US tariffs, Chinese competition weigh on EU trade

  • The European Union’s trade surplus continued to shrink in December, reflecting mounting pressure from U.S. tariffs and intensifying competition from China. Data showed the surplus narrowed to €12.9Bn from €14.2Bn a year earlier, as declining exports of machinery, vehicles, and chemicals more than offset savings from lower energy imports. The figures highlight growing structural strains on the bloc’s export-led economic model.
  • S. tariffs have taken a clear toll on transatlantic trade. Exports to the United States, the EU’s largest export partner, fell 12.6% year-on-year, reducing the trade surplus with the U.S. by roughly one-third to €9.3Bn. While monthly figures showed some volatility, the broader trend indicates weaker sales as higher prices prompt U.S. buyers to reduce purchases or shift sourcing elsewhere.
  • At the same time, competition from China is intensifying. The EU’s trade deficit with China widened to €26.8Bn from €24.5Bn, rising roughly 15% over the full year. Chinese exports of increasingly sophisticated technology have deepened competitive pressures on European manufacturers, crowding out domestic production in key sectors.
  • Although there was a modest rebound in the monthly surplus, supported by machinery and vehicle exports, economists caution that regaining lost U.S. market share could take years. Given that net exports have been a primary driver of eurozone growth, the erosion of external demand raises concerns that the region may face prolonged expansion barely above 1% annually.
  • Despite external headwinds, the domestic economy has shown resilience. AI-related investment and steady consumer demand are helping cushion the trade shock. The euro zone economy grew 0.3% in the fourth quarter of 2025, in line with preliminary estimates, implying annualised growth of roughly 1.25%.
  • Labour market conditions remain supportive, with employment rising 0.2% quarter-on-quarter, reinforcing consumption through a still-tight job market. This internal strength is partially offset by weaker external demand.
  • Fiscal expansion in Germany is also providing a buffer. Government plans to increase investment in defence and infrastructure are beginning to materialise, with defence-related orders already appearing in industrial data. While the spending rollout is gradual, it is expected to gather pace through the second quarter and reach full momentum by year-end, supporting overall growth.
  • Policymakers are also viewing external challenges as a potential catalyst for long-delayed structural reforms. The European Central Bank estimates that removing internal trade barriers within the bloc could help offset losses stemming from U.S. tariffs, suggesting that policy adjustments at home may become increasingly important as global trade dynamics shift.

(Source: Reuters)