As trade tensions between China and the United States reach new heights, Chinese exports may be redirected to Europe, lowering import prices and bringing down inflation. In a severe scenario, this additional supply could bring down euro area inflation by as much as 0.15 percentage points, said the European Central Bank in a blog post on Wednesday.
China is currently under growing pressure in its trade negotiations with the U.S., especially after Washington finalized tariff agreements with the EU, Japan and the UK. If talks fail and the U.S. imposes tariffs on Chinese goods at the threatened effective rate of 135 percent, China may redirect much of its surplus to Europe.
This shift would significantly increase supply in European markets, potentially lowering inflation by as much as 0.15 percent in 2026 and, to a lesser extent, in 2027, said the ECB.
Why Europe?
Looking back to the 2018 U.S.-China trade war, U.S. tariffs on Chinese goods caused a sharp decline in China’s exports to the United States and Europe contributed to absorbing the trade displaced. Between 2018 and 2019, euro area imports from China increased by around 2-3 percent.
Several factors suggest that the euro area could experience a larger redirection of Chinese exports than it did back in 2018. First, the composition of China’s exports to the United States and to Europe is similar, making the euro area a natural alternative. Second, established supply chain links, which have expanded since the last China-U.S. trade war, and ongoing industrial upgrades in China, facilitate the redirection of trade flows.
Third, Chinese businesses have laid the groundwork to facilitate faster market entry. For instance, they have almost tripled their presence with investments in European sales and distribution networks since 2017. Fourth, the depreciation of the Chinese renminbi makes Chinese goods cheaper and more attractive for European importers.
While the profit margins of Chinese exporters have narrowed since the onset of the first trade conflict in 2018, many firms, especially those in final goods production, still have room to absorb the reduced profit margins. In addition, Chinese authorities have pledged targeted support to help affected exporters redirect sales to domestic or third markets, which could allow for further price cuts.
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How does this redirection impact Europe’s inflation?
If China’s exports are redirected to Europe due to higher U.S. tariffs, it could put downward pressure on euro area inflation by lowering import prices. ECB estimates suggest that a 10 percent rise in Chinese imports—assuming domestic demand stays unchanged—would create an oversupply equal to 1.3 percent of total goods consumption. To absorb this surplus, Chinese goods would likely need to become cheaper, with estimates indicating this could lower overall import prices by 1.6 percent.
However, the effect on consumer prices would take time to unfold. While import prices might decline quickly, prices for non-energy industrial goods (NEIG) typically adjust more slowly, with the full impact appearing within 12 to 18 months. The extent of the effect depends on factors like domestic demand strength, the size of the shock and potential policy responses.
China supplies around 6 percent of Europe’s consumer goods imports and plays a key role in global supply chains, particularly in sectors like clothing, footwear and electrical appliances, industries that could feel a more significant pricing shift. The growing influence of direct-to-consumer e-commerce could also accelerate how quickly price changes reach consumers.
Ultimately, if China’s exports to Europe surge as projected, NEIG inflation could drop by up to 0.5 percentage points in 2026. This would translate into a peak reduction of about 0.15 percentage points in headline inflation, with lingering but smaller effects continuing into 2027.
