China's Currency: A Double-Edged Sword for the EU
The European Union's trade deficit with China is a complex issue, and the Chinese currency, the yuan or renminbi, is a key factor. While the EU is right to highlight the problem of currency manipulation, the solution is not as straightforward as it may seem. In my opinion, the EU's approach to addressing this issue should be nuanced and consider the broader economic context.
The Currency Conundrum
The undervaluation of the yuan is a hot topic, with estimates suggesting it is undervalued by around 20-25%. This undervaluation is not solely due to central bank intervention, but also to China's strategy of keeping export revenues in Hong Kong rather than converting them into yuan. This practice prevents the yuan from appreciating faster, which is an interesting strategy in itself. What many people don't realize is that this approach can also be seen as a form of economic leverage, allowing China to maintain its competitive edge in the global market.
Impact on EU-China Trade
The EU's trade deficit with China is a significant concern, reaching a record-high €359.9 billion in 2025. This deficit is not solely due to currency manipulation, but also to the inflation differential between the two regions. The undervaluation of the yuan does play a role in keeping Chinese products competitive, making them around 30-40% cheaper than European equivalents. However, the inflation differential, particularly since the invasion of Ukraine, has also contributed significantly to the loss in external competitiveness.
EU's Options and Considerations
The EU has several options, but it should approach this issue with caution. German Chancellor Friedrich Merz's suggestion to begin dialogue with China on the currency issue is a good starting point. However, the EU should also consider the broader economic context. The Plaza Agreement in 1985 and the European Monetary System are examples of coordinated efforts to manage currency fluctuations. But, as pointed out by Bruegel expert Alicia Ferro Herrera, the US did not push for similar negotiations during the G7 summit. Therefore, the EU should focus on monitoring China's export prices for sector-by-sector deviations, as this can be an important indicator of overcapacity and negative price growth.
Broader Implications and Future Developments
The currency issue is a symptom of a larger problem: the EU's economic dependence on China. This dependence has both positive and negative implications. On the one hand, it has led to increased trade and investment, but on the other hand, it has also made the EU vulnerable to economic imbalances. The EU should consider diversifying its trade partners and supply chains to reduce this vulnerability. Additionally, the EU should also focus on promoting its own economic competitiveness and innovation to reduce its reliance on external factors.
Conclusion: A Balanced Approach
In conclusion, the EU's trade deficit with China is a complex issue that requires a nuanced approach. While the undervaluation of the yuan is a concern, it is not the sole factor contributing to the deficit. The EU should focus on monitoring China's export prices and promoting its own economic competitiveness. By taking a balanced approach, the EU can address this issue while also considering the broader economic context and its long-term interests.
