Europe Struggles to Get Out from the Flood of Chinese Goods
Europe is quickly learning that China has no interest in addressing unsustainable trade imbalances. Far from it. China produces its trade imbalances intentionally and treats any effective attempts to ameliorate them as acts of economic aggression.
Over the past five years, China’s exports to the Europe have exploded, rising 45 percent. Europe’s goods trade deficit soared from 291 billion euros in 2023 to around 360 billion euros in 2025. The reason for this is well-known. As the U.S. has sought to reduce our trade deficit with China by raising tariffs, China has sought to use Europe as a substitute buyer for its exports.
This is not going over well with Europe. Its politically powerful manufacturers understand surging imports are a mortal threat. They know full well what the “China shock” did to American manufacturing and to entire regions in the U.S. that were once global manufacturing leaders. And since European Union rules constrain deficit spending by national governments, Europe has less flexibility to respond to trade imbalances by expanding the fiscal deficit. So the Europeans are trying to figure out how to respond to China.
Europe is not totally blameless for the current plight. Years of criticism of President Trump’s tariffs from European economic leaders make levying tariffs politically difficult. Europe’s fanatical pursuit of reducing local carbon emissions and energy extraction—preferring, apparently, that distant rather than local emissions and energy extraction contribute to climate change—has damaged its industrial capacity and competitiveness. And its unwillingness to seriously limit international migrants has sapped the idea that Europe has an identity worth defending.
There Is No Third Way to Rebalance Trade with China
So Europe is trying to find a “third way” to respond to Chinese mercantilism. One proposal involves requiring import diversity in the name of “derisking” supply chains. The most moderate position, the one the “responsible” globalists in Europe are gathering around, sees the yuan’s exchange rate with the euro as a major factor in the surge. An undervalued yuan makes China’s products cheaper in Europe and Europe’s pricier in China, leading to surging imports in Europe and a gaping trade deficit. Addressing currency valuations is attractive because it seems less “protectionist” to many policymakers than import duties.
Recently, German Chancellor Friedrich Merz appeared to back this position, pointing to the 1985 Plaza Accord as a historical example of how trade imbalances could be addressed through an agreement on currency valuations. Under the Plaza Accord, finance ministers and heads of central banks of the United States, Japan, West Germany, Britain, and France agreed to intervene in currency markets to reduce the value of the dollar and raise the value of the yen.
German Chancellor Friedrich Merz speaks at a news conference following a European Council meeting in Brussels, Belgium, on June 19, 2026. European Union leaders sought to strike a balance between addressing deepening trade imbalances with China while not provoking a damaging conflict with China. (Wiktor Dabkowski/Bloomberg via Getty Images)
This is more wishful thinking than a strategy. At the currency level, the Plaza Accord worked even better than planned: the dollar fell from around 242 yen to 150 yen the following year. On trade imbalances, however, the effect was more muted and delayed: the U.S. trade deficit with Japan expanded for the first few years, contracted for a few, but then started growing again. At best, it’s likely the Plaza Accord slowed the growth of the trade deficit with Japan. What’s more, one of the big drivers of the Plaza Accord was the Cold War. The five countries that participated were united in their efforts to stave off global communism. There’s no similar threat for China and the EU to respond to.
Yet even this was too much for the mouthpiece for China’s communist party, the Global Times newspaper. This is from a recent editorial in the Global Times:
Following the recent EU summit, German Chancellor Friedrich Merz stirred controversy over the renminbi exchange rate, claiming that the currency was undervalued by as much as 30 percent and citing the 1985 “Plaza Accord” – which plunged Japan into its “lost decades” – as a solution…
The call to repeat the “Plaza Accord” is, in essence, not an economic solution but a form of political pressure. After the US reached the “Plaza Accord” with its major trading partners in 1985, the yen appreciated significantly, the economy fell into a prolonged recession, and the dollar depreciated sharply; yet this did not resolve the US trade imbalance…
China will not accept using exchange rates as a pretext for oppression, nor will it return to the old era of great powers coordinating the fate of a few countries. Today’s China is not the Japan of the past; the scale of China’s economy, the depth of its market, the integrity of its industries, and its policy autonomy are all on a different level.
Note that almost no respectable economists outside of China believe that the Plaza Accord plunged Japan into its “lost decades” of slow growth. There is a body of work that holds that Japan’s excessive fiscal and monetary response to the Plaza Accord inflated a financial bubble in equities and real estate and that the subsequent efforts to keep bad banks and uncompetitive companies afloat led to prolonged stagnation. This is decidedly a minority view among U.S. economists. The mainstream view assigns a much smaller role to the Plaza Accord and a larger role to the particular combination of excessive stimulus, financial deregulation, leverage, weak bank capital, regulatory forbearance, zombie lending, and premature tightening of monetary policy moves later in the 1990s.
But that’s largely beside the point because the Global Times response tells us how China’s ruling communist party sees the Plaza Accord. And that is first that it was a “pretext for oppression” and second that it crippled Japan’s economy. In the view of China’s regime, the “moderate” position of currency adjustment outlined by Merz and modeled on the Reagan administration’s Plaza Accord—which was at the time seen as the “third way” between the highly ideological free-traders and the much-maligned protectionists—is an act of economic imperialism.
In the end, it’s likely that Europe will discover that there’s just one way to rebalance trade with China and that is tariffs high enough to discourage imports. But the journey to that discovery will likely involve many false steps like Merz’s dream of a Sino-version of the Plaza Accord.