China’s goods exports have expanded sharply since 2020, while imports have remained broadly stagnant, pushing the goods trade surplus to a record $1.2 trillion in 2025. This renewed export surge has revived concerns about a new ‘China shock’. The China shock 2.0, however, is not simply a repeat of the early-2000s episode that followed China’s accession to the WTO. Whereas the first shock was driven largely by China’s integration into global markets as a low-cost producer of labour-intensive manufactures (Autor et al. 2016), the new shock is different: Chinese firms now compete increasingly in advanced manufacturing, green technologies, machinery, electronics, transport equipment, and other sectors that sit at the core of Europe’s industrial base. 

In recent research, we examine the structural forces behind the China shock 2.0 and assess its implications for euro area inflation, investment, and external competitiveness (Aprigliano et al. 2026). 

What is driving the China shock 2.0?

Several forces are at work. Weak domestic demand has reduced the ability of Chinese firms to sell at home, pushing them towards foreign markets. A prolonged period of domestic deflation, coupled with nominal exchange rate depreciation, has improved China’s price competitiveness. At the same time, industrial policies and public support have helped sustain investment and production capacity in strategic sectors. Technological upgrading has also changed the nature of Chinese competition, especially in green and advanced manufacturing sectors.

To assess the relative importance of these forces, we decompose Chinese export growth into three components: global trends common to all exporters and sectors, demand conditions in China’s destination-product markets, and China-specific domestic factors (Amiti et al. 2024). The results show a sharp break from the recent past. Between 2018 and 2022, domestic factors explained less than 10% of Chinese export dynamics. Since late 2023, they have explained around 75% (Figure 1a). 

We find weak domestic demand to be the dominant factor. Industries facing falling domestic sales have recorded the strongest export expansion towards third markets. In our estimates, declining domestic sales account for about 60% of the explained variation in the China-specific export shock (Figure 1b). Government support accounts for almost one-quarter, while technological upgrading in green industries accounts for more than 10%.

A natural concern is that higher US tariffs could deflect Chinese exports towards other markets, including the euro area. In our decomposition, however, this channel accounts for only about 7% of the China-specific export shock. The recent export surge therefore appears to be driven mainly by structural forces within China, rather than by trade diversion away from the US market, in line with recent evidence for the EU (Schulte et al. 2026, Le Roux and Spital 2026).

Notes: Decomposition based on Amiti et al. (2024). Shapley R-squared decomposition of China-specific domestic drivers, right panel.

A disinflationary shock for the euro area

For the euro area, the most immediate transmission channel operates through import prices. Weak domestic price dynamics in China, combined with strong manufacturing supply, are transmitted abroad through lower prices for imported goods. This channel is relevant for the euro area, whose imports from China in 2025 exceeded €430 billion in manufactured goods. Import volumes from China rose across many product categories in 2024 and 2025, while import unit values declined markedly, especially in 2025.

Following the methodology of Corsello et al. (2025), we estimate that a temporary 1% decline in import unit values from China reduces euro area non-energy industrial goods (NEIG) consumer prices by around 0.15% over three years. Given the 6.5% decline in Chinese import unit values since early 2025, this implies a cumulative 1% reduction in non-energy industrial goods prices by the end of 2028, absent additional shocks. This effect is quantitatively relevant: China-sensitive goods account for around 40% of the euro area non-energy industrial goods Harmonised Index of Consumer Prices (HICP) basket and have contributed to the moderation of industrial goods inflation since mid-2024 (Figure 2).

Figure 2 Decomposition of euro area non-energy industrial goods inflation by main components

Notes: Authors’ calculations based on Eurostat data. ‘China-sensitive’ items are those most responsive to China import unit value shocks. See Aprigliano et al. (2026).

Cheaper imports, weaker investment

Chinese import competition affects the euro area not only through prices, but also through production and capital accumulation. Lower import prices can benefit consumers and downstream firms, but they may also reduce domestic manufacturing activity in sectors directly exposed to Chinese competition. To the extent that this affects firms’ expected demand and profitability, it can translate into weaker investment.

Our estimates suggest that a one-standard-deviation decline in Chinese manufacturing import unit values — corresponding to a price fall of more than 3% — has a negative and persistent effect on euro area capital accumulation. The estimated impact on total investment peaks at around -0.5%, with stronger effects for investment in transport equipment and intellectual property (Figure 3). 

The effects vary across sectors and countries. In sectors where European firms are positioned more downstream, cheaper Chinese inputs can lower production costs and support competitiveness and investment. At the same time, stronger Chinese competition may put pressure on European producers operating in similar segments. The main policy concern is that persistent price competition may, over time, weaken incentives to invest in innovation and productive capacity in the most exposed sectors.

