CHINA: China's recent surge in low-cost exports to Europe isn't just a byproduct of U.S. tariffs, it's rooted in its own weakening domestic economy, according to a European Central Bank (ECB) study.

The ECB, responding to growing pressure on the European Union to act against Chinese goods flooding the market, said the trend began well before the latest round of U.S.-China trade tensions. Instead, the shift stems largely from China's internal slowdown, particularly a slump in property and construction sectors that began in 2021.

"Escalating trade tensions between the United States and China might result in a further diversion of Chinese exports to Europe," the ECB said in an article in its Economic Bulletin. "However, the rise in China's exports to the EU predates the latest tensions and coincides instead with the onset of weakness in domestic demand in China."

The analysis challenges the widely held belief that U.S. tariffs imposed by the Biden and Trump administrations are solely responsible for the sharp rise in Chinese imports into Europe.

According to the ECB, the slowdown began with a real estate downturn that dragged down China's housing investment — a sector that is both economically critical and heavily reliant on imports.

To compensate for the weakening demand at home, the Chinese government ramped up state-led manufacturing investment to stabilize overall growth. But this triggered overcapacity, forcing many firms into price wars and pushing them to look outward for buyers — especially in Europe.

"To expand abroad, firms must gain competitiveness," the ECB noted. "They typically do so by reducing short-run marginal costs and prices, or by accepting narrower profit margins, and in some cases even losses."

That means European producers are increasingly facing unfair competition from Chinese goods being sold at prices that are either heavily discounted or below production cost — a phenomenon often described as "dumping."

The ECB also warned that China's import behaviour is changing in more structural ways. Weak consumer sentiment, domestic industrial policy, and reduced reliance on foreign goods are reinforcing a persistent trade imbalance.

"A host of factors in China like weak consumer demand, trade policies and a strategic focus on the domestic manufacture of key products keep curbing import demand," the ECB said. "These point to a lasting shift in China's import behaviour, leaving the trade gap on a widening path."

The findings could bolster calls within the EU for anti-dumping measures, particularly as industries such as steel, solar, and electric vehicles raise concerns over the impact of cheap Chinese imports.