Global trade flows were reshaped in 2025 following the introduction of new US tariffs. US import growth weakened sharply, reflecting a strong decline in imports from China. Meanwhile, Chinese exports have surprised to the upside overall, with broad-based growth across destinations outside the United States. A key question is whether this resilience reflects trade diversion in response to the US tariffs, i.e. the reallocation of exports originally destined for one market towards alternative markets, or other adjustment mechanisms, such as rerouting through intermediary countries. However, it may still be too early to assess the full extent of tariff-induced trade redirection, as anticipatory behaviour, implementation lags at customs, shipping delays and other factors can all affect how long it takes for tariff changes to be reflected in observed trade flows. This box reviews developments in Chinese exports in 2025 and provides initial empirical evidence on whether US tariffs have triggered trade diversion.
Chinese export performance remained strong in 2025, although with marked divergence across destination markets. The value of Chinese exports grew by 5.5% in 2025, compared with 4.6% in 2024. While exports to the United States declined by 20%, export growth to all other regions remained robust, increasing by 8% for the euro area, 13% for countries in the Association of Southeast Asian Nations (ASEAN), 7% for Latin America, and 26% for Africa (Chart A, panel a). In value terms, China’s exports to the United States in 2025 were USD 104 billion lower than in 2024 (Chart A, panel b). This decline was broadly comparable with the increase in exports to ASEAN countries. Exports to the euro area rose more moderately, by about USD 32 billion, while exports to Africa expanded by USD 46 billion, a sizeable increase relative to the region’s GDP.

Chart A
China’s nominal exports

a) Annual growth rate
(annual percentage changes; percentage point contributions)

b) 2025 vis-à-vis 2024
(year-on-year changes in USD billions)

Sources: General Administration of Customs of the People’s Republic of China and ECB staff calculations.
Notes: The charts are based on nominal trade data measured in US dollars. The latest observation is for December 2025.

We assess whether US tariffs have led to trade diversion of Chinese exports by capturing variations in tariff exposure across products in a product-level panel model with fixed effects. We carry out a panel regression relating the year-on-year growth rate of Chinese exports at the product level to product-level tariff variation, while controlling for an extensive set of fixed effects that capture product-specific and destination-specific trends.[1] The model is estimated using data on global imports of Chinese products over the period January-September 2025.[2]
Although the US tariffs imposed on Chinese goods had a strong negative direct effect on China’s exports to the United States, evidence of broad-based trade diversion remains limited. Empirical analyses of the 2025 tariff episode are still scarce, and existing assessments rely on early evidence. Our model estimates suggest that the tariffs reduced US imports from China by around 9% (Chart B, panel a), while the observed year-on-year decline in the trade data reached approximately 17% over the first nine months of 2025.[3] This gap suggests that factors other than tariffs, such as heightened policy uncertainty, frontloading of imports ahead of tariff increases, weaker US demand or the slight appreciation of the renminbi against the US dollar, also contributed to the contraction in Chinese exports to the United States. At the same time, evidence of trade diversion effects to other markets is limited. A statistically significant positive effect is identified only for African and ASEAN countries, while the estimated impact on the euro area is modest and statistically insignificant. Disaggregating by product category, the negative effects of US tariffs are most pronounced for capital goods, followed by consumer goods and intermediate goods (Chart B, panel b). At this more granular level, some evidence of trade diversion emerges, particularly for consumer goods, where higher US tariffs on Chinese products are associated with increased exports to other markets.

Chart B
Impact of the 2025 US tariffs on Chinese exports

a) By destination
(percentage deviation between December 2024 and September 2025)

b) By category
(percentage deviation between December 2024 and September 2025)

Sources: Trade Data Monitor and ECB staff calculations.
Notes: The charts show the percentage changes of Chinese exports as a result of the 2025 US tariffs. The impact is calculated by applying the average tariff rate increase observed between the end of 2024 and September 2025, expressed in percentage point differences, to the estimated elasticity of exports with respect to tariffs. On average, US tariffs on Chinese exports rose by 37 percentage points over this period. The grey bars represent 95% confidence intervals around the estimated coefficients, while (*), (**) and (***) denote 10%, 5% and 1% significance levels respectively. The sample of estimation includes data on global imports of Chinese goods between January and September 2025. The latest observation is for September 2025.

