The arrival of Donald Trump at the White House has sounded the alarm among all exporting companies that have the United States as clients. The impact of a 60% tariff (the one Trump promised for China) can be devastating for these companies selling their products to the world’s largest economy. Much of the focus has been on China, whose economy relies heavily (although increasingly less) on exports to the United States. There is, however, one region where businesses may suffer a double whammy: US tariffs and an “avalanche” of goods at knockdown prices from China. This region is none other than Europe.
The euro zone could fully suffer from American customs tariffs, which would cause significant damage to a purely exporting continent (especially since Germany implemented its growth model after the 2008 crisis) and which has its best customer in the UNITED STATES. But in addition, the eurozone may have to deal with the indirect effects of the gigantic 60% tariffs that the United States could impose on China. If this scenario comes true, Chinese companies will look for another region to store all their goods (at least until their production capacity adapts to the new normal). The only region in the world similar to the United States (in terms of size and purchasing power) is the Eurozone.
This led to a series of experts have speculated on the possibility that China is already preparing a plan to divert some of the goods that go to the United States today and route them to the euro zone. For this strategy to bear fruit, China knows what it must do: reduce its margins and sell these products at knockdown prices. The impact on the eurozone economy is somewhat uncertain. On the one hand, this will allow Europeans to access low-cost products, but on the other hand, it may also crowd out “made in Europe” products that are sold on the continent. More purchasing power for the consumer and problems for certain businesses. The history of globalization could repeat itself quickly and forcefully in a short time and be concentrated in Europe.
Deutsche Bank analysts explained in a recent report that this should be the big source of concern for the Eurozone, at least when it comes to inflation: “The real source of uncertainty regarding inflation is theThe indirect effects of 50 to 60% customs duties on China and whether and to what extent this will trigger dumping of exports to Europe,” they point out from Deutsche Bank.
“Without EU safeguard measures, this could further impact growth by shifting production to Europe and subtracting up to half a point from the euro zone’s CPI, according to recent analysis by the ECB We see some risk of this disinflation in our updated inflation forecasts, with an impact between.“20 and 25 basis points less in 2026, which means that we are now seeing average inflation of 1.9% in 2025 and 2026,” assure these experts.
“Tariffs of 10% on European goods are probably manageable, but tariffs of 60% on Chinese goods could be very disruptive, either by reducing Chinese demand or triggering a massive devaluation of the yuan, and /or by encouraging Chinese producers to be more competitive. fiercely with European suppliers outside the American market”, explains Gilles Moëc, chief economist at AXA IM. “A policy response from China that results in increased production and supply of goods to economies outside the United States could worsen disinflationary pressures in Europe”consider Dean Turner and Matthew Gilman, analysts at UBS.
This scenario would be the spark that would fuel an already recurring fire, that of Chinese overcapacity and Beijing’s recovery measures for its industries. In recent years, China has reached 30% of global industrial production, which is starting to worry Western economies. More recently, the combination of very low domestic consumption and stimuli from Beijing more focused on large-scale investments than on the household economy (subsidies to “green” industries like electric cars, batteries, etc.) play their role there. panels) has worsened the above-mentioned overcapacity problem. In money: China produces a lot (especially in the new industries mentioned above) and by not selling as much as expected internally, it can export more and at lower prices.
In this dynamic, Europe is particularly exposed. Some analysts suggest that the Old Continent is China’s “green prisoner” to the extent that the Asian giant dominates the supply chain of these new industries and Europe wants to accelerate the transition to a world without polluting emissions. Although the European Union has planned to reduce risks (reduction of risks given the heavy dependence on China and the fierce competition it represents for its local industries) and measures such as the recent customs duties of up to 35% on vehicles Chinese electricians, the truth is that the situation is not at all easy. In fact, any decision in this regard causes divisions between countries. The best example has been Germany reluctant to cut ties with Beijing given China’s importance to its historic automakers.
“The United States, Japan and some emerging economies (such as India) have reduced their share of their imports from China since 2015, while the Eurozone has increased its share, posing additional risk that its economy, relatively open to trade, is disproportionately affected by subsidized exports from China”, confirm the economists of the European Central Bank (ECB) Alistair Dieppe, Ivan Frankovic and Mi Liu in an independent journal. For example, the EU imports around 29% of its wind turbines and components and around 68% of its heat pumps from China.
“China is building massive capacity in green technology and, in particular, European markets will be flooded with subsidized Chinese solar panels, electric vehicles and wind turbines until 2024/2025, as China has brilliantly ensured a strong supply chain, which makes it difficult for European companies to compete,” corroborates the strategist. Andreas Steno Larsenformerly of Nordea.
In an in-depth analysis of European strategy towards China, experts from the American think tank Atlantic Council are not very optimistic: “There is no indication that Beijing will seriously address European concerns. Chinese subsidies will likely continue to distort the European market and Chinese products threaten to flood Europe due to China’s excess capacity, Beijing will both increase diplomatic allusions and positive messages on the “complementarity” of Chinese and European economies. this will take advantage of any opportunity to drive divisions between member states. Meanwhile, Beijing will continue to destructure its own economy, investing in self-sufficiency in manufacturing and advanced technology supply chains, so that existing challenges for European industry will worsen.
From Deutsche Bank they do not exclude that the new situation with China arising from Trump’s tariffs will lead to some action from Brussels: “Our base case scenario foresees that the EU implements safeguard measures (e.g. countervailing customs duties) to counter the threat of dumping and that the favorable aspects of recent stimulus announcements from Beijing mean that there will have some absorption of the tariff shock. However, admit the German bank’s economists, “the risk is that American customs tariffs will be more disinflationary for Europe, indirectly through China.”
In addition, JP Morgan economists believe that the customs tariffs approved by the United States against the EU will affect European growth and, at the same time, have a disinflationary impact, which would reinforce the hypothesis proposed by Deutsche Bank. “In 2018-2019, Eurozone GDP growth slowed sharply following Trump’s tariffs, falling from around 3% per year in 2017 to just 1% per year. We would attribute 0.5 percentage points of this slowdown in growth to the trade conflict, which has been building up. an impact of 1% on the level of GDP over the two years”, we underline at JP Morgan.
“We now expect a similar drag on growth in 2025 due to trade uncertainty. The implications for inflation are less clear… But the disinflation path we expect has become more likely given the weaker growth environment.. This pushes ECB rates lower: we now expect faster cuts and a final rate below 1.75%. At the national level, the burdens should be heavier in Germany and Italy, while France faces an additional burden due to its greater needs for budgetary consolidation,” estimate the experts of the American bank.
