Trade Redirection Fears Rise as China Turns to Europe Amid U.S. Tariff Clampdown

China–U.S. Trade War

Economic

Summary:

As U.S. tariffs block Chinese exports, Beijing is pivoting toward Europe, risking a trade diversion effect that could flood the EU market with redirected Chinese goods—potentially increasing China’s trade surplus with Europe by 70%....

China eyes Europe to offset U.S. trade closure

Faced with escalating tariffs from the U.S., China is actively redirecting its trade strategy toward Europe in a bid to sustain export flows and repair its global economic positioning. Chinese policymakers, led by President Xi Jinping, are making symbolic diplomatic overtures—including lifting sanctions on EU lawmakers—as a gesture of goodwill. Beijing has also announced plans to welcome more European parliamentarians, reinforcing its message that it seeks closer, more stable ties with the EU.

While some European leaders remain critical of China’s alignment with Russia, recent signals from Brussels suggest a willingness to recalibrate the relationship—especially through more pragmatic economic engagement. EU officials are currently exploring policy alternatives, such as replacing last year’s 45.3% tariffs on Chinese electric vehicles (EVs) with a quota and minimum pricing system, to de-escalate ongoing trade disputes.

Strategic investments and industrial diplomacy take center stage

At the Shanghai Auto Show, Chinese firms outlined ambitious investment plans for Europe, a clear indication of their pivot away from the American market. Executives emphasized intentions to deepen their footprint across the continent, with EVs, digital services, and e-commerce identified as key growth areas. Meanwhile, China has paused retaliatory tariffs—such as those on French cognac—for three months, reducing friction and signaling a temporary opening for negotiation.

Behind these moves lies a calculated attempt to position the EU as both a substitute market and a diplomatic counterbalance to the U.S. However, as noted by Harvard’s Rana Mitter, while Beijing may seek to turn Europe into a "natural shield" for its global ambitions, the EU is unlikely to sever ties with the U.S. or shift its geopolitical alignment wholesale.

Risks of trade diversion and structural imbalances emerge

Amid this realignment, economists warn of an unintended consequence: trade diversion. According to estimates by Eurizon strategists Stephen Jen and Joana Freire, up to one-third of goods previously destined for the U.S. could now be rerouted to Europe. This could inflate China’s trade surplus with the EU by 70%, reaching approximately $420 billion—a development that could intensify political backlash within Europe, especially in sensitive sectors like automotive manufacturing and advanced electronics.

The European Chamber of Commerce in China has called on Beijing to reassess its industrial policies to avoid a stronger response from European institutions. Jens Eskelund, the Chamber’s president, urged Chinese authorities to "rethink how they engage with the world," stressing the need for reforms that align better with international norms and mitigate the risk of economic retaliation.

Summit diplomacy and a potential investment treaty revival

In a sign of mutual interest in preventing further deterioration, European leaders are preparing for a high-stakes summit in Beijing this July. Though originally planned for Brussels, the location change reflects China’s preference and a symbolic shift in diplomatic norms. EU Commission President Ursula von der Leyen and Premier Li Qiang have already agreed to launch high-level dialogues on economic cooperation, green transition, and digital infrastructure.

The revival of the China–EU Comprehensive Agreement on Investment (CAI), shelved in 2021 due to retaliatory sanctions, is now back on the long-term agenda. If sanctions are lifted, the treaty could offer EU firms improved access to Chinese markets, while affording Beijing greater legitimacy and a shield against intensifying Western economic containment.

Yet skepticism remains. As Ilaria Mazzocco of CSIS points out, "the summit’s success depends on whether Beijing is willing to make concessions"—particularly on market access, transparency, and data governance. Still, the growing urgency on both sides may create a window for narrowly focused compromise.

Trade rebalancing carries risks—and opportunities

As the U.S. clamps down on Chinese imports, Europe has become the new focal point of Beijing’s economic diplomacy. While this redirection offers short-term relief for Chinese exporters, it poses strategic dilemmas for Europe, including the risk of import surges, domestic backlash, and deeper economic dependence on a politically complex partner.

To manage this evolving dynamic, both China and the EU must pursue cooperative, rules-based mechanisms that support sustainable trade rather than opportunistic flows. Whether through revised EV policies, industrial standards, or treaty talks, the coming months will test the ability of two global actors to reset ties without triggering new fault lines in an already fragile geopolitical landscape.

