Falling International Business: Why German SMEs Are Scaling Back
Numerous Small and Medium Enterprises (SMEs) are pulling out of international trade activities. - Numerous Small-to-Medium Enterprises (SMEs) Retreat from International Commerce
Small and Medium-sized Enterprises (SMEs) from Germany are pulling back on international business. While roughly 880,000 of the 3.8 million SMEs were active abroad in 2022, this number dropped to 763,000 by 2023, according to KfW analysis. This shrinkage has led to a decrease in the percentage of SMEs involved in international trade, from around 23% to under 20%, falling below pre-COVID-19 crisis levels.
Dirk Schumacher, KfW's chief economist, attributes this shift to deteriorating foreign trade conditions. He points to escalating geopolitical conflicts in regions like Ukraine and the Middle East, heightened competition from China in key sectors, and the protectionist trade policies of the U.S. as major stumbling blocks for businesses.
In addition, many SMEs find Germany's local conditions increasingly unfavorable for their competitiveness. A special KfW survey from January 2025 revealed that this trend of struggling international business has persisted. It showed that while 21% of SMEs exports increased, 25% reported a decline in foreign sales, indicating a mixed outlook for the future.
SMEs with business ties to the U.S. (approximately 16% of the total) are particularly alarmed. Before the announcement of Trump's tariff package, a survey revealed that 34% of these companies expected negative consequences on their own business, with an additional 9% anticipating very negative effects.
Main export markets for German companies are within Europe. In 2023, German businesses sold their goods most frequently to Austria and Switzerland, followed by the Benelux countries and France. SMEs that stayed active abroad were able to slightly increase the share of international business to 29% of their total turnover, yet the overall foreign sales of German SMEs shrank to €698 billion.
Geopolitical Tensions and escalating trade tensions, primarily with the U.S., have impacted business confidence, resulting in weak foreign demand and reduced exports. The unpredictability surrounding U.S. trade policy places additional strain on German industry and weakens recovery efforts.
Meanwhile, their competition from China in the global market poses a significant challenge for European businesses. Although China isn’t explicitly mentioned as a direct factor in the decline of international business among German SMEs, its growing economy and industrial capabilities can threaten the competitiveness of European exporters.
Besides these challenges, other barriers mentioned by businesses in Germany include skills shortages, high labor costs, and domestic policy risks.
In essence, the decline in international business among German SMEs is primarily driven by increased political unrest, protectionist trade policies, and domestic economic challenges. While trade competition from China is not specifically cited in the search results, it remains a broader concern for many exporters worldwide.
- The community policy should address the concerns of SMEs regarding geopolitical tensions and their impact on international business, as these tensions have contributed to the decline in SMEs' involvement in foreign trade.
- Financial institutions like KfW should conduct regular analyses of the state of SMEs in terms of employment policy, particularly those related to international business, given the significant decrease in the percentage of SMEs involved in international trade recently.
- In the general-news sector, more coverage on the challenges faced by SMEs in the business industry, such as skills shortages, high labor costs, and domestic policy risks, could help foster a better understanding of the intricacies faced by these entities and possible solutions to their problems.
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