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China’s widening trade surplus with the European Union is fueling fresh concerns that the 27-nation bloc risks becoming a dumping ground for cheap goods in the volatile tariff confrontation between Washington and Beijing.

As European officials step up vigilance to ward off a flood of Chinese goods facing higher barriers to get into the US, data already indicate that China’s surplus with the EU reached a record $90 billion in the first four months of this year.

For now, most of the rerouting of Chinese goods is passing through Latin America and Southeast Asia. But the quantity of Chinese exports already flowing to Europe since the pandemic raises alarm bells that the influx may accelerate as America’s higher import taxes take root.

“European and non-US markets are going to see an increase of Chinese shipments,” said Maxime Darmet, a senior economist at Allianz Trade. “China will want to keep global market share at a high level so will try to increase share in other markets.”

Europe and China’s fragile relationship will be on display as China’s Vice Premier He Lifeng meets with French officials in Paris on Thursday after he struck a temporary deal with US counterparts in Geneva to lower tariffs. Markets cheered the 90-day truce, though economists say it still leaves high barriers between the world’s two largest economies.

Even with both China and the US reducing their tariffs this week, Washington’s levies on most Chinese goods are still 30 percentage points higher than they were in January.

Protectionist Pivot

Such shifting tides of global trade are testing Europe’s strategy of moving carefully in the fast-evolving race to design new rules that run counter to a central tenet of the EU’s existence — economic openness.

While China responded to President Donald Trump’s aggressive policies with tit-for-tat levies that initially escalated to prohibitive levels, the EU instead prepared targeted measures to deploy only if talks with Washington fail.

Currency movements are compounding the challenge for Europe. Last month, the yuan slumped to the lowest level in more than a decade against the euro, making Chinese exports cheaper and more attractive to European buyers.

Story Continues

More fundamentally, there are also concerns the swelling trade imbalance with China may reflect a stark loss of competitiveness in Europe as Chinese companies rapidly move up value chains and challenge market leaders both at home and abroad.

“In an era of protectionism, you cannot have open trade — it’s just impossible, because it just destroys your industry,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA. “We have to have barriers for products — it doesn’t have to be necessarily electric vehicles, but anything in which the EU thinks it wants to compete and it has a nascent industry” needs protection, she said.

Paris and Beijing are already at odds over the EU’s tariffs on Chinese EVs and Beijing’s levies on spirits that are costing millions for French cognac makers.

Chinese exports to the EU so far this year are the second-highest on record, according to data released Friday in Beijing, only surpassed by 2022’s pandemic driven surge in goods.

EU Monitoring

Maros Sefcovic, the EU trade chief, last week said “we are monitoring possible risks of trade diversion” and that the initial results are expected in mid-May. The topic is expected to come up when EU trade ministers meet on Thursday in Brussels.

Meanwhile, Chinese purchases have steadily dropped as domestic demand slows and domestic companies become more competitive and push European suppliers out of the market.

The EU was already concerned about the rapid increase in imports from China, especially as prices of those products were falling due to deflation at home.

Even before Trump’s return to the White House in January, the trading relationship between Europe and China was undergoing a transformation. That can be seen in the rapid change in German-Chinese trade ties, which flipped from a deficit for China of more than $18 billion in 2020 to a $12 billion surplus last year.

If the trend of the first four months holds for the rest of this year, that surplus with Germany could exceed $25 billion.

The car market has been one of the big drivers of the change, with Chinese exports of electric vehicles and conventional cars rising rapidly, while Europe’s shipments to and sales in China fall quickly.

Although exports of EVs have plateaued after Brussels imposed tariffs on them last year, China’s automakers are selling more cars than ever in the region by throttling up deliveries of hybrids and combustion engine-powered models.

According to Allianz’s Darmet, the situation will push European policymakers to pursue more active measures to support domestic industry and put up tariff and non-tariff barriers.

“We initially thought that would be a stand-off between China and the US, but actually this is going to have implications for the rest of the world and Europe in particular because it will force major countries to be increasingly protectionist,” he said.

--With assistance from Jorge Valero.

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