Figure 3 Impulse response functions for euro area total investment of a shock to manufacturing import unit values from China, by investment type

Notes: Authors’ calculations based on Eurostat data. Impulse responses to a one-standard-deviation decline in Chinese manufacturing import unit values. 

Competition in third markets

A third transmission channel operates through external competition. China shock 2.0 affects euro area firms not only in domestic markets, but also in third markets where European and Chinese exporters compete directly. This channel has become more relevant as China’s export basket has moved closer to that of advanced economies, especially in advanced manufacturing. Export similarity with China has risen for all major euro area economies and is now highest for Germany (Figure 4).

This growing overlap is reflected in export performance. Since 2017, losses in euro area export market shares have been larger in sectors where China’s presence has increased the most. The decline was particularly visible for France and Germany, where market share losses were broad-based and larger in more exposed sectors. In Italy and Spain, losses in more exposed sectors were partly offset by gains in less exposed segments, such as agri-food products.

Econometric evidence points in the same direction. An increase in China’s market penetration is associated with weaker export growth by euro area economies in the same product-destination markets. For Italy, a one-percentage-point increase in the share of imports sourced from China in a given product-destination market is associated with roughly 0.9% lower export growth in that cell; estimates are broadly comparable for the other main euro area economies. The effect is heterogeneous across sectors and is particularly strong in electronics and transport equipment.

Figure 4 Goods export similarity relative to China

Notes: Authors’ calculations based on CEPII-BACI data at the HS six-digit level. The index ranges from zero to one, with higher values indicating greater similarity.

Policy implications for Europe

The persistence of China shock 2.0 will depend in part on the evolution of China’s growth model. Weak private consumption, the property sector downturn and policies aimed at technological self-sufficiency have held back demand for import-intensive goods and encouraged the substitution of foreign inputs with domestic ones. If export capacity continues to expand faster than domestic absorption, China’s external surplus may remain large and trade tensions with major partners may intensify.

For Europe, the appropriate response is neither broad protectionism nor unconditional openness. Access to cost-efficient and technologically advanced Chinese inputs can support downstream competitiveness, ease cost pressures, and contribute to decarbonisation objectives, particularly in clean technologies. At the same time, openness needs to be accompanied by the capacity to respond when competition is distorted by subsidies, non-market practices, or persistent overcapacity, and by targeted de-risking in sensitive upstream segments, including critical raw materials, key components, and strategic Information and Communications Technology (ICT) and clean-tech technologies (Attinasi and Mancini 2025, Panon et al. 2025).

The broader policy challenge is one of competitiveness. Trade defence and de-risking can address specific vulnerabilities, but they cannot substitute for stronger European investment, innovation, and productivity growth. The first China shock was largely about the integration of a low-cost producer into global manufacturing; the new shock is taking place closer to the technological frontier. For the euro area, the short-term effect may be lower goods inflation; the longer-term challenge is to ensure that these gains do not come at the cost of weaker industrial capacity, lower investment, and reduced technological competitiveness. 

References

Amiti, M, O Itskhoki and D E Weinstein (2024), “What drives US import price inflation?”, AEA Papers and Proceedings 114: 106-111.

Aprigliano, V, L Bencivelli, A Borin, F P Conteduca, F Corsello, S Federico, C Giordano, F Leone, M Mancini, L Panon, L Patrignani and S Pica (2026), “China Shock 2.0: Structural drivers and implications for the euro area”, Occasional Papers, Bank of Italy, no. 1025.

Attinasi, M G and M Mancini (2025), “Trade wars and fragmentation: Insights from a new ESCB report”, VoxEU.org, 28 March.

Autor, D H, D Dorn and G H Hanson (2016), “The China shock: Learning from labor-market adjustment to large changes in trade”, Annual Review of Economics 8: 205–240.

Corsello, F, S Pica and F Venditti (2025), “The Great Wall of Chinese goods: The effect of tariff-induced re-rerouting on Euro area consumer prices”, VoxEU.org, 12 June.

Le Roux, J and T Spital (2026), “Global trade redirection: Tracking the role of trade diversion from US tariffs”, Economic Bulletin 1.

Panon, L, L Lebastard, M Mancini, A Borin, D Essers, A Linarello, P Caka, G Cariola, E Gentili, T Padellini, F Requena and J Timini (2025), “Critical input disruptions: Mapping out the road to EU resilience”, VoxEU.org, 4 March.

Schulte, P, A Enders, A Esser and F Strobel (2026), “From tariffs to trade flows: Diversion effects and China’s exports to the EU”, VoxEU.org, 27 February.