ECB Sees 0.15 Pct Pt Inflation Drop From Chinese Exports Shift to Eurozone in 2026

The European Central Bank (ECB) has indicated that a shift in Chinese exports from the United States to the Eurozone could help temper inflation in the region. The ECB highlighted that if U.S.-China trade negotiations fail and tariffs—such as the proposed 135% by former U.S. President Donald Trump—are imposed, surplus Chinese goods might flow into the European market. This increased supply could reduce inflation by up to 0.15 percentage points in 2026 and potentially more in 2027 [1]. The ECB’s analysis suggests that redirecting Chinese exports could allow the Eurozone to benefit from lower import prices and increased competition, which may ease inflationary pressures without the need for aggressive interest rate cuts [3].

According to the ECB, the Eurozone is particularly well-positioned to absorb this surplus due to existing trade patterns and supply chain adjustments made during previous trade tensions. More than 40% of European firms rely on Chinese imports for retail products such as clothing, electronics, and footwear, while nearly 75% of European imports have at least one Chinese supplier. Additionally, Chinese companies have expanded their presence in Europe through investments in sales and distribution networks, increasing their capacity to supply European markets [1].

The potential inflationary benefits of this trade shift, however, may not manifest immediately. The ECB noted that it could take up to 18 months for consumer prices—particularly for non-energy industrial goods—to reflect the full impact of redirected Chinese exports. While the Eurozone’s inflation is projected to fall to 1.6% in 2026, the ECB warned that initial price adjustments may be delayed, meaning the full effects of increased competition and lower import prices may not be seen for some time [1].

To absorb the surplus of redirected Chinese goods, the ECB estimated that overall prices of Chinese imports to the EU would need to drop by 1.6%. In that scenario, the Eurozone’s imports from China could rise by up to 10%, representing an oversupply equivalent to 1.3% of total European consumption. The ECB also noted that non-energy industrial inflation could fall by as much as 0.5 percentage points in 2026 if the trade shift occurs [1].

The ECB’s blog post, published on July 30, 2025, emphasized that the Eurozone could benefit from this trade realignment, particularly given similarities in the types of goods imported from China by both the U.S. and the EU. The central bank also pointed to China’s own efforts to support exporters by encouraging diversification of trade destinations and the depreciation of the RMB, which has made Chinese goods more attractive to European consumers [1].

Meanwhile, U.S. Treasury Secretary Scott Bessent stated that President Trump would have the final say on U.S.-China trade decisions, including any potential tariff extensions. Bessent suggested that despite the lack of major breakthroughs in recent talks, Trump was unlikely to reject a 90-day truce in tariffs. However, China’s dominant role in the global rare earths market and other strategic sectors remains a complicating factor [1].

Despite the ECB’s analysis, a separate trade deal between the U.S. and EU—announced on July 28—introduced a 15% import tariff on most EU goods. This agreement, while reducing some tariff-related uncertainties, could also diminish the pressure for trade to shift toward Europe from the U.S. [5]. However, the ECB continued to view Chinese trade dynamics as a key factor in the Eurozone’s inflation outlook, indicating that global trade tensions remain central to its inflationary analysis [1].

Overall, the ECB’s blog signaled a non-urgent but strategic consideration of how global trade shifts could influence domestic economic conditions in the Eurozone. While no immediate policy changes were proposed, the central bank’s acknowledgment of this possibility reflects a broader openness to leveraging external trade dynamics as part of its inflation management toolkit.