The European Union is experiencing a severe and accelerating ‘China shock’. We predict the EU’s trade deficit with China to reach €400 billion in 2025 – more than double the level before the pandemic – despite the euro area as a whole continuing to run a trade surplus of over €400 billion with the rest of the world. In this context, the China imbalance stands out.
The imbalance traces back to pandemic-driven global supply-chain disruptions and the energy crisis price shock following Russia’s invasion of Ukraine, both of which caused producer prices to rise sharply in Europe. During the same period, China entered a prolonged deflationary phase, stemming from overinvestment in manufacturing, creating the overcapacity we see today. This divergence in costs for European versus Chinese producers has given Chinese exporters a decisive price advantage in many sectors, including machinery, chemicals, electric vehicles and green technologies.
The textbook adjustment mechanism that should have mitigated this gap – appreciation of the renminbi against the euro in response to increased European imports of Chinese goods – has not occurred. Instead, the renminbi has remained remarkably stable, even losing some ground against the euro. The result is precisely what economic theory would predict: a loss of European market share in the Chinese market, third-country markets and increasingly its own market. This is particularly surprising given that Europe maintains a trade surplus with the world, which should indicate healthy global competitiveness for Europe.
EU trade-defence instruments, such as anti-dumping and anti-subsidy measures, are useful but do not have the scope for the magnitude of the problem. These tools are slow to be activated, resource-intensive, firm- and product-specific and blind to economy-wide distortions that affect thousands of goods simultaneously. Waiting for case-by-case investigations while Chinese exports flood the market is not a viable strategy when the damage to European industry is becoming structural.
Domestically sourced input requirements are sometimes proposed as a countermeasure, but these would further raise production costs for European manufacturers and potentially disrupt international supply chains, ultimately making the EU less competitive internationally.