The limited but significant Chinese trade diversion toward ASEAN countries following tariffs may reflect broader trade rerouting patterns. Trade rerouting occurs when exports are redirected through intermediary countries but ultimately reach the original destination market. Notably, Chinese exports to ASEAN countries have surged, particularly in intermediate goods used for further processing or assembly (Chart C, panel a). This trend aligns with the increase in US imports from ASEAN countries, which is the only region that contributed positively to US import growth in 2025 overall. Sectoral data also indicate a sharp rise in Chinese export volumes to ASEAN countries, accompanied by declining unit values for most sectors – a pattern consistent with a greater integration of lower-value intermediate inputs into regional production chains (Chart C, panel b). Taken together, these developments suggest that ASEAN-centred supply chains played a role in the adjustment, although the evidence remains preliminary.

Chart C
Chinese export developments, January-November 2024 to January-November 2025

a) By category
(changes in USD billions)

b) By trading partner and sector
(percentage changes)

Sources: Trade Data Monitor and ECB staff calculations.
Notes: Panel a) reflects the changes in total Chinese exports during the first 11 months of 2025 compared with the same period in 2024. Panel b) shows the changes in Chinese export volumes and export unit values (in US dollars) during the first 11 months of 2025 for each trading partner and each sector. The size of the bubbles is proportional to the average corresponding trade value during the same months from 2022 to 2024. The high-tech goods list is based on the European Commission’s definition. The latest observation is for November 2025.

Overall, trade diversion accounts for only a limited role in recent Chinese export dynamics, with other factors playing a more prominent role. While part of the decline in Chinese exports to the United States can be attributed to the new tariffs, thus far there is little evidence that these measures have led to substantial trade diversion towards other markets. Any tariff-related diversion appears modest and confined to a narrow set of products, indicating limited spillovers from US tariffs to third destinations. Instead, the recent strength of Chinese exports to other markets seems to have been driven by trends that predate the latest tariff measures, as evidenced by broad-based export growth across major regions. Several factors underpin these trends. Weak domestic demand has pushed Chinese firms to channel excess capacity abroad, supported by falling export prices, competitiveness gains reinforced by a weak currency, and state-led expansion of manufacturing capacity.[4] Deeper supply chain integration within Asia has also supported exports to regional partners.
References
Al-Haschimi, A., Dvořáková, N., Le Roux, J. and Spital, T. (2025), “China’s growing trade surplus: why exports are surging as imports stall”, Economic Bulletin, Issue 7, ECB.
Amiti, M., Redding, S. J. and Weinstein, D. E. (2019), “The Impact of the 2018 Tariffs on Prices and Welfare”, Journal of Economic Perspectives, Vol. 33, No 4, pp. 187-210.
Cigna, S., Meinen, P., Schulte, P. and Steinhoff, N. (2022), “The impact of US tariffs against China on US imports: Evidence for trade diversion?”, Economic Inquiry, Vol. 60, No 1, pp. 162-173.

We use product data based on the six-digit level of Harmonized System (HS) codes, and combine it with tariff assumptions at the same level of disaggregation. Products exempted from tariffs are retained in the sample.

We replicate the approach by taken Cigna et al. (2022), which builds on that of Amiti et al. (2019). Click here to see the equation that was used.

Trade tensions between the United States and China escalated sharply in early 2025. The United States imposed 10% tariff increases on all Chinese goods in February and March, followed by further hikes that culminated in a peak rate of 125% in April. Following bilateral agreements, tariffs were partially rolled back in May and October. The current effective tariff rate on US imports of Chinese goods stands at 34%.
For details on recent Chinese export developments, see Al-Haschimi et al. (2025).

 
Authors:
• Tajda Spital, Economist, ECB
• Julien Le Roux
 
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Stefano Scarpetta has been appointed as the next Chief Economist of the OECD. He will take up his duties on 1 April 2026.
Mr Scarpetta brings an outstanding international reputation as a leading economist, built over more than three decades of distinguished service. Since 2013, he has led the OECD Directorate for Employment, Labour and Social Affairs, where he oversaw landmark initiatives including the OECD Jobs Strategy and strengthened the Organisation’s capacity to assess the impact of major structural transformations — including demographic change, digitalisation and artificial intelligence — on labour markets and public services. He also served as sous-sherpa to the G7 and G20 on employment and social policy issues.
As Chief Economist, Mr Scarpetta will lead the OECD Economics Department in delivering rigorous, evidence-based analysis, international benchmarking and country-specific policy advice. The Department’s work supports policymakers in fostering sustainable economic growth, expanding employment opportunities and improving living standards across more than 100 countries worldwide.
“Over three decades at the OECD, Stefano has consistently demonstrated exceptional leadership, deep expertise in economic analysis and policy with a commitment to advancing the OECD’s mission and the collective interests of its members and partners,” OECD Secretary-General Mathias Cormann said.
Mr Scarpetta began his career at the OECD in 1991 and became a Senior Economist in the Economics Department in 1995. From 2002 to 2006, he served at the World Bank as labour market advisor and lead economist before returning to the OECD’s Economics Department in 2006. There, he led a division of the Department’s country studies branch before taking up successively senior positions in the Directorate he now leads.
An Italian national, Stefano holds a PhD in Economics from the École des Hautes Études en Sciences Sociales (EHESS), a Master of Science in Economics from the London School of Economics and Political Science and a Laurea Summa cum Laude from the University of Rome.