Source: Yahoo Finance

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China–U.S. Trade War

Economic

A surprise move to counter growing external and fiscal pressures

On April 25, the People's Bank of China (PBOC) announced an unexpected liquidity injection of 600 billion yuan (approximately $82.3 billion) into the banking system using its one-year Medium-Term Lending Facility (MLF). This represents one of the largest net monthly infusions since December 2023, pushing April's total net injection to 500 billion yuan.

The move signals a shift toward more proactive monetary support in response to mounting economic pressures stemming from heightened U.S. tariffs—some of which have reached up to 145% on Chinese exports. According to PBOC officials and policy analysts, the injection is intended to both ease short-term liquidity strains and accommodate the issuance of newly approved special government bonds.

Monetary strategy amidst trade turbulence

Chief strategist Wang Qing of Golden Credit Rating emphasized that the liquidity boost is a clear policy signal. With trade tensions escalating and export demand weakening, China's economic planners are leaning on monetary instruments to stabilize the financial system and preserve market confidence. The timing, just ahead of the early May holiday season and the launch of a major special bond issuance program, further underlines the urgency to keep funding conditions fluid.

This liquidity infusion reflects a causal response mechanism: external trade shocks—such as retaliatory tariffs—have increased the demand for monetary easing to prevent credit tightening and investment slowdown. By expanding MLF operations, the PBOC aims to bridge both structural funding needs and cyclical volatility.

MLF as a dual-purpose liquidity and policy tool

Although the role of MLF has been diminishing in recent years with the emergence of other policy instruments, it remains a vital tool for mid-to-long-term liquidity management. Chief economist Ming Ming of Citic Securities pointed out that the expanded MLF operation not only meets surging liquidity demands but also alleviates near-term pressures from expiring reverse repos, which could otherwise trigger instability in interbank funding markets.

Moreover, the sizable MLF injection may delay the need to cut banks’ reserve requirement ratio (RRR), preserving other policy levers for future use. This approach suggests a preference for fine-tuning liquidity rather than deploying broader stimulus measures—at least for now.

Monetary flexibility aligned with fiscal expansion

The liquidity injection is also closely tied to China’s ramped-up fiscal efforts. The government has recently begun issuing a large batch of special sovereign bonds aimed at supporting infrastructure investment, technological upgrades, and consumption stimulation. Ensuring liquidity is sufficient to absorb these issuances is essential to avoid yield spikes that could destabilize broader financial markets.

This alignment between monetary and fiscal tools demonstrates a coordinated macro policy response to complex external shocks. The parallel use of MLF and special bond issuance underscores Beijing’s determination to balance short-term stability with long-term developmental goals, even as global trade dynamics remain volatile.

A calibrated response to a complex external landscape

China’s $82 billion liquidity injection via MLF marks a decisive, though targeted, policy action to preserve economic momentum amid a difficult external environment. It reflects both the urgency created by U.S. trade barriers and the necessity to ensure smooth execution of domestic fiscal initiatives.

While not a dramatic stimulus pivot, the move signals the PBOC’s readiness to act swiftly in support of financial system stability. Going forward, the interplay between liquidity tools, trade shocks, and sovereign financing will continue to shape China’s monetary posture—balancing caution with adaptability in an increasingly fragmented global economy.

Source: Bloomberg

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Glendon

Economic

Forex

Stocks

Emerging Asia shares rallied on Friday, led by indexes in Manila and Taipei, on a potential de-escalation in trade tensions between the world's two largest economies, while currencies in the region struggled for direction.

Equities in Taiwan jumped more than 2%, tracking a tech-led rally on Wall Street after strong earnings reports from Google-parent Alphabet and AI major ServiceNow.

Taiwan hosts some of the world's largest chip manufacturers, such as TSMC, which gained 2.8%, boosting the broader index.

Stocks in Kuala Lumpur, Bangkok and South Korea rose 0.1%, 0.9% and 1%, respectively.

The Philippines share market touched its highest since March 21, reflecting the limited impact of US President Donald Trump's tariff policies. The benchmark was also set for its best week since early March.

Analysts at JPMorgan Chase upgraded Manila stocks to an "overweight" rating earlier this week and called them a relative winner through the global upheaval triggered by Trump's tariffs.

"We think the market is pricing in the Philippines’ resilient narrative amid limited impact of Trump 2.0 policies on economy and earnings," said Estella Dhel Villamiel, head of institutional equity research at First Metro Securities.

Currencies in Asian nations were mixed, while the dollar gained, with investors taking a cautious stance amid the Trump administration's mixed signals on trade negotiations and comments on the Federal Reserve Chair.

During the week, the US shifted its tone on tariff deal with China by saying the situation was unsustainable and that Beijing was considering exempting some US imports from its 125% tariffs.

