The European Union’s trade deficit with China has ballooned to a staggering €1 billion per day, and it’s not just about the sheer volume of imports. What’s truly alarming is the role of China’s currency, the yuan, in exacerbating this imbalance. Personally, I think this is where the conversation needs to shift—away from tariffs and quotas and toward the subtler, yet equally powerful, tool of currency manipulation. It’s a game-changer, and one that Brussels seems to be waking up to, albeit slowly.
The Yuan’s Hidden Advantage
One thing that immediately stands out is the widespread agreement among experts that the yuan is undervalued by 20-25%. This isn’t just a technicality; it’s a strategic move that gives Chinese exports an unfair edge. If you take a step back and think about it, this undervaluation effectively subsidizes Chinese goods, making them 30-40% cheaper than their European counterparts. What many people don’t realize is that this isn’t solely due to central bank intervention. Alicia Ferro Herrera, an expert at Bruegel, points out that China keeps much of its export revenue offshore, particularly in Hong Kong, preventing the yuan from appreciating naturally. This raises a deeper question: Is this a deliberate policy, or a byproduct of China’s complex financial system? In my opinion, it’s likely a bit of both, and that’s what makes it so hard to address.
The EU’s Growing Desperation
The EU’s trade deficit with China hit a record €359.9 billion in 2025, and for the first time, every single EU member state, including economic powerhouse Germany, is in the red. What this really suggests is that the bloc’s economic model is under siege. European Commission President Ursula von der Leyen called it ‘unsustainable,’ and she’s right. But what’s fascinating is how inflation dynamics are compounding the problem. Ferro Herrera estimates that inflation differentials since the Ukraine invasion account for about three-quarters of the EU’s competitiveness loss. This isn’t just about currency—it’s about a perfect storm of economic pressures that Europe seems ill-equipped to handle.
Brussels’ Limited Options
German Chancellor Friedrich Merz has suggested opening a dialogue with China on the currency issue, citing the 1985 Plaza Agreement as a potential model. From my perspective, this is both ambitious and naive. The Plaza Agreement worked because it involved major economies coordinating to address a shared problem. Today’s geopolitical landscape is far more fractured. What makes this particularly fascinating is Merz’s reference to the European Monetary System, which once used exchange-rate bands to stabilize currencies. But here’s the catch: China isn’t part of any such system, and it’s unlikely to join one. Ferro Herrera’s suggestion to monitor sector-by-sector export prices for signs of overcapacity is more practical, but it’s a reactive measure, not a solution.
The Broader Implications
If you ask me, the yuan’s undervaluation is a symptom of a larger issue: China’s state-driven economic model versus Europe’s market-oriented approach. This isn’t just a trade dispute; it’s a clash of ideologies. What many people don’t realize is that currency manipulation is just one tool in China’s toolkit—subsidies, state-backed enterprises, and strategic overproduction are equally problematic. The EU’s challenge isn’t just to level the playing field but to redefine what fair competition means in a globalized economy. This raises a deeper question: Can Europe afford to play by the rules when its competitors don’t?
A Way Forward?
In my opinion, the EU needs to think beyond diplomacy. While dialogue is important, it’s unlikely to yield results without leverage. One surprising angle is the role of inflation—Europe’s inability to control price growth has handed China an unintended advantage. Addressing this internally could be a first step. But ultimately, the EU must confront the uncomfortable truth: its economic model is being outmaneuvered. Whether through strategic industrial policy, currency coordination, or a reevaluation of its trade dependencies, Europe needs to act—and fast. The alternative? A future where the EU is perpetually at a disadvantage, not just in trade, but in global influence.
What this really suggests is that the yuan isn’t just a currency—it’s a weapon in a new kind of economic warfare. And unless Europe wakes up to this reality, its deficit will only grow. Personally, I think this is the defining economic challenge of our time, and how the EU responds will shape its future for decades to come.
