government ramps up spending on defence and infrastructure.

German exports declined by 1.4% month-on-month in May, following a 1.6% drop in April, according to the federal statistics office. Year-on-year, exports rose by 0.4%. Imports also fell, dropping 3.8% compared to the previous month, but increased by 4.2% on an annual basis. Germany’s trade balance reached €18.4 billion in May, up from €15.7 billion in April.

The data reveals a significant decrease in shipments to the United States, following earlier tariff frontloading that prompted export increases of 1.8% in February and 1.3% in March. Despite the recent slowdown, the US remains the primary destination for German exports.

Germany, negotiating as part of the EU, is working to avoid a threatened 50% tariff on its exports to the US, with a negotiation deadline set for 1 August. Earlier this year, the Trump administration imposed a 20% tariff on EU goods, but the White House paused the duties for 90 days following market turmoil, with the reprieve set to expire on 9 July and later extended to allow more time for negotiations.

Reports indicate the EU is prepared to accept a 10% baseline tariff on its exports to the US, while seeking exemptions for key sectors. In addition, the EU faces a 25% duty on automobiles and car parts exported to the US, as well as a 50% tariff on steel and aluminum. Brussels is aiming to reduce the impact of these measures through a new trade framework.

German auto exports to the US fell by 13% in April and 25% in May compared to the previous year, according to the VDA industry association.

Germany’s economy continues to face headwinds, including the aftereffects of Europe’s energy price spike, low productivity, and limited infrastructure investment. Over the last two years, GDP growth has been negative, and Deutsche Bundesbank head Joachim Nagel warned that new trade duties could lead to another economic contraction this year.

“More generally speaking, with the hard macro data in for the first two months of the second quarter, the German economy looks set for yet another stagnation or even small contraction,” said Carsten Brzesk, Global Head of Macro for ING Research, on Tuesday. “While retail sales and construction activity were down compared with the first quarter, the small uptick in industrial production is not enough to offset the expected drag from trade.”

In May, industrial production in Germany increased by 1.2% month-on-month after a 1.6% drop in April. Retail sales, however, declined by 1.6% month-on-month in May.

Despite these challenges, investor sentiment has been buoyed by the government’s commitments to increase defence and infrastructure spending. A recent constitutional amendment exempts defence spending above 1% of GDP from borrowing limits, and Chancellor Friedrich Merz aims to boost military spending to 3.5% of GDP by 2029. The government has also established a €500 billion extrabudgetary fund for infrastructure investment.

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