"A case of de-escalation narrative persisting for awhile more should not be ruled out and this can aid US dollar short covering, following the over 10% decline (at one point) since January peak," said Christopher Wong, currency strategist at OCBC.

Wong, however, added that a broad bounce back in the US dollar may also see some Asian currencies, excluding Japan, come under pressure in the interim despite a conciliatory tone towards the trade deal.

The Indonesian rupiah jumped as much as 0.3% to 16,815 per US dollar and was set for its strongest session since April 10. Jakarta equities rallied 0.8%.

Bank Indonesia, earlier in the week, held interest rates steady in a bid to limit the depreciation of the currency.

Fakhrul Fulvian, an analyst with Trimegah Securities, attributed the rupiah's gain to the "loosening of trade war tensions".

Among other currencies, the Singapore dollar and South Korean won dropped around 0.3% each while the Philippine peso added 0.2%.

Source: Theedgemarkets

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China–U.S. Trade War

Economic

Asia’s economic outlook dims amid global trade disruptions

In its latest regional outlook released on April 24, the International Monetary Fund (IMF) downgraded Asia-Pacific’s economic growth forecast to 3.9% for 2025 and 4.0% for 2026, marking a sharp decline from 4.6% in 2024. The downgrade reflects the mounting toll of escalating trade tensions, particularly following the April 2 tariff hike announcement by U.S. President Donald Trump, which imposed broad import duties on goods from nearly all major economies.

The IMF notes that policy uncertainty since January 2025 has rapidly eroded short-term prospects for many Asian economies. Krishna Srinivasan, Director of the IMF’s Asia-Pacific Department, emphasized that the region’s strong exposure to global trade and its central role in supply chains have made it especially vulnerable to external shocks triggered by aggressive U.S. protectionism.

Price stability gives Asia room to maneuver

Despite the deteriorating external environment, the IMF sees a silver lining: subdued inflation across much of Asia. Srinivasan explained that because inflation in many economies remains at or below target, central banks still have room to cut interest rates without risking price instability.

This correlation between low inflation and policy space provides an important strategic lever. While the region faces elevated risks, the IMF asserts that monetary easing remains a viable tool to soften the blow from weakened exports, financial volatility, and disrupted capital flows. The causal link is clear—as external shocks depress trade and investment, accommodative monetary policy can act as a buffer for domestic demand and liquidity.

Monetary and exchange rate tools in focus

Srinivasan also highlighted the potential role of flexible exchange rates in absorbing external shocks, a position consistent with IMF recommendations in past crisis scenarios. However, in instances of sharp capital outflows or excessive market volatility, he argued that direct monetary policy responses—such as rate cuts or liquidity injections—may be necessary to restore financial stability.

In this context, central banks across Asia are expected to closely monitor bond yields, currency trends, and capital movements. Countries with sufficient monetary autonomy and fiscal discipline may be better positioned to respond swiftly to shocks without jeopardizing long-term macroeconomic credibility.

A fragile trade model faces structural headwinds

The IMF reiterates that Asia’s longstanding growth model—centered on export-driven expansion and deep integration into global value chains—is under pressure. The dual challenge of global trade fragmentation and policy unpredictability from major economies like the U.S. has exposed structural vulnerabilities, especially in highly open economies like South Korea, Taiwan, and Singapore.

Moreover, the destabilizing impact of financial market turbulence, coupled with slowing investment, threatens to dampen regional recovery prospects. The combination of weaker external demand and volatile capital flows may further restrict fiscal space, increasing the burden on monetary policy to do the heavy lifting.

Monetary flexibility key to regional resilience

Amid slowing growth and persistent external shocks, the IMF’s message is cautiously optimistic: Asia still has tools at its disposal. With inflation largely under control, many countries in the region can and should act to loosen monetary conditions, ensuring liquidity, supporting investment, and stabilizing consumption.

Nevertheless, this monetary buffer must be used wisely. Long-term resilience will require not only cyclical support but also structural adjustments—diversifying export markets, strengthening domestic demand, and reducing overdependence on any single trade partner. In a world of rising economic fragmentation, Asia’s ability to adapt swiftly and maintain macroeconomic agility may be its greatest advantage.

Source: IMF

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China–U.S. Trade War

Economic

Tariff retaliation poses inflation risk for Britain, BoE cautions

On April 24, Bank of England Governor Andrew Bailey cautioned that imposing retaliatory tariffs in response to recent U.S. trade measures could accelerate inflation in the UK. Speaking to CNBC, Bailey underscored that although Britain had prepared a list of potential counter-tariff targets following U.S. President Donald Trump's announcement of reciprocal duties, such actions could have adverse economic side effects.

