China's trade diversion from US may lower euro zone inflation
FRANKFURT : A major flow of Chinese trade away from the US would likely lower euro zone inflation next year, when price growth is already set to undershoot the 2% target, a European Central Bank (ECB) blog post said today.
China is negotiating a trade deal with the US and pressure has increased on Beijing to accept higher tariffs after Washington cut deals with the EU, Japan and Britain.
'If those talks failed and US tariffs on Chinese goods rose to an effective rate of around 135%, as threatened by the Trump administration, then China would likely sell much of its surplus product in the euro zone, pushing up supply and lowering inflation by as much as 0.15% next year and to a lesser extent in 2027,' the ECB blog said.
While economists do not see this scenario as the most likely outcome, such a price drag would be problematic since euro zone inflation is already expected to fall to 1.6% next year and this trade diversion would raise the spectre of more persistent undershooting, potentially forcing the ECB to cut rates.
'It will take some time for consumer prices to drop,' the blog argued.
'Consumer prices for non-energy industrial goods tend to respond with the strongest impact materialising one to one-and-a-half years after the initial shock,' the blog said.
'Under this 'severe' scenario, the euro zone's imports from China could rise by as much as 10%, resulting in an excess supply of goods equivalent to 1.3% of overall goods consumption,' the blog, which is not necessarily the ECB's opinion, said.
'For the market to absorb such an excess supply, overall import prices would need to drop by 1.6% and non-energy industrial goods inflation may fall by as much as 0.5 percentage points in 2026,' it said.
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