Working with over 100 countries, the OECD is a global policy forum that promotes policies to preserve individual liberty and improve the economic and social well-being of people around the world.

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Munich, 14 February 2026
It is a mark of how much our world has changed that a central banker speaks at the Munich Security Conference on supply chains.
A decade ago, this would have seemed like a category error. Today, everyone in this room recognises that trade is as much a security issue as an economic one.
Economic interdependence has deepened substantially in recent decades, creating intricate webs of cross-border trade flows. Where this was once seen as a source of stability, it is now a source of vulnerability: to global disruptions like the pandemic and to deliberate weaponisation of dependencies.
Eurosystem staff have mapped products that are hard to diversify and difficult to substitute – and we can stress test the implications of suddenly cutting off supply.
Our analysis suggests that a sudden 50% drop in supply from geopolitically distant suppliers would reduce manufacturing value added by 2-3% – with the impact concentrated in electrical equipment, chemicals and electronics.[1]
This shift matters profoundly for Europe. We are the most open of the major economies. Now we must make the transition to strategic autonomy.
But what does that actually mean?
We hear many terms – reshoring, friendshoring, coalitions of the willing – but they distill into three distinct strategies:

Independence: rebuilding supply chains at home in critical technologies and inputs to reduce dependence.
Indispensability: building strengths in critical “indispensable” areas of those supply chains.
Diversification: spreading supply chains across partners so that no single disruption can paralyse our economy.

Each strategy is legitimate. But they are not the same – and without clarity, they can work at cross purposes.
If we pursue independence in sectors where we are lagging far behind, we risk imposing costs that erode competitiveness downstream.
For example, pursuing full autonomy in chip making could produce what one study calls “hollow champions” – firms unable to compete globally, supplying substandard technology to industries that are themselves strategic.[2]
Yet relying solely on trade – even within alliances – also carries risks. Trusted partners do not always remain so.
In some critical sectors, we need to build domestic capacity, even when it is temporarily more expensive. In 2023, the US conducted 114 orbital launches. Europe conducted three.[3]
Broad-brush strategies will not work. They may create unnecessary costs or miss real chokepoints. We need a targeted approach: understanding our strengths and weaknesses at a granular level, and evaluating costs and benefits.[4]
What does this mean from the ECB’s perspective? Let me focus on one key initiative.
The ECB needs to be prepared for a more volatile environment. As industrial policy becomes more assertive, geopolitical tensions rise and supply chains are disrupted, financial market stress is likely to become more frequent.
We must avoid a situation where that stress triggers fire sales of euro-denominated securities in global funding markets, which could hamper the transmission of our monetary policy. And this means we have to give partners who want to transact in euros the confidence that euro liquidity will be available if they need it.
That is why, last week, the Governing Council decided to expand our EUREP facility – our standing facility that offers euro liquidity against high-quality collateral.
This expanded facility provides permanence: central banks outside the euro area can now rely on continuous access to liquidity in euros, not just temporary lines.
It extends scope: we move from a regional to a global perimeter. Any central bank that meets basic criteria can request access, with flexibility on usage.
And it ensures agility: access is granted by default unless there is a reason to restrict it, speeding up the provision of liquidity.
This facility also reinforces the role of the euro. The availability of a lender of last resort for central banks worldwide boosts confidence to invest, borrow and trade in euros, knowing that access will be there during market disruptions.
In a world where supply chain dependencies have become security vulnerabilities, Europe must be a source of stability – for ourselves and for our partners.
That, too, is part of European security. And that is how the ECB plays its part.

