From Tariffs to Trade Flows: Diversion Effects and China’s Exports to the EU

Why It Matters

The findings temper fears of a sweeping Chinese flood into European markets, highlighting instead the broader competitive challenge posed by China’s expanding manufacturing capacity.

Key Takeaways

• EU export growth up ~10% YoY in 2025
• Only 5% of products show significant diversion
• High‑potential goods: bicycles, washing machines, tyres
• Lithium‑ion batteries, hybrid EVs drive 32% of growth
• Overall macro impact of diversion remains modest

Pulse Analysis

Trade diversion theory predicts that higher U.S. tariffs would push Chinese exporters toward alternative markets like the EU, especially for products with similar demand profiles. Empirical evidence from monthly customs data, however, tells a more nuanced story. While Chinese shipments to Europe rose sharply in 2025, the timing predates the tariff implementation and the growth rate has plateaued. A rigorous difference‑in‑differences framework reveals that only a narrow tail of products—about five percent of the sample—showed measurable quantity increases and modest price reductions, suggesting limited reallocation of U.S.‑bound sales.

The dominant driver behind the EU surge is China’s underlying export momentum, not tariff‑induced diversion. Advances in manufacturing technology, capacity expansion, and a depreciated real effective exchange rate have boosted sectors such as chemicals, pharmaceuticals, electronics, and especially high‑value goods like lithium‑ion batteries and hybrid electric vehicles. These two categories alone account for roughly a third of the year‑on‑year export growth to Europe, underscoring a strategic shift toward high‑tech, intermediate products that command global demand. This pattern aligns with broader observations that Chinese exporters are increasingly targeting emerging markets, where competition is less intense, while maintaining strong growth in advanced economies.

For European policymakers and industry leaders, the limited diversion effect means that concerns about an imminent flood of cheap Chinese consumer goods may be overstated. The real challenge lies in confronting China’s rising competitiveness across a wide array of sophisticated products. Strategies focusing on innovation, supply‑chain resilience, and targeted trade defenses will be more effective than reactive measures aimed solely at tariff‑driven spillovers. Understanding the distinction between short‑term diversion and long‑term structural export growth is essential for shaping balanced trade policies that protect European interests without stifling beneficial market dynamics.