Here is s brief summary by a news agency: Chinese goods dumping started before tariffs, ECB study finds
Weak domestic demand appears to be the missing link in explaining China’s strong exports to Europe – more so than tariff-related trade diversion, according to an analysis by the European Central Bank (ECB).
Escalating trade tensions between the United States and China might result in a further diversion of Chinese exports to Europe. 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 ECB says.
In the fourth quarter of 2024 the average monthly value of domestic sales was around four times higher than total exports and over 28 times larger than exports to the United States. This suggests the pool of goods that could be redirected to the EU is much broader than trade data alone would suggest. Redirecting even a small share of domestic sales abroad could boost overall exports – including to the EU – more than a sizeable diversion of exports from the United States.
The ECB argues that the start of rising exports and slowing imports dates back to 2021, when China’s crisis in its domestic real estate market - typically an import-sensitive sector - sharply curtailed household demand.
At the same time, state-imposed manufacturing investment created overcapacity in industries that would otherwise face market-driven constraints, which eventually resulted in fierce price wars in Chinese home markets forcing companies to seek relief in exports.
The ECB writes:
This has eroded profit margins and discouraged spending in a deflationary environment with significant labour slack – prompting firms to redirect sales toward foreign markets.This shift reflects the “vent-for-surplus” theory of international trade, which posits that a demand-driven decline in domestic sales generates excess capacity that can be redirected abroad. The mechanism assumes fixed investment in the short term, which is particularly relevant in China, where investment is often guided by central planning. To expand abroad, firms must gain competitiveness in foreign markets. They typically do so by reducing short-run marginal costs and prices, or by accepting narrower profit margins, and in some cases even losses.