Tariffs were supposed to shrink China’s trade surplus. Instead, it ballooned to a record $1.19 trillion in 2025 (up $196 billion, a 19.8% jump), and the surplus didn’t vanish; it just changed addresses. That’s the headline finding from the latest data, and it explains why Brussels is scrambling to figure out its China strategy before the problem gets any bigger.

The Diversion Effect

A McKinsey analysis laid it out plainly: US imports from China have dropped sharply under the weight of successive tariff rounds. But imports from Vietnam, India, Taiwan, and Mexico have surged to fill the gap. Some of that is genuine supply chain diversification. A lot of it is transshipment: Chinese goods with a brief layover in a third country before continuing to American ports. Either way, the tariffs haven’t reduced America’s overall trade deficit; they’ve just rearranged the geography.

The more consequential shift is where China’s excess production is going. With the US market partially walled off, Chinese exporters have pivoted aggressively toward ASEAN and Europe. China’s trade surplus with Asia jumped $125 billion in 2025 alone, and European manufacturers (particularly in steel, solar panels, electric vehicles, and industrial machinery) are feeling the squeeze.

Brussels Fights Back

The European Commission isn’t sitting idle. The Critical Raw Materials Act is the EU’s attempt to reduce dependence on Chinese-controlled supply chains for the minerals that underpin the green transition: lithium, cobalt, rare earths. There’s growing talk of “Made in Europe” requirements for public procurement, especially in defense and energy infrastructure.

But the EU’s position is complicated. Unlike Washington, which can absorb the economic cost of decoupling through sheer market size, European economies are deeply intertwined with Chinese supply chains. Germany’s automotive sector, France’s luxury goods exports, and the continent’s reliance on Chinese-manufactured solar panels all make a clean break impossible. The EU’s preferred term remains “de-risking” rather than “decoupling,” a distinction that’s becoming harder to maintain.

Global Trade Keeps Growing, Somehow

Here’s the counterintuitive part: despite all the tariff chaos, global trade actually grew. WTO data from its March 2026 Global Trade Outlook shows worldwide merchandise trade hit $35 trillion in 2025, a 7% increase. Services trade also expanded. The global trading system is more resilient than the doom-mongers predicted, though the composition and direction of flows are shifting fast.

The UNCTAD Trade and Development Report has emphasized that developing countries, particularly in Southeast Asia, are the biggest beneficiaries of trade diversion. Vietnam’s export sector has roughly doubled since the first US-China tariffs in 2018. India’s merchandise exports are finally gaining ground. But the sustainability of these gains depends on whether these countries can move up the value chain before the music stops.

The October Cliff

ING’s research team has flagged a date that markets aren’t paying enough attention to: October 2026. That’s when the current US-China trade deal expires. If Washington and Beijing can’t agree on an extension or replacement, tariff rates snap back to their pre-deal levels, or potentially higher, depending on the political climate in both capitals.

The implications for Europe are direct. A trade war escalation would push even more Chinese goods toward European ports, intensify pressure on EU manufacturers, and force Brussels into retaliatory measures it’s been trying to avoid. It would also complicate the Mercosur trade deal, which EU member states are currently voting on and which would open South American markets to European exporters while lowering barriers to agricultural imports.

The Strategic Calculus

What’s happening isn’t just a trade story. It’s a geopolitical one. The EU is trying to maintain commercial relationships with China, preserve its alliance with the United States, and protect its own industrial base, all simultaneously. The Critical Raw Materials Act, the potential Mercosur deal, and the ongoing tariff negotiations are all pieces of the same puzzle.

The old model, where everyone traded with everyone and comparative advantage sorted out the details, isn’t coming back. The question for 2026 and beyond is whether the new model can sustain the growth that $35 trillion in global trade represents, or whether the rerouting eventually becomes a roadblock.

Frequently Asked Questions

Why is China's trade surplus still growing despite tariffs?

US tariffs reduced direct imports from China, but Chinese exporters pivoted to other markets. China’s trade surplus hit a record $1.19 trillion in 2025, up nearly 20% from the prior year. Much of the redirected flow goes to ASEAN countries and Europe. Some goods also reach the US indirectly through transshipment, briefly stopping in a third country like Vietnam or Mexico before continuing to American ports.

What does "de-risking" mean in EU-China trade?

De-risking is the EU’s preferred term for reducing economic dependence on China without fully cutting ties, which they call “decoupling.” In practice, it means diversifying supply chains for critical materials, adding domestic manufacturing capacity for strategic goods, and imposing targeted trade measures like the Critical Raw Materials Act. The EU uses this softer framing because European economies are deeply intertwined with Chinese supply chains, making a clean break unrealistic.

What happens when the US-China trade deal expires in October 2026?

If Washington and Beijing can’t agree on an extension or replacement before October 2026, tariff rates could snap back to pre-deal levels or potentially go higher. For Europe, this would mean even more Chinese goods getting redirected toward European markets, intensifying competitive pressure on EU manufacturers. It would also complicate ongoing negotiations around the EU-Mercosur trade deal and likely force Brussels into retaliatory measures it’s been trying to avoid.

Which countries benefit most from US-China trade diversion?

Vietnam, India, Taiwan, and Mexico have seen the biggest export gains as supply chains reroute away from China. Vietnam’s export sector has roughly doubled since the first US-China tariffs in 2018. Southeast Asian nations in particular have become major beneficiaries, though the long-term sustainability of these gains depends on whether they can move up the value chain and build genuine domestic manufacturing capacity rather than just serving as transshipment hubs.

Is global trade actually shrinking because of tariffs?

No. Despite the trade wars and tariff escalations, global merchandise trade actually grew 7% in 2025, reaching $35 trillion according to WTO data. The global trading system has proven more resilient than many predicted. What’s changed is the direction and composition of trade flows, not the total volume. Goods are being rerouted through different countries and supply chains are being reconfigured, but overall trade keeps expanding.