The U.S. has imposed a 10% tariff on most UK imports, along with 25% duties on aluminum, steel, and vehicles. While the UK still aims to negotiate a bilateral trade deal, the retaliatory path is fraught with macroeconomic consequences—most notably the risk of upward pressure on consumer prices.

Inflationary pressures already brewing from domestic sources

Bailey emphasized that UK inflation was already set to rise in April, largely due to domestic adjustments in energy and water pricing. He warned that layering tariffs onto this dynamic could worsen inflationary trends, especially by increasing the costs of imported goods and disrupting supply chains.

This illustrates a potential cause-effect pattern: retaliatory tariffs would directly raise input costs for businesses and retail prices for consumers, feeding into broader inflation metrics at a time when economic resilience remains delicate. Bailey's remarks suggest that monetary policy authorities are concerned about compounding pressures that could limit their policy flexibility.

Trade diversion may offer limited inflation relief

Interestingly, Bailey also pointed out that trade diversion—particularly shifting imports from China to lower-cost or less-tariff-exposed countries—could help moderate inflation. This reflects a broader global trend as companies reconfigure supply chains to mitigate U.S. and Chinese tariff barriers. For the UK, this adjustment could provide marginal relief in specific product categories but is unlikely to fully offset the inflationary impact of direct tariffs on high-value sectors like automotive and metals.

This dual-track scenario highlights a mixed correlation: while tariffs push inflation higher, strategic trade reorientation could exert a mild deflationary counterweight—though not strong enough to neutralize the overall impact.

UK–U.S. trade diplomacy: Seeking solutions through compromise

In parallel with central bank concerns, UK Chancellor Rachel Reeves recently floated the possibility of slashing the UK’s current 10% import tax on U.S. cars to 2.5% as part of a broader trade negotiation effort. This gesture is aimed at softening tensions and facilitating a bilateral agreement, particularly given the UK’s significant auto exports to the U.S., valued at over £6.4 billion annually. In contrast, U.S. vehicle exports to the UK remain modest at £1.1 billion.

These trade dynamics illustrate an asymmetric economic relationship that could provide London with negotiation leverage. However, the broader context of escalating global protectionism remains a challenging backdrop for crafting mutually beneficial trade terms.

Balancing retaliation with economic stability

Governor Bailey’s inflation warning highlights the policy dilemma facing the UK: whether to retaliate against U.S. tariffs to defend national trade interests or maintain restraint to protect macroeconomic stability. While political pressure may favor strong responses, economic logic urges caution—especially as the UK seeks to avoid importing stagflation through miscalculated tariff policies.

The UK’s next moves in trade negotiations and tariff management will be closely watched, not only for their bilateral impact with the U.S., but for their ripple effects across inflation, investment sentiment, and monetary policy space. In a fragmented global trade environment, economic strategy must now weigh national assertion against systemic risk.

Source: WSJ

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Catherine Richards

Economic

British retailers reported the best start to the year since 2021 in what may be a fleeting boost for the economy, with rising bills and the US trade war increasingly weighing on consumer morale.

Retail sales volumes rose by 0.4% in March alone, after downwardly revised growth of 0.7% in February, the Office for National Statistics said on Friday.

A Reuters poll of economists had pointed to a month-on-month fall of 0.4%.

For the first quarter as a whole, retail sales rose by 1.6% — the strongest reading in four years, and providing a 0.08 percentage point boost to overall economic output for the quarter.

That may prove to be a high watermark for Britain's consumer economy for the foreseeable future.

Earlier on Friday, a closely-watched gauge of British consumer confidence fell in April to its lowest level since late 2023. Market research firm GfK cited rising household energy bills and turbulent global financial markets as reasons for the drop.

"Retailers face an uphill battle to protect margins, sustain investment, and navigate an increasingly complex trading environment," said Nicholas Found, head of commercial content at consultancy Retail Economics.

"The outlook is clouded further by uncertainty around US trade tariffs, which has the potential to disrupt shipments if orders are cancelled and routes impacted."

On Thursday Bank of England governor Andrew Bailey said he was focused on an expected shock to growth from US President Donald Trump's import tariffs and retaliatory measures by other countries.

Some of Bailey's BOE colleagues say the trade war could prove to be disinflationary.

Clothing and outdoor retail chains said good weather helped sales last month, although supermarkets struggled, the ONS said.

The outlook for the rest of the year looks tougher, with household energy bills on the rise and financial markets in turmoil because of the trade war.