Attinasi, M.G. et al. (2024), “Navigating a fragmenting global trading system: insights for central banks”, Occasional Paper Series, No 365, ECB.
Institut Montaigne (2025), “Autonomy or Indispensability? Identifying the EU’s Semiconductor Lodestar“, Policy Paper, December.
European Space Agency (2024), Report on the Space Economy, December.
Attinasi et al. (2024), op. cit.

 
 
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Thank you, Madam President, dear Roberta,
Deputy-Minister Raouna, dear Marilena,
Honourable Members,
In the last plenary, we focused on the geopolitical shockwaves that Europe is facing and on our united response. But our power on the global stage depends greatly on our strength on the economic front. Competitiveness is not just the foundation of our prosperity but of our security, and ultimately of our democracies too. This is why competitiveness has been at the top of our agenda from day one. At the very start of the mandate, we turned the Draghi and Letta reports into a plan for change, the Competitiveness Compass. And since then, it has been a year of action. With the Clean Industrial Deal. AI Factories and Gigafactories. Five new trade deals. Ten simplification omnibuses. The Grids Package. Tailor-made action plans for the automotive, steel and chemicals industries. The Savings and Investment Union. The greatest surge in defence investment in our history – with SAFE and the Roadmap 2030. And so much more. This is the urgency mindset we need, and we will relentlessly stay the course until we get it all done.
Today, I would like to focus on progress and next steps in three key areas. First, trade. Second, the Single Market. And third, simplification.
To the first topic: trade. A competitive Europe can only be an independent Europe. Today, dependencies are at risk to become weapons of coercion. Therefore, we must eliminate the bottlenecks in our most strategic value chains. And we can do this by stepping up production in Europe – and by expanding our network of reliable partners. This is why trade is so important. We must be laser-focused on opening growth opportunities and new markets to our companies. We need more rules-based, reliable trade with like-minded partners. Therefore, in 2025 we concluded trade agreements with Mexico, Indonesia and Switzerland. Last month, I signed our trade agreement with Mercosur. And two weeks ago, I was in India to sign the largest free trade agreement ever. The mother of all deals. It has a market of 2 billion people. 25% of global GDP. It grants Europe unique access to the fastest growing large economy – a clear ‘first-mover’ advantage for our businesses. Not only is this a breath of fresh air for European exporters, this will also create alternative supply chains in strategic sectors – from chips to clean tech. And more trade deals are on their way with Australia, Thailand, the Philippines, the UAE, etc. This is the European way to independence. And Europe’s independence moment is now.
Let me continue with the Single Market. The IMF says that interstate barriers in our Union are three times higher than interstate barriers in the US. So how can we compete on an equal footing? We have the second-largest economy in the world, but we are driving it with the handbrake on. The good news is: This can be fixed. But we need single-minded focus on the Single Market. And we need to tear down barriers one by one. That is why, next month, we will propose the 28th regime. We call it EU Inc, a single and simple set of rules that will apply seamlessly all over our Union so that business can operate across Member States much more easily. Our entrepreneurs will be able to register a company in any Member State within 48 hours – fully online. EU Inc will ease access to finance in the start-up and scale-up phases. EU Inc enables smooth cross-border operations, and it allow rapid wind-down – if a company fails. This is the speed we need. And this is ‘Europe made easy’.
The same is true for capital markets. Let me take the US example again. One financial system, one capital market, and a handful of other financial centres. Here in Europe, we do not only have 27 different financial systems, each with its own supervisor. But also, more than 300 trading venues across our Union. That is fragmentation on steroids. We need one large, deep and liquid capital market. And this is the goal of our Savings and Investment Union. We have made proposals on market integration and supervision. And now we need you to get them over the finish line. Our companies need capital right now. So let us get this done this year. And thank you for your support, because my plan A is to move by 27. But if this is not possible, the Treaty allows for enhanced cooperation. We have to make progress, one way or the other, to tear down the barriers that prevent us from being a true global giant.
Honourable Members,
Completing our Single Market also means completing our Energy Union. And this is vital to bring prices down even further. Prices remain too high and too volatile. And we know why. It is because of lack of interconnection and grids and our reliance on fossil fuels. The data is as clear as daylight. In 2025, electricity from gas cost on average more than EUR 100 per megawatt-hour. The price of electricity from solar? EUR 34. Electricity from nuclear? EUR 50 to EUR 60 per megawatt-hour. The figures are telling. Low-carbon energies are not only homegrown and clean. They give us more independence, more security and they bring costs down. This is why today, we are investing heavily in low-carbon energy. Last year, for the first time ever, we produced more electricity from solar and wind than from all fossil fuels combined. And nuclear keeps rising year on year. But we need more than that. To lower and stabilise costs, we need the infrastructure for a true Energy Union. This is why we introduced the European Grids package. It will speed up permitting and fast-track the construction of Energy Highways across our Union. Just last month, we reached an agreement on the first such project. The Bornholm Energy Island. It will create a new bridge between Denmark and Germany, connecting both countries to 3 gigawatts of offshore wind energy. It will transform the Baltic wind from a national resource into shared European power. The goal is simple. Clean energy must flow freely all across our Union.
Finally, on European preference. I believe that in strategic sectors, European preference is a necessary instrument that will contribute to strengthen Europe’s own production base. It can help create lead markets in those sectors and support the scaling-up of European production capabilities. But I want to be clear – it is a fine line to walk. There is no ‘one-size-fits-all’. That is why every proposal must be underpinned by robust economic analysis and be in line with our international obligations.
Honourable Members,
In all of this in the Single Market, we must be driven by the greatest sense of urgency. We need a clear timetable and everyone’s commitment to get things done. This is why we need a Joint Single Market Roadmap to be completed by 2028. I will propose that, together with the Parliament and the Council, we endorse such a roadmap at the March European Council. It will include a commitment to swiftly adopt some key proposals, all by end of next year. Because time is of the essence.
Honourable Members,
My final point is simplification. We know why it is vital. European companies tell us they spend almost as much on bureaucracy as on research and development. This cannot be. We have made simplification a core focus. And in one year, we have delivered more than in the previous decade. We have already proposed to slash bureaucratic costs for companies by EUR 15 billion every year. But all the omnibuses must reach their destination. But we do not only need to look at the omnibuses at the European level. We must also look at the national level. There is too much gold-plating – the extra layers of national legislation that just make businesses’ life much more complicated and create new barriers in our Single Market. Let me give an example. A truck in Belgium can weigh up to 44 tonnes. But if you cross the border with France, it can only carry up to 40 tonnes. In June 2023, we proposed legislation to harmonise this. Almost two years later, it is still under discussion by the co-legislators. Another example. Shipping waste from one Member State to another should be efficient, easy and quick. But with gold-plating, there are different national practices in every Member State. Some Member States for instance only accept correspondence by fax. It is true. It can take several months for traders to get green light from the authorities depending on the different rules in different Member States. If we are serious about simplification, we must crack down on gold-plating and fragmentation. It is time for a deep regulatory housecleaning – at all levels.
So what matters now is speed of delivery. So we need everyone to play their part. This is the moment for unity and for urgency. This is how we make Europe move faster – and this is how we make Europe stronger.
Thank you, and long live Europe.
 
