China-US trade tensions could bring more Chinese exports and lower prices to Europe

30 July 2025

By Lukas Boeckelmann, Lorenz Emter, Vanessa Gunnella, Karin Klieber and Tajda Spital

The United States has imposed tariffs on many trading partners, with China being hit particularly hard. Hamstrung by higher US tariffs, Chinese exporters may redirect some of their goods from the United States to the euro area. Looking back to the 2018 US-China trade war, this redirection could be significant. Back then, US tariffs on Chinese goods caused a sharp decline in China’s exports to the United States and the euro area contributed to absorbing the trade displaced by US tariffs (Gunnella et al., 2025). Between 2018 and 2019, euro area imports from China increased by around 2-3%.

Now, history could repeat. In 2025, the United States has imposed a new round of tariffs on Chinese imports. At the height of the latest escalation in April, a series of tit-for-tat measures saw the effective tariff rate on Chinese goods rise to around 135%, although recent efforts to de-escalate have brought tariffs down somewhat. However, they remain significantly higher and broader in scope than those in 2018.

In light of these developments, this blog post explores the potential implications for euro area imports and inflation dynamics. We build on the June 2025 Eurosystem staff macroeconomic projections for the euro area, focusing on how the redirection of Chinese exports may exert downward price pressures in the euro area.^[1] We find that additional Chinese exports could bring down headline HICP inflation by around 0.15 percentage points in 2026, with smaller effects persisting into 2027.

The 2025 tariffs: a new wave of trade shifts?

To assess the impact of the 2025 tariffs, we considered a severe scenario whereby US tariffs on Chinese goods escalate to an effective rate of around 135%, as posited in the June 2025 projections. We used two methods to judge the potential scale of redirected Chinese exports to the euro area. The first method uses estimates of trade elasticities from the literature (Boehm et al., 2023) to quantify an upper bound for Chinese trade redirection in the short run. This means we used estimates of the sensitivity of trade flows to changes in prices to calculate the maximum extent to which trade might shift in reaction to higher US tariffs. Those estimates suggest that the euro area could see imports from China rise by up to 10% in 2026 (Chart 1, left panel).

A second estimate uses general equilibrium models (as in Baqaee and Farhi, 2024), which feature production interlinkages. These models seek to explain how supply and demand respond to tariffs in a market in which different industries are connected – where the output of one sector becomes the input for another. This accounts for the broader economic adjustments that higher tariffs are likely to trigger. In particular, it looks at the dampening of global demand and the consequent reduction of overall trade. As such, it better captures the general equilibrium effects that are likely to materialise over the medium to long term. Estimates suggest a somewhat more moderate increase in euro area imports from China of 7-9% (Chart 1, right panel).

Chart 1

Estimated increase in euro area imports from China

(x-axis: percentage points; y-axis: percentages)

Why the euro area could be more affected this time

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 Chinese exports to the United States and to the euro area is similar, making the euro area a natural alternative.

Second, established supply chain links, which have expanded since the last China-US trade war, and ongoing industrial upgrades in China (Al-Haschimi et al., 2024) facilitate the redirection of trade flows. Many euro area firms already rely on Chinese imports, making it easier to absorb redirected goods. For example, over two-fifths of companies within the euro area currently import products from China, with a particularly high share of imports for retailers, for example in the clothing and footwear and electrical appliance industries, coming from China. More broadly, around 75% of all products imported by large euro area countries already have at least one Chinese supplier (Chart 2, left panel).

Third, Chinese businesses have laid the groundwork to facilitate faster market entry. For example, 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.

And fifth, 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 (Chart 2, right panel).

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.

Implications for euro area inflation

So how could all of this affect euro area inflation? The redirection of Chinese exports has the potential to exert downward pressure on euro area inflation through lower import prices. As mentioned above, our upper bound estimate suggests a 10% increase in Chinese imports. Assuming that domestic demand remains the same in the short term, this increase in imports would result in an excess supply of goods equivalent to 1.3% of overall goods consumption. For consumers to absorb this additional volume of imported goods – either by replacing other imports or substituting domestic production – the prices of Chinese imports would need to decrease. Specifically, our calculations indicate that lower Chinese import prices would reduce overall import prices by 1.6%.^[2]

But it will take some time for consumer prices to drop. While stronger supply from China may trigger a swift decline in import prices, consumer prices for non-energy industrial goods (NEIG) tend to respond more gradually, with the strongest impact materialising one to one-and-a-half years after the initial shock (Chart 3, left panel). This reflects the sequential nature of price-setting along the supply chain: import prices tend to fall first as more goods become available at lower cost, followed by a slower and more gradual adjustment in consumer prices.

The magnitude of the effect depends on several factors, including the strength of domestic demand, the scale of the shock itself and the potential policy responses that may offset the disinflationary impact. China accounts for around 6% of euro area consumer goods imports, but it also plays a central role in global value chains. This means that supply shocks can lead to widespread price adjustments, with some sectors being more affected than others depending on their share of Chinese inputs. For instance, more than 10% of the inputs in the clothing and footwear and electrical appliance industries are sourced from China, meaning that these industries, and others like them, are likely to see a stronger response. Finally, the increasing prevalence of direct-to-consumer e-commerce platforms amplifies the transmission of price changes to consumer prices.

Based on these pass-through estimates and the potential scale of Chinese redirection to the euro area discussed above, NEIG inflation may fall by as much as 0.5 percentage points in 2026. Given the weight of goods in the consumption basket, this would lead to a negative peak impact on headline HICP inflation of around 0.15 percentage points, with smaller effects persisting into 2027 (Chart 3, right panel).

Chart 3

Response of import prices and consumer goods inflation to a positive Chinese supply shock and potential near-term downward price pressures from redirected Chinese exports

(left-hand scale: percentage points; right-hand scale: percentages)

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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