Outlook statements this month from major British retailers have been downbeat. Tesco and Sainsbury's, the country's two biggest food retailers, warned profit growth was unlikely this year amid a potential price war.

Sportswear retailer JD Sports forecast little or no growth even before any potential impact from US tariffs.

Source: Theedgemarkets

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Gerik

China–U.S. Trade War

Economic

Turning point in global policy: U.S. tariffs disrupt fragile recovery

Just as the global economy began to show early signs of stabilization, the announcement of sweeping new U.S. tariffs in April 2025—reaching as high as 145% in some cases—has reignited uncertainty and deepened the fragility of international markets. The latest Brookings-FT TIGER index update captures this tension: while macroeconomic indicators still reflect a healthy outlook, financial conditions have deteriorated, and private sector confidence has collapsed, revealing a growing disconnect.

The primary catalyst behind this downturn is the reintensification of U.S. protectionism. President Trump’s "reciprocal" trade policies have thrown global supply chains into turmoil, overshadowing earlier positive signals such as strong Q1 output and job growth in the U.S. Even temporary tariff suspensions and exemptions have failed to restore market stability, as policy unpredictability itself now acts as a growth deterrent.

Monetary constraints and policy uncertainty limit response capacity

In the United States, the inflationary effects of import tariffs—now increasingly borne by consumers—are narrowing the Federal Reserve’s room to maneuver. Rising prices combined with slowing momentum risk pushing the U.S. economy into stagnation. Moreover, the Fed’s policy tools may prove insufficient in the face of such externally induced volatility, particularly as fiscal policy remains unpredictable and reactive rather than preemptive.

Across the eurozone, performance is diverging. Core economies like France, Germany, and Austria are underperforming, burdened by both rising political risk and tightening credit conditions, while southern economies such as Greece and Spain are temporarily more resilient. Yet overall, the zone is vulnerable to external shocks, especially from deteriorating trade flows and higher borrowing costs.

China and India diverge under trade pressures

China, which had begun showing signs of economic stabilization, now faces renewed headwinds as trade with the U.S. deteriorates further. Its industrial capacity is misaligned with weakening domestic demand, and retaliatory tariffs threaten to magnify this mismatch. Meanwhile, India has emerged as a relative outlier, benefiting from robust rural consumption and a vibrant services sector, while positioning itself as a supply chain alternative for multinationals shifting out of China.

The differing responses of these two Asian giants illustrate a correlation—if not outright causation—between domestic demand resilience and exposure to global trade frictions. China’s dependence on manufacturing exports leaves it more vulnerable, while India’s internal demand buffers it, at least in the near term.

Emerging markets at the epicenter of global fragmentation

Other major emerging economies are facing increasingly complex challenges. Brazil’s consumer-driven rebound is being undercut by inflationary pressures tied to loose fiscal policy, weakening real growth prospects. South Africa remains constrained by energy shortages and currency instability. In both cases, declining investor and consumer sentiment risks turning temporary slowdowns into more persistent stagnation.

Elsewhere, the fallout from the U.S.–China tariff standoff is exacerbating structural vulnerabilities in Southeast Asia and Africa. Many low- and middle-income countries that rely on exports are being hit by weaker global demand, rising debt burdens, and dwindling foreign aid. For these regions, the compounded effects of trade disruption and capital withdrawal are especially dangerous, limiting their ability to mount effective countercyclical responses.

The end of global trade as we knew it

Trump’s aggressive tariff strategy has not only disrupted specific bilateral relationships but also catalyzed a broader shift toward protectionism. While a full retreat from globalization is unlikely, the once-prevailing model of open, rules-based trade is being replaced by fragmented, politicized supply chains. Even if tariffs are eventually scaled back, the damage to institutional trust and business planning horizons may prove lasting.

This shift reflects a broader geopolitical reality: even prior to the tariff war, international trade had begun to fragment under the weight of growing strategic rivalries. Because capital flows often follow trade patterns, this fragmentation is expected to weaken cross-border economic linkages, reducing global financial stability in the process.

Navigating the era of fractured globalization

The risks posed by U.S. trade policy shifts go far beyond temporary disruptions—they signal a structural transition in how global commerce functions. As protectionist policies ripple outward, countries are being forced to reassess their economic strategies. Policymakers must safeguard their remaining fiscal and monetary space, using it judiciously to shield their economies from external shocks.

The path forward requires enhancing domestic demand, building policy flexibility, and investing in economic resilience. In an era defined by volatility, uncertainty, and decoupling, adaptability will become the most critical asset for governments and corporations alike.