 
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The Council today formally approved new customs duty rules for items contained in small parcels entering the EU, largely via e-commerce. The new rules respond to the fact that such parcels currently enter the EU duty free, leading to unfair competition for EU sellers.
“As global e-commerce booms, EU customs rules must keep pace. Abolishing the out-of-date exemption for small parcels will help support EU business and shut down avenues for unscrupulous sellers. Now, we need to move forward decisively on the overall customs reform which is a key part of the puzzle in making the EU more competitive and more secure.”
– Makis Keravnos, Minister of Finance of the Republic of Cyprus
Today’s agreement abolishes the threshold-based customs duty relief for parcels valued at under €150 entering the EU. Customs tariffs will therefore start applying to all goods entering the EU once the EU customs data hub – under discussion as part of a broader fundamental reform of the customs framework – is operational. This is currently expected in 2028.
Until that time, EU member states have agreed to introduce an interim flat rate customs duty of €3 on items contained in small parcels valued at less than €150 sent directly to consumers in the EU. As of 1 July 2026, the duty will be levied on each different category of item, identified by their tariff sub-headings, contained in a parcel.

Example:
A parcel contains 1 blouse made of silk and 2 blouses made of wool.
Therefore, due to their different tariff sub-headings, the parcel contains two distinct items and €6 in customs duty should be paid.

