ECB Warns China-U.S. Trade Rift Could Lower Euro Zone Inflation Below Target

A European Central Bank (ECB) blog post has warned that if China diverts its exports away from the United States due to heightened U.S. tariffs, it could trigger a noticeable drop in inflation across the euro zone. This shift in trade patterns would result in a surplus of Chinese goods entering European markets, increasing supply and pushing down prices at a time when inflation is already expected to fall below the ECB’s 2% target in 2026.

The blog post comes amid ongoing trade negotiations between China and the U.S., with Washington pushing for higher tariffs following recent agreements with allies such as the EU, Japan, and the UK. If talks fail, and tariffs rise to an effective 135%—as previously threatened by the Trump administration—China may be forced to reroute its surplus goods toward Europe, leading to a deflationary spillover effect.

The ECB blog projects that such a diversion of trade could reduce euro zone inflation by up to 0.15% in 2026, exacerbating an already subdued price environment, with inflation forecast at just 1.6% next year. The most significant price impact would be felt in non-energy industrial goods, which typically respond to external shocks with a lag of one to 1.5 years.

In this adverse scenario, the euro zone’s imports from China could rise by as much as 10%, creating a supply excess equivalent to 1.3% of total goods consumption. To absorb this glut, import prices would need to fall by 1.6%, and inflation in non-energy industrial goods could drop by as much as 0.5 percentage points by 2026.

Although economists do not consider this the most likely outcome, the ECB noted that such downward pressure on prices may require additional monetary easing. Persistent inflation undershooting could force the ECB to cut interest rates further. Meanwhile, financial markets have shown some reaction, with U.S. stocks closing lower on Tuesday amid concerns over global economic stability.

Source: Reuters