The European Central Bank (ECB) released a weighty research report on Tuesday (November 11th) pointing out that the main reason for the influx of Chinese goods into the European market at ultra-low prices is the ongoing weak domestic demand and overcapacity in the manufacturing industry, rather than the commonly believed trade diversion caused by U.S. tariffs.
The European Union is facing tremendous pressure to take action against the surge in imports from China. In response, the ECB argued in a report titled “Continuous Expansion of China’s Trade Surplus: Why Exports Are Booming while Imports Stagnate” that the growth of China’s exports to the EU predates the recent trade tensions between the U.S. and China, reflecting deeper structural issues.
The ECB pointed out that the current trend of robust Chinese exports and stagnant imports can be traced back to 2021, illustrating a clear decoupling of the “export-import” dynamics.
The reasons for the decline in imports mainly come from three aspects:
Real Estate Market Downturn:
The downturn in the Chinese real estate market since 2021 has suppressed demand for import-intensive sectors (such as real estate investment) and eroded household balance sheets, limiting consumer willingness.
“Made in China 2025”:
The Chinese government’s structural policies like “Made in China 2025” aim to control global key industry chains. While these policies have reduced China’s reliance on foreign intermediate products and technology inputs in specific segments, the resulting massive overcapacity is a deep structural factor that propels the flood of inexpensive goods worldwide and continues to weaken import demand.
Protectionism Impact:
The report pointed out that non-tariff barriers by China to foreign goods, such as long-term discrimination in foreign investment and technology standards, have a constraining effect on imports. It has been observed that imports from developed economies such as the EU and the U.S. have significantly decreased. Furthermore, China’s recent export controls on key raw materials like rare earths, though of a different nature, directly threaten the stability of the European industrial chain.
In stark contrast to the decline in imports, Chinese exports have remained strong since the pandemic, driven by the “disposal” of domestic surplus capacity:
Imbalanced State-Led Investment:
In an environment where consumer demand is suppressed, state-led manufacturing investment in China continues to expand on a large scale. This policy error of supply-side bias has resulted in severe overcapacity.
Price Wars:
The report pointed out that to digest excess capacity, companies have been forced into price wars, leading to a continuous decline in export prices since mid-2023, a key factor in enhancing the competitiveness of Chinese goods.
Surplus Disposal:
The European Central Bank cited this theory to explain the current trend. When domestic demand declines and excess capacity generated by fixed investments cannot be absorbed by the domestic market, companies will shift sales to foreign markets, even at the expense of profit margins or short-term losses. The report observed that industries with poor domestic sales performance (such as automobiles and steel) saw the greatest increase in exports.
The European Central Bank concluded that the weak domestic demand is a “missing link” in explaining the strong Chinese exports to Europe, with its impact far outweighing trade diversion.
The report stated that the monthly average value of domestic sales in China is four times that of total exports, and over 28 times that of exports to the U.S. This means that even if only a small portion of goods that cannot be absorbed domestically are redirected abroad, it is enough to create a significant impact on the global and European markets, indicating that European companies will face long-term and increasing competitive pressures.
Despite facing structural long-term challenges, EU leaders have unequivocally stated that action will be taken. The European Commission has initiated an investigation into anti-subsidy measures for Chinese electric vehicles this year and has already imposed temporary tariffs.
Core decision-makers in the EU, such as Joachim Nagel, President of the German Central Bank, have openly urged for a more aggressive approach in playing the European card, leveraging its position as the world’s largest single market to actively protect domestic industries and avoid becoming a dumping ground for Chinese overcapacity.
（This article referenced Reuters reporting）