The new system will have a positive impact both for the EU budget as well as for national public finances, as customs duties constitute a traditional own resource of the Union, and member states retain part of those amounts by way of collection costs. The measure is distinct from the proposed so-called ‘handling fee’ currently under discussion in the context of the customs reform package.
Next steps
The interim flat rate customs duty of €3 will be levied on each item category contained in a small parcel entering the EU from 1 July 2026 to 1 July 2028 and may be extended as appropriate. Once the new EU customs data hub is operational, this interim duty will be replaced by normal customs tariffs.
Background
According to the European Commission, the volume of small packages arriving into the EU has doubled every year since 2022. In 2024, 4.6 billion such packages entered the EU market. 91% of small shipments arrive from China.
More broadly, the EU is currently working to reform its customs system so that it can deal with the significant pressure arising from increased trade flows, fragmented national systems, the rapid rise of e-commerce and shifting geopolitical realities. Negotiations between the Council and the European Parliament on the reform – including on the establishment of the customs data hub, overseen by a new EU customs authority – are ongoing.
 
 
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Import tariffs imposed by other countries tend to lower euro area inflation and weaken growth. However, the sectors most exposed are also the most responsive to interest rate changes. This means that monetary policy can help offset disinflationary pressures and support activity.[1]
 

Tariffs are a tax on trade. The immediate impact falls on the country imposing them, as import prices rise and trade volumes fall. But trading partners can also be affected. On the one hand, higher import costs reduce demand for their products in the tariff-imposing country. Moreover, other countries hit by tariffs may divert some of their exports to other markets, increasing supply and lowering prices in those economies. Through these channels, import tariffs imposed by one country can reduce economic output and lower inflation abroad. On the other hand, when large and globally integrated economies impose tariffs, they raise costs along global value chains, by making inputs more expensive and increasing production prices. Such supply-side effects can lead to higher inflation in trading partners’ economies, even if these countries do not raise tariffs themselves.
Changes in trade dynamics also affect exchange rates. A common assumption is that since higher tariffs lead to lower imports, the demand for foreign currency falls in the country imposing the tariff, which should lead to an appreciation of its own currency relative to those of its trading partners. However, higher import prices and lower activity in the tariff-imposing country could also mean that the domestic central bank either raises or lowers interest rates, depending on how it weighs price stability versus economic growth in its decision-making. In turn, a change in the relative interest rate will affect the exchange rate, reinforcing spillovers to other economies.[2]
All of this means that the consequences of one country’s import tariffs for other countries’ economies are influenced by a wide range of partly opposing effects. In this blog, we analyse which of these effects dominates, on balance. We estimate how declining trade volumes with the US following increases in US tariffs affect the euro area. When trade falls by more than expected after a rise in tariffs – a situation we call a “tariff-related trade surprise” (TTS) – euro area inflation declines and economic activity weakens over the medium term. Our results therefore suggest that the effects of the drop in demand due to US tariffs on the euro area outweigh any inflation-boosting supply effects.[3]
Monetary policy can soften these effects. We find that the impact of US tariffs differs notably between sectors. Those sectors hit hardest by TTSs are also those that respond most strongly to interest rate changes. Consequently, monetary policy can help counter the adverse effects of higher trade barriers.
Identifying tariff-related trade surprises
To study the impact of tariffs, we identify TTSs by linking unusual trade patterns with historical data on US tariff changes in a novel two-step approach.
First, we estimate how much trade between countries would normally be expected. To do this, we use a standard “gravity” model of trade. This model covers monthly exports from 20 euro area countries to 192 trading partners over the pre-pandemic period (2002-19). We control for common factors that affect individual exporting and importing countries as well as those that affect each country-pair together, such as structural economic and financial conditions, local and global business cycles, or membership of bilateral or multinational agreements and institutions. After accounting for the main drivers of trade, we extract the part of euro area exports to the United States that the gravity model cannot explain. We call these unexplained variations in exports “trade surprises”, since they reflect unusually strong or weak trade compared with historical patterns.
Second, we isolate those trade surprises that are plausibly related to tariffs. To this end, we compare the sign of the trade surprise with preceding changes in US tariffs on euro area goods. When effective US tariffs on euro area goods rose over the previous year, and euro area exports to the United States were unexpectedly weak, we interpret this as a trade-tightening TTS. When tariffs fell and euro area exports were unexpectedly strong, we treat it as a trade-easing TTS.[4] We then estimate how the TTSs identified affect euro area prices and activity using local projections.[5]
Effects on prices and activity
Immediately after a TTS, euro area prices edge up slightly, consistent with higher production costs spreading through supply chains (Chart 1). Over the medium term, however, prices begin to fall. At its lowest point, about one and a half years after a TTS that cuts euro area exports to the United States by 1%, the consumer price level[6] is around 0.1% lower. Euro area activity follows a similar pattern, with industrial production declining over this period before stabilising. Taken together, the pattern of lower prices and weaker activity resembles an adverse demand shock.[7]

