The European Union's trade surplus continued to shrink in December 2025, according to data released today by Eurostat, offering the starkest evidence yet that the bloc's export-driven economic model is under existential pressure. The surplus fell to €12.9 billion from €13.9 billion a year earlier, as both the US tariff regime and rising Chinese imports eroded Europe's competitive position from opposite directions.
The US Problem: Tariffs Bite Hard
Exports to the United States — the EU's largest export market — fell by 12.6% from a year earlier, pushing the bloc's surplus with America down by roughly a third to €9.3 billion. Machinery and vehicle sales, which have been the engine of European export growth for decades, continued their decline. Chemical exports also weakened.
The deterioration follows a series of tariffs imposed by the Trump administration beginning in early 2025, including baseline IEEPA tariffs, Section 232 duties on steel and aluminium that remain at 50% for EU products, and various sector-specific levies. While a framework agreement between Brussels and Washington has eased some tensions, the underlying tariff architecture continues to weigh on transatlantic trade. Economists warn it may take years for Europe to regain lost market share, as American importers have already begun sourcing from alternative suppliers.
The China Problem: A Flood of Cheap Goods
On the other side of the ledger, the EU's trade deficit with China widened to €26.8 billion in December, up from €24.5 billion a year earlier. This trend has accelerated as US tariffs on Chinese goods — reaching effective rates of around 135% in some categories — have diverted massive volumes of Chinese exports toward European markets.
The products arriving range from disposable consumer items to advanced manufactured goods including electric vehicles, batteries, chemicals, and machinery. The Chinese currency has depreciated significantly against the euro in recent years, making Chinese goods ever cheaper for European buyers. The European Central Bank has estimated that euro-area imports from China could rise by up to 10% in 2026 as a result of this trade diversion, putting downward pressure on prices but also threatening domestic production.
"Those goods have just found new destinations, with Europe emerging as a major new destination for low-cost items, from disposable consumer items to advanced manufactured products."
— Jay Shambaugh, George Washington University
A Resilient Domestic Economy — For Now
Despite the trade shock, the eurozone's domestic economy has shown surprising resilience. GDP grew by 0.3% in the final quarter of 2025, in line with preliminary estimates, and employment rose by 0.2% over the quarter. AI-related investment and domestic consumption are helping to offset the drag from trade, keeping growth at a modest but steady pace.
However, the eurozone is likely facing years of expansion barely above 1% annually, a significant downgrade from the growth rates Europe enjoyed when net exports were a reliable driver of output. The European Central Bank has suggested that breaking down internal market barriers could help compensate for lost US trade — a reform agenda that EU leaders discussed at yesterday's summit in Belgium.
The Policy Response
Brussels has been exploring several countermeasures. The EU has agreed to impose fees on small imported packages starting in July 2026, targeting the direct-to-consumer e-commerce platforms that have become a primary channel for Chinese goods. The European Commission is also preparing new economic security measures on access to public funding, expected in March, to limit the role of Chinese companies in sensitive sectors.
On the US front, Brussels continues to seek additional tariff exemptions and relief on steel and aluminium duties. Washington has demanded that Europe lower its own industrial tariffs in return — legislation that is now slated for 2026 — and has also pushed for softer implementation of EU digital regulations as a precondition for trade relief.
The data released today paints a picture of a continent caught in a vice between the world's two largest economies, forced to simultaneously defend its markets from Chinese competition and rebuild its trading relationship with an increasingly protectionist United States. How Europe navigates this squeeze will shape its economic trajectory for years to come.