G7 Weighs Tariff Escalation on Chinese Exports Amid EU Trade Deficit Surge

G7 Summit in France Targets China Trade Practices

G7 leaders meeting in Évian-les-Bains, France, have placed China's export strategy at the forefront of discussions, signaling potential coordinated tariff measures amid rising trade tensions. The move follows China's record $1.2 trillion global trade surplus in 2024, which has intensified export flows to Europe as U.S. tariffs curbed shipments to America by 37% in early 2024.

EU imports from China rose 16.4% year-over-year in the January-to-May period, deepening trade deficits across the bloc. France's deficit with China expanded to $5.3 billion, while Germany, traditionally a major exporter to China, now imports more than it exports. The German economy contracted in 2023 and 2024, with growth limited to 0.2% in 2024, underscoring the strain from Chinese competition in core sectors.

EU Tariff Regime Under Scrutiny

The EU currently applies baseline WTO-mandated tariffs on Chinese goods but has imposed sector-specific duties of up to 35% on electric vehicles. French officials are advocating for a broader tariff framework aligned with U.S. trade policies, targeting Chinese overcapacity in EVs, batteries, solar panels, and advanced machinery. Analysts warn that China's state-driven industrial model, supported by cheap credit and undervalued labor costs, perpetuates overproduction and export dependency, exacerbating global trade imbalances.

Market Implications for EURUSD and Risk Sentiment

European equities with China exposure, particularly German industrials and automakers, face heightened downside risks if tariffs expand beyond current measures. The euro (EURUSD) may weaken against the dollar if trade tensions escalate, as investors price in potential economic headwinds for the eurozone. Risk sentiment could deteriorate, with safe-haven demand for the dollar and yen likely rising amid uncertainty over supply chain disruptions in critical sectors.

China now competes directly with 58% of eurozone exports, up from 46% in 2000, with its product mix shifting toward high-value goods. This "China Shock 2.0" dynamic poses structural challenges for European policymakers, who may struggle to balance competitiveness with strategic autonomy. Traders should monitor EURUSD volatility and Chinese yuan (CNY) repricing risks ahead of any formal G7 communique.

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