Chart 1
Impact of a euro area-specific US tariff-related trade surprise on the euro area economy

(percentage changes)

Notes: Impulse responses are derived by local projections estimated in long-differences (see for example Jorda and Taylor, 2024). Tariff-related trade surprises (TTSs) are identified using a two-step process. In step one, residuals from a three-way gravity model with importer-time, exporter-time and country-pair fixed effects are estimated to capture regular drivers of bilateral trade. Step two involves applying simple sign restrictions that directly associate negative (positive) residuals with tariff increases (decreases) observed over the preceding year, isolating the tariff-related component from other unexplained influences. We then feed the identified TTSs into local projections. TTSs are scaled to a 1% trough decline in bilateral exports of euro area countries to the United States in the first year after the shock. The local projections include the first six lags of several euro area macroeconomic and financial market control variables, including industrial production, bilateral euro area exports to/imports from the United States, the HICP, the unemployment rate, the EUR/USD exchange rate, the euro area Composite Indicator of Systemic Stress, the three-month overnight index swap rate, GDP-weighted ten-year sovereign bond yields, and the International Monetary Fund commodities price index. We also include forward controls entering the model at the same t+h-step horizon as the dependent variable to account for the COVID-19 period and the start of the Russian invasion of Ukraine.

Sectoral differences
We also find that the force with which TTSs hit different industries varies (Chart 2).[8] In “downstream” sectors, which predominantly produce final goods such as machinery, autos and pharmaceuticals, the peak impact of a tariff-tightening shock usually occurs one to two years after a TTS, as the shock takes time to transmit through production chains.[9] When we scale the surprise to a 1% fall in bilateral exports, output in these sectors declines by about 0.3% on average and producer prices fall by about 0.1% one year after the TTS. “Upstream” sectors producing predominantly intermediate inputs, like chemicals, can react on a different timeline. As these sectors operate primarily at the beginning of the value chain, they are more likely to be immediately affected by tariff changes.

Chart 2
Impact of a sector-specific US tariff-related trade surprise on euro area sectors

(percentage change)

Notes: Impulse responses are derived by local projections estimated in long-differences (see for example Jorda and Taylor, 2024). Tariff-related trade surprises (TTSs) are identified following the same two-step approach as described in the notes to Chart 1 and are scaled to a 1% trough decline in bilateral sector-specific exports of euro area countries to the United States in the first year after the shock. The local projections include the first six lags of several euro area macroeconomic and financial market control variables, including industrial production, bilateral euro area exports to/imports from the United States and China, the HICP, the unemployment rate, the EUR/USD exchange rate, the euro area Composite Indicator of Systemic Stress, the three-month overnight index swap rate, GDP-weighted ten-year sovereign bond yields, the IMF commodities price index, and the aggregate TTSs as identified for the aggregate results presented in Chart 1. The grey area covers the min-max range of impulse responses estimated for a reference set of other manufacturing sectors.

Can monetary policy soften the impact?
The sectors hit hardest by TTSs also respond most strongly to interest rate changes. Our results show that sectors with larger declines in prices and output in the 12 months after a TTS tend to be more sensitive to an easing of monetary policy over the same horizon (Chart 3).[10]

Chart 3
Impact of sector-specific US tariff and monetary policy shocks on euro area sectors after one year

(percentage change)

Sources and notes: The x-axis shows the impulse response to a monetary policy tightening shock (based on Altavilla et al. 2019) scaled to a 100-basis point peak response in the first year after the shock, evaluated 12 months after the shock. The y-axis shows the impulse response to an adverse sector-specific US TTS scaled to a 1% trough decline in bilateral sector-specific exports of euro area countries to the United States in the first year after the shock. The colours of the dots indicate below-average (blue) or above-average (orange) sectoral exports to the United States in shares of total export volumes reported by the manufacturing sectors that were evaluated. Impulse responses are obtained from the same local projections model as in Chart 2.

