ECB proposes diverting Chinese U.S. imports to ease inflation in Europe

The European Central Bank (ECB) believes that redirecting Chinese exports from the U.S. to Europe could greatly slow down inflation in the bloc. The ECB report came as Washington tightened the noose on China by making trade deals with Britain, Japan, and the EU to force China into accepting higher tariffs. 

The ECB pointed out that China’s surplus goods could be redirected to the Eurozone market if the U.S.-China trade talks failed, and Trump’s 135% tariffs were imposed.

Diverting Chinese exports to the bloc could increase supply, lowering inflation by up to 0.15% in 2026 and probably in 2027. The Eurozone’s inflation is expected to drop to 1.6% in 2026, but redirecting Chinese products to the bloc could also force the ECB to cut interest rates.  

However, the ECB also argued that consumer prices could take some time to fall after the initial shock. It pointed out that consumer prices for non-energy industrial products could take a year and a half to come down.

The Eurozone’s imports from China could increase by as much as 10% under this “severe” situation, resulting in a surplus of goods equivalent to 1.3% of the total consumption. However, the overall prices of Chinese imports to the EU would need to drop by 1.6% for the EU market to absorb the excesses. The inflation on non-energy industrial products could also drop by up to 0.5 percentage points in 2026.

Why China’s trade diversion affects the Eurozone

The ECB claimed several factors explained why the Eurozone could experience a larger diversion of Chinese exports compared to the 2018 scenario. First, the European Central Bank observed that the U.S. and the EU received similar imports from China, making the EU an obvious alternative option.

Secondly, the ongoing Chinese industrial upgrades and expanded supply chains established during the previous U.S.-China trade war facilitated this redirection.

Many firms in the Eurozone already relied on Chinese imports, making absorbing the redirected surplus of goods easier. Over two-fifths of European firms import Chinese retail products like shoes, electricals, and clothes. There was at least one Chinese supplier for nearly 75% of all goods imported by European countries. 

“Chinese businesses have laid the groundwork to facilitate faster market entry…They have almost tripled their presence with investments in European sales and distribution networks since 2017.”

–The ECB

Chinese authorities also pledged to help affected domestic exporters divert their goods to other markets outside the United States. Additionally, the depreciating RMB made Chinese goods much cheaper, thus more attractive to the European market. 

Bessent says Trump has the final say

U.S. Treasury Secretary Scott Bessent said on July 29 that President Trump had the final say regarding the trade deals with China. His remarks came as U.S. and Chinese officials sought to extend their 90-day tariff truce. However, Bessent noted that Trump was unlikely to reject the extension despite having no breakthroughs in recent trade discussions. The trade secretary pointed out that recent meetings had been more constructive, although the final sign-off was yet to be given.

Trump also recently disclosed that he was pleased with the progress made in trade talks. However, China’s grip on the global flow of rare earth metals made things more complicated. Jamieson Greer, a U.S. Trade Representative, also added to the conversation, acknowledging that Trump had the final say. He claimed that Trump would decide on all outcomes regardless of the positive reports made by U.S. trade negotiators.

However, Li Chenggang, China’s leading trade negotiator, said both sides needed to recognize the importance of a sound and stable trade relationship. He pointed out that teams from both countries would continue to communicate and exchange views to promote the healthy development of bilateral trade relations. Bessent believes Trump and China’s President Xi Jinping could meet before the year ends. 

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