The implications of US-China trade tensions for the euro area – lessons from the tariffs imposed by the first Trump Administration

Prepared by Vanessa Gunnella, Giovanni Stamato and Alicja Kobayashi

Published as part of the ECB Economic Bulletin, Issue 3/2025.

This box examines how the tariffs that the United States introduced on Chinese products in 2018 influenced euro area trade patterns. It looks at whether euro area exporters were able to gain market share in the United States as their competitiveness increased vis-à-vis their Chinese counterparts. It also assesses how Chinese export patterns changed, highlighting how Chinese exports were diverted from the United States to alternative markets, including the euro area. Examining the outcomes of these past measures can give an indication of the potential channels through which current US tariffs on Chinese goods could affect the euro area.

Trade tensions in 2018 led to a significant decline in Chinese exports to the United States, which prompted Chinese exporters to seek other markets. The US Administration implemented numerous tariff and non-tariff measures targeting Chinese goods, significantly increasing trade restrictions from 2018 onwards. As a result of the measures, the effective tariff rate on Chinese imports to the United States increased by almost 18 percentage points. This escalation caused a marked decrease in aggregate Chinese exports to the United States, with China’s share of the US import market declining substantially from its level in 2017. Although the COVID-19 pandemic makes it difficult to disentangle the effects of the increased trade restrictions, it appears that Chinese exporters sought alternative markets when the US tariffs hit. This included shifting trade towards the euro area, with China’s market share of euro area imports growing more rapidly in the years after the tariffs were imposed (Chart A).

A detailed analysis of product-level trade data reveals that the US tariffs had a significant impact on Chinese exports, with products possibly being diverted to the euro area. By analysing granular six-digit product-level trade data, we can identify Chinese goods that were affected by US tariffs and assess the resulting trade diversion.^[1] Our findings indicate that exports of the affected products to the United States decreased significantly, contributing to a substantial decline in China’s market share in the United States. Chart B, panel a, shows how these tariff-affected products – which include clothing, IT equipment, auto parts and furniture – primarily drove down China’s share of US aggregate imports. Concurrently, these products found alternative markets, such as neighbouring countries in Asia and, notably, the euro area (Chart B, panel b).^[2] Indeed, it appears that, from 2019, goods subject to US tariffs were redirected to the euro area, significantly boosting China’s market share. While COVID-19-related products like medical equipment and electronics – such as computers and related IT equipment – may have reinforced this trend during the pandemic, the structural change in trade flows persisted afterwards.

The euro area, however, did not increase its market share in the United States. With tariffs applied to Chinese imports to the United States, euro area goods would have been more price competitive in US markets. Yet, compared with 2017, the euro area did not substantially increase its share of the US import market. Developments in market shares do not seem to be related to the US tariffs on China (Chart B, panel c). Other countries with export baskets that are more similar to China’s may have been able to increase their market share in the United States as supply chains were reconfigured to reduce direct US sourcing from China.^[3]

Empirical results from a gravity model confirm that some of China’s exports to the United States were redirected to the euro area. A structural gravity model on bilateral sector-level trade flows in manufacturing from 2012 to 2023 is used to assess the trade diversion effects.^[4] The results (Chart C) confirm a significant decrease in Chinese exports to the United States. This was related to the trade measures, as these roughly doubled in number over the time interval considered, dampening US imports from China by around 10%. Chinese exports were largely redirected towards South and South-East Asian countries, the euro area and other global markets. The trade restrictions imposed by the United States on Chinese goods led to a statistically significant increase of 2%-3% in euro area imports from China.

As global trade dynamics shifted, China strategically redirected its exports, with the euro area emerging as a key alternative market owing to the structural similarities between Chinese exports to the United States and those to the euro area. Similarity metrics (Chart D) illustrate that, of China’s trading partners, the euro area was considered to be among the most similar to the United States. This made redirecting trade towards the euro area a natural channel for Chinese exporters attempting to find alternative markets. In parallel, China redirected trade even more strongly to other countries, particularly in Asia. However, this appears to be for different reasons, as the similarities between Chinese exports and the imports of certain South and South-East Asian countries were much less pronounced. Rather, the redirection of Chinese exports to these countries may have reflected efforts to reconfigure Chinese supply chains towards neighbouring countries.^[5]

Empirical findings confirm that the euro area did not increase its exports to the United States. The gravity model is used to explore how US imports were reconfigured as restrictions on Chinese exports were imposed. Results from the gravity regression show that, as Chinese exports to the United States decreased, South and South-East Asian countries increased their exports to the United States as global supply chains shifted production to China’s neighbours, confirming the findings in the previous paragraph. The gravity model shows that euro area exports to the United States did not increase significantly (Chart E). This result again reflects export similarities. In 2018 the composition of exports from South and South-East Asian countries to the United States was very similar to that of Chinese exports to the United States. Interestingly, as other South and South-East Asian countries replaced China in the United States, their export baskets became increasingly similar, confirming that these countries progressively substituted China as US trading partners. Conversely, among the United States’ major trading partners, the composition of the euro area’s export basket was the least similar to China’s.

Trade barriers are being raised further, which has consequences for the euro area. A renewed period of trade tensions between the United States and China could have negative effects for euro area net trade and growth. However, any trade diversion effects will greatly depend on the configuration of US bilateral trade barriers and the responses to them. In addition, it is crucial to consider that trade structures have evolved over the past seven years, which could result in effects that differ from those observed in previous periods.