This means that, for instance, output in the machinery sector drops sharply following a TTS. But production in this sector also expands particularly strongly in response to an easing of domestic monetary policy. We find that this pattern holds for about 60% of the sectors we study – representing roughly 50% of total average euro area industrial output and of total goods exports to the United States. TTSs push prices and activity down one year after the incidence, but easier monetary policy supports them. This suggests that monetary policy remains a powerful tool to counter TTS-induced disinflation and to cushion the drag from higher trade barriers.[11]
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

We would like to thank Maria Grazia Attinasi, Ambra Boilini, Claus Brand, Lorenz Emter, Fédéric Holm-Hadulla, Sujit Kapadia and David Lodge for their helpful contributions, comments and suggestions.
See ECB (2025),“What happens when US and euro area monetary policy decouple?”, The ECB Blog, 5 February. Additionally, many other factors can affect how the exchange rate adjusts in response to tariffs. These include relative trade relations and exposures, changes in capital flows, financial spillovers to other economies, supply-chain adjustments and trade rerouting, and not least rising uncertainty regarding future trade modalities.
In contrast, if supply effects dominated, this would normally result in weaker euro area economic activity and higher inflation as US tariffs are passed on to euro area consumers.
Using nominal per unit (i.e. unweighted) tariff rates does not significantly affect the results.
Local projections are estimated in long‑differences, following Jordà, Ò. and Taylor, A.M. (2025), “Local projections”, Journal of Economic Literature, Vol. 63(1). We scale the TTS model to reflect a 1% trough decline in euro area exports to the United States in the first year after the shock. The model includes lags of euro area and global variables, capturing typical reactions such as retaliation, trade diversion, supply chain effects, uncertainty, and demand shifts.
The consumer price level is measured using the Harmonised Index of Consumer Prices (HICP).
This finding is consistent with studies using alternatively identified tariff surprises and shocks, see for instance Barnichon, Régis and Aayush Singh (2025), “What Is a Tariff Shock? Insights from 150 years of Tariff Policy”, Working Papers, Federal Reserve Bank of San Francisco, 17 November.
The analysis is based on sectoral data as presented in De Sanctis, Gebauer, Holm-Hadulla and Sirani (2025), “Financial frictions across the production network and the transmission of monetary policy”.
Formally, “upstreamness” measures the distance of a sector’s output from final demand (Antràs, Chor, Fally, Hillberry (2012), “Measuring the Upstreamness of Production and Trade Flows”). It captures the expected number of production stages an output passes through before reaching final use. Upstream sectors predominantly supply intermediate inputs, while downstream sectors are closer to final consumption.
For this part of the analysis, we use the monetary policy shock database from Altavilla et al. (2019), “Measuring euro area monetary policy”, Journal of Monetary Economics, Vol. 108.
On the monetary policy implications of trade shocks, see Bergin, P.R. and Corsetti, G. (2023), “The macroeconomic stabilization of tariff shocks: What is the optimal monetary response?”, Journal of International Economics, Vol. 143.

 
Authors:
• Alessandro De Sanctis, Economist, EUROPEAN CENTRAL BANK 
• Stefan Gebauer, Senior Economist, EUROPEAN CENTRAL BANK
• Julian Schumacher, Team Lead – Economist, EUROPEAN CENTRAL BANK
• Flavia Ungarelli, BANCO DE ESPANA
 
Compliments of the European Central Bank 
 The post ECB | Lower Inflation, Weaker Activity: What Foreign Import Tariffs Mean for the Euro Area first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Bernd Lange, chair of Parliament’s International Trade Committee and standing rapporteur for the US, has issued the following statement regarding the EU-US trade deal.

Following a Wednesday afternoon meeting of the committee’s shadow rapporteurs (i.e. political group representatives responsible for work on the legislation linked to the implementation of the Turnberry deal), Bernd Lange (S&D, Germany) said: “A majority of shadow rapporteurs of the International Trade Committee have today decided to resume work on the two Turnberry legislative proposals. A vote could therefore potentially take place at the next committee meeting on Tuesday 24 February.
“Trade Committee members remain committed to advancing work on the two legislative proposals expeditiously, provided the US respects the territorial integrity and sovereignty of the Union and its member states, and honours the terms of the Turnberry Deal.
“In this spirit, we have also agreed to include among the grounds for suspension of the tariff preferences granted under both legislative proposals threats to the essential security interests of the Union or its member states, including their territorial integrity.”
Background
In July 2025, the EU and the US reached a political agreement on tariff and trade issues (Turnberry Deal). These were outlined in detail in an August 2025 joint statement announcing an EU-US Framework Agreement. The Commission then published two legislative proposals aimed at implementing certain tariff aspects of the EU-US Framework Agreement.
The International Trade Committee is responsible for steering the legislation through Parliament and for leading negotiations with EU governments on the final shape of the customs duties on goods imports from the US.

 
 
Compliments of the European Parliament The post European Parliament | EU-US Trade Legislation: MEPs to Resume Work on Turnberry Proposals first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.