US tariffs, Chinese competition weigh on EU trade

The EU's trade surplus kept shrinking, data showed on Friday, as tariffs weighed on exports to the U.S. and rising Chinese imports crowded out domestic production, highlighting existential threats to the bloc's economic model.

Shifting trade and political relations with the world's biggest powers have been squeezing Europe for years, and leaders met yet again on Thursday to brainstorm ways to survive aggressive economic rivalry from the U.S. and China.

Underlining their concerns, the trade surplus narrowed to 12.9 billion euros in December from 14.2 billion a year earlier, as machinery, vehicle and chemicals sales, the engines of export growth for years, kept falling, more than offsetting a boost from lower energy imports.

TARIFFS HIT US EXPORTS

Hit by tariffs, exports to the U.S., the bloc's biggest export partner, fell by 12.6% from a year earlier, pushing down the surplus by a third to 9.3 billion euros, Eurostat data showed.

Meanwhile the bloc's trade deficit with China rose to 26.8 billion euros from 24.5 billion and was up around 15% for the full year as China exported increasingly sophisticated technology, proving to be a big competitor to European firms.

Exports have been volatile since the U.S. announced a raft of tariffs in early 2025 but, smoothed for this volatility, the trend shows significantly lower sales as higher prices force U.S. importers to either cut purchases or source their products from elsewhere.

REGAINING US MARKETS TAKES YEARS

A small positive in the numbers was that the surplus rose compared to the previous month, with machinery and vehicles accounting for a rebound.

Still, economists say it will take years for Europe to regain this lost market, leaving a large gap in the economy as net exports have been the key plank in growth and the euro zone is now facing years of expansion barely above 1% per year.

However, the domestic economy appears to be resilient to the trade shock for now as AI-related investments and domestic consumption are kicking into higher gear, keeping GDP growth at a modest but still respectable rate.

In the final quarter of 2025, the euro zone grew by 0.3%, in line with a preliminary estimate, Eurostat said in a separate release.

"The economy is growing roughly at trend at an annualised 1.25%," Kenneth Broux, head of corporate research FX and rates at Societe Generale said. "Expectations are quite positive for this year, especially for Germany, which is turning the corner."

Adding to the mildly positive signs, employment in the euro zone rose by 0.2% over the previous quarter, holding steady from three months earlier and confirming views that the bloc keeps creating jobs and a tight labour market will keep up consumption.

A fiscal splurge in Germany is adding to the optimism, with the government's plans to boost investment in defence and infrastructure, two long-neglected areas, finally materialising.

"Defence orders are starting to show up in the industrial orders data," JPMorgan economist Greg Fuzesi said.

"We continue to think that significant sums are being mobilised and that last year’s under-delivery is likely to be followed by much fuller delivery from this year onwards."

This spending is slow to pick up pace but should lift second quarter figures and be at full speed by the end of the year.

The bloc's external economic challenges could also kick-start long-stalled reform efforts at home and the European Central Bank estimates that breaking down external barriers could offset trade lost to U.S. tariffs.

(Additional reporting by Francesco Canepa; Editing by Alex Richardson)