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An escalation in trade tensions between Washington and Beijing could drag down inflation in the Eurozone if cheap Chinese goods are diverted from the US to the currency area, European Central Bank economists have warned.
A major rerouting of Chinese goods to Europe could push inflation in the euro area further below the central bank’s target of 2 per cent next year, a team of ECB economists noted in a blog post on Wednesday.
“The euro area could see imports from China rise by up to 10 per cent in 2026,” they wrote, adding that this was equivalent to about 1.3 per cent of overall consumption of goods in the Eurozone.
While the economists did not analyse the implications of such a scenario for monetary policy, undershooting inflation would strengthen the case for further cuts in the ECB’s benchmark interest rate.
Frankfurt rate-setters kept their key rate unchanged at 2 per cent last week, in their final meeting before the summer break.
In their most recent forecast for consumer prices, published in June, ECB economists predicted that inflation would average 1.6 per cent in 2026, due to a stronger euro and falling energy prices.
If the US were to reimpose punitive import duties exceeding 100 per cent on Chinese products, and goods were redirected to Europe, annual inflation in the Eurozone could fall by another 0.15 percentage points in 2026, “with smaller effects persisting into 2027”, the ECB economists wrote.
This year, US President Donald Trump increased tariffs on imports from China to 145 per cent, prompting Beijing to impose a retaliatory rate of 125 per cent.
In May, the two countries agreed a 90-day pause that included reducing so-called reciprocal tariffs to allow time to negotiate a more comprehensive trade deal. During two days of talks in Stockholm this week, the countries discussed an extension to the ceasefire, but this would require Trump’s approval.
