Europe's trade problem with China is becoming more measurable

China recorded its largest-ever trade surplus with the European Union in the first quarter of 2026. What this headline leaves out is how that surplus was generated. China’s surplus is widening, driven mainly by a surge in exports to the EU: since 2021, Chinese exports to the EU have grown at a compound annual rate of 6%, while its imports from the EU have contracted by 2.5% per year. The EU now accounts for 31% of China’s total goods-trade surplus. The asymmetry of exports growing and imports shrinking points to something more than a temporary redirection of trade flows, begging the question of whether the policy tools currently being discussed in Europe address the real causes.

One recent report helps with an important piece of that question: quantifying trade deflection. Trade deflection is when tariffs on goods from one country cause those goods to be redirected towards third countries. In Europe’s case, trade deflection is more relevant than ever due to recent US tariffs. The empirical findings for the first wave of US tariffs imposed on China are notable: Chinese exports to America of targeted products fell by around 30% within fifteen months, while Chinese exports of these same products to the EU rose by 14%. After the US closed its de minimis loophole in 2025, low-value Chinese parcel exports to the EU rose by around 80%. The size of the impact clearly calls for action, and the report calls for a European Commission-led, China-specific, dedicated surveillance mechanism to track simultaneous drops in US imports and rises in EU imports of the same goods. Such a mechanism is surely welcome, but action is needed if the consequences of trade deflection are to be tackled.

Nevertheless, trade deflection driven by US tariff policy is only one of several factors contributing to the widening deficit; the others are more structural in nature. They predate the current tariff cycle and are likely to persist regardless of how US-China trade relations evolve.

China’s industrial production has been growing faster than both its GDP and its domestic demand. This reflects a broader pattern of supply-side expansion that continues to seek global outlets, regardless of US policy. Even a significant rollback of US tariffs would not by itself relieve the structural pressure this creates for European markets.

Third-market competition is another layer that does not appear in bilateral EU-China trade data. Europe and China both compete for export market share in Latin America, Asia and Africa, and the competitive dynamic between them in these markets has been shifting for well over a decade. As Chinese manufacturers have moved into more sophisticated product categories – advanced machinery and green technology, areas where European exporters have traditionally been strong – the question of third-country market displacement has grown more relevant, even if it is harder to measure than direct bilateral flows.

Perhaps the most analytically complex dimension concerns price competitiveness. A significant share of the price pressure European manufacturers face from Chinese competitors appears to reflect actual price compression rather than exchange rate movements. It matters a great deal for policy design whether that compression stems from genuine productivity gains, state support that decouples price from underlying cost or the scale advantages of a large and protected home market. Each source requires a different corresponding policy instrument – industrial investment, trade defence, or market access reform – and they cannot be easily substituted for one another.

Meanwhile, subdued Chinese domestic demand limits the scope for offsetting the deficit with an increase in Chinese consumption of European goods. The EU’s overall trade surplus – still around 2% of GDP – suggests this is not a story of the EU’s broad competitive decline, but rather one of changing patterns of specialisation that warrant careful monitoring at the sectoral level.

Deflection from overcapacity, third-market effects and the sources of price divergence all require different policy responses, so distinguishing between them is crucial. All in all, decomposing China’s trade surplus with the EU is clearly needed to better understand the extent of the challenge and how to tackle it.

ZhōngHuá Mundus is a newsletter by Bruegel, bringing you monthly analysis of China in the world, as seen from Europe.

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