ECB Sees US Tariffs on China Driving Down Euro Area Inflation, Blog Suggests

30 July 2025

By David Barwick – FRANKFURT (Econostream) – The imposition of tariffs on Chinese imports entering the US could exert mild disinflationary pressure on the euro area by 2026, according to a new European Central Bank blog post published Wednesday analysing trade diversion dynamics and inflation pass-through.

In particular, the authors estimate that, depending on the effective rate implied by US tariffs on China, in the more severe scenario, an increase in Chinese exports to Europe of approximately 10% could lower euro area overall inflation by about 0.15pp in 2026, with a smaller impact the following year.

‘Hamstrung by higher US tariffs, Chinese exporters may redirect some of their goods from the United States to the euro area’, said the authors. ‘Looking back to the 2018 US-China trade war, this redirection could be significant.’

Various reasons support the idea that the redirection will be greater than in 2018, according to the post, which cited the euro area economy’s character as a ‘natural alternative’ to the US, the expansion since 2018 of supply chain links, the enhanced Chinese ability to enter markets and the cheaper renminbi.

Such a redirection could shave up to 0.5pp off non-energy industrial goods inflation, the authors said.

‘The magnitude of the effect depends on several factors, including the strength of domestic demand, the scale of the shock itself and the potential policy responses that may offset the disinflationary impact’, the authors noted.