Chinese Trade Shift to EU From U.S. Would Cut Euro Zone Inflation: ECB

A major shift in Chinese trade away from the United States would likely lower euro zone inflation next year, at a time when price growth is already expected to fall below the European Central Bank’s 2% target, according to an ECB blog post published and reported by Balazs Koranyi for Reuters.

Eurozone imports from China could rise by up to 10%, creating an excess supply of goods equivalent to 1.3% of overall goods consumption.

China is currently negotiating a trade deal with the U.S., while facing pressure from Washington to accept higher tariffs following recent U.S. trade agreements with the European Union, Japan, and Britain.

If those negotiations fail and U.S. tariffs on Chinese goods rise to an effective rate of around 135%—as threatened by the Trump administration—China would likely redirect much of its surplus to the euro zone.

This would increase supply and lower inflation by as much as 0.15% in 2026, and to a lesser extent in 2027, the ECB blog said.

In this "severe" scenario, Eurozone imports from China could rise by up to 10%, creating an excess supply of goods equivalent to 1.3% of overall goods consumption.

While the blog reflects the views of ECB staff and not necessarily the central bank itself, it warned that this price drag could become problematic, as euro zone inflation is already forecast to fall to 1.6% next year.

Such a scenario could raise the risk of persistent inflation undershooting and potentially force the ECB to cut interest rates. “It will take some time for consumer prices to drop,” the blog noted.

Consumer prices for non-energy industrial goods typically respond with a lag of one to one-and-a-half years after the initial shock.

To absorb the excess supply, overall import prices would need to decline by 1.6%, and inflation for non-energy industrial goods could fall by as much as 0.5 percentage points in 2026.