ECB: Tariff war can deepen Chinese presence in the Eurozone

Brussels – For better or worse, Donald Trump’s US may indeed be the revolutionary element in world trade. The EU-US trade agreement, given the rebalancing toward Washington, may impact the twelve-star economy and growth. However, the latter may benefit from the clash between the US and the People’s Republic of China. Analysts at the European Central Bank are beginning to look at all scenarios, and the result is that “China-US trade tensions could bring more Chinese exports and lower prices to Europe.“

The Trump administration’s policy of “bargaining” with anyone with tariffs has seen relations with the Asian economy escalate, culminating in tariffs on the selling price of Chinese goods in the US rising to 135 percent. Faced with goods that have become more expensive for American companies and retailers, and the resulting drop in US demand for more expensive goods, Chinese exports could be redirected to the Eurozone,
say ECB experts. “In a severe scenario, this additional supply and the accompanying lower import prices could bring down euro area inflation by as much as 0.15 percentage points.”

https://www.eunews.it/en/2024/10/28/ecb-china-influence-eurozone-increases/

The diversion of ‘made in China’ products would be almost immediate. Assuming that trade could shift in reaction to higher US tariffs, estimates produced in Frankfurt suggest that the Eurozone could see imports from China increase by up to 10 percent in 2026. The Eurozone is becoming increasingly Chinese, then, but with the return of a positive impact on inflation. 

In this scenario, the Eurozone would not be impacted at all, because on closer inspection, it is already Chinese. “Over two-fifths of companies within the euro area currently import products from China,” the ECB said. This is especially true for clothing and footwear, as well as household appliances. But more generally, about 75 percent of all products imported by large Eurozone countries already have at least one Chinese supplier. Moreover, “the composition of Chinese exports to the United States and to the euro area is similar, making the euro area a natural alternative” to the US. In addition to these factors, the depreciation of the Chinese renminbi makes Chinese goods cheaper and more attractive for European importers. In short, China is poised to deepen its presence in Europe, with a helping hand from Trump’s America.

 The advantage estimated by the ECB is that the redirection of Chinese exports has ‘the potential’ to put downward pressure on Eurozone inflation through lower import prices. “But it will take some time for consumer prices to drop,” they warn. While increased supply from China may trigger a rapid decline in import prices, consumer prices for non-energy industrial goods tend to respond more gradually.