Published on Aug 14, 2026 • Updated on Sep 4, 2026
This article was written by Adem Tumerkan
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China isn't officially fighting a two-front trade war with the U.S. and EU, but the pressure is mounting on both sides at once. The EU's trade deficit with China hit a record €359.9 billion in 2025, even as the U.S. deficit fell to $202.7 billion, suggesting China is rerouting excess exports from a closing U.S. market straight into Europe. This is creating widespread trade imbalances throughout Europe, affecting manufacturing and jobs.
For the past few years, the world's attention has been locked on the U.S.-China trade war - tariffs, chip bans, overcapacity issues, and rare earth bottlenecks.
Meanwhile, a second front in this trade war has been building up - mostly ignored - while the U.S.-Iran war and the AI capex boom hog the headlines.
That front is between Europe and China.
I’ve written to you about this last year1 – how the embers were beginning to burn between the world’s second largest economy (the EU collectively) and the world’s third largest economy (China).
Well, that thesis hasn’t changed. In fact, it’s gotten more likely.
The core issue comes down to global trade imbalances.
China subsidizes its exports and pushes the excess into Western markets - and that shows up as rising unemployment, rising deficits, and manufacturing capacity getting hollowed out on the other side.
So is China fighting a two-front trade war between the U.S. and Europe now?
Not officially – at least not yet.
But the pieces are already on the board - and Europe seems to have had enough.
Military strategists have feared one thing above almost everything else for the last two centuries.
And that’s fighting a war on two fronts at once.
Think of it like this. An army only has so many troops, so much ammunition, so many supply lines, etc. Fighting one enemy means every resource point is focused on one direction.
But fighting two enemies at once means splitting all of that in half.
Worse, the two enemies rarely fight the same way. One might come by land - the other by sea. One retaliates with tanks - the other with submarines. Thus, the general can't use one playbook for both. He actually needs two playbooks – running at double the effort - with half the resources for each.
Doesn't sound great, right?
That's why avoiding a two-front war became doctrine for generations of military planners.
For example:
Trade wars run on the same premise.
A country can absorb one hostile trading partner. But two at the same time - each demanding a different response - is a much harder problem to handle. Especially when it’s the U.S. and EU – which combined make up roughly 44% of global GDP3.
The U.S. fights China with tariffs and chip bans. Europe is reaching for currency policy and anti-subsidy probes. Different weapons and strategies – but China has to answer both regardless.
China’s economic growth model depends heavily on exporting its way out of trouble (which it’s in big time). But that model assumes at least one major buyer stays open.
Right now, both are starting to close the door at once.
Let’s start with the currency angle - because it's the part I believe most people are missing (remember, currencies4 play a big part in a trade war).
German Chancellor Friedrich Merz has spent the past few months making a claim that would've sounded extreme a year ago - that the Chinese yuan is undervalued by as much as 25-30% against the euro and has been for years.
Here's what that 30% discount actually means.
Say a Chinese factory makes a washing machine for the equivalent of 1,000 yuan. If the yuan traded at what Merz would call a "fair" value against the euro - that machine might cost a European importer around €140. But because the yuan is kept artificially weak by Beijing to boost exports, that same 1,000-yuan machine converts to something closer to €100. And that alone just handed the Chinese exporter a built-in 30% discount a European competitor will struggle to match (no matter how efficient their own factory is).
Put simply, a weaker currency works like a permanent sale sign stapled to every Chinese export - yet nobody in the EU voted for it.
The U.S. has also been stressed about Chinese imports and Beijing’s manipulation of the yuan. So Merz is just describing the same disease.
Meanwhile, in June, the EU's trade chief Maroš Šefčovič said5 the bloc's imbalance with Beijing had reached a point that requires a “reset." Merz followed days later - accusing China of flooding markets through heavy subsidies.
Long story short, a weak yuan against the euro means Chinese goods stay cheap in Europe no matter how many tariffs the EU stacks on top. And this will only make things more inflamed.
If Europe's frustration has a face - it's Germany as they’re getting squeezed from both sides.
For starters, Germany is also a major exporting economy – so its trade balance is most at risk as Chinese imports flood into Germany.
Secondly, Germany is a major auto producer – which depends on Chinese consumers buying BMWs and Mercedes. But China’s consumer economy remains anemic at best, which means Germany is exporting fewer cars.
Said another way, Germany is exporting less and importing more at the same time.
To put this not perspective, German exports to China fell over 12% year-on-year to just under €37 billion in H1 2026 - knocking China down to Germany's ninth-biggest export market (a huge drop from second place just five years ago).
Chancellor Merz put it more bluntly6 during his own trip to Beijing – stating that German-China trade deficit has "quadrupled in five years” (that’s a ~32% compounded annual growth rate).
Thanks to this, Germany is losing7 more than 10,000 manufacturing jobs a month right now which is becoming an existential crisis for the export-driven economy (and politically unpalatable)
But Germany's own government is split on how to push back, with half wanting to hit back hard and the other half wanting to keep working diplomacy with China. The latter hasn't worked.
Either way, the match is set.
Merz visited Beijing in February, talking about how cooperation was possible. Now - just months later - he's citing the 1985 Plaza Accord (a period of historically aggressive currency intervention) as his preferred option.
Thus, when an export-driven nation that depends on China as its top trading partner starts talking about currency intervention - the relationship has already changed.
Neither side is waiting for the other to move first anymore.
Since I wrote about this last year, here's some recent news:
China's moves:
The EU's moves:
Both sides publicly insist they want to avoid a full trade war – yet both sides keep pushing toward one anyway.
Here's where the two-front problem gets sharp.
China's entire strategy for delaying its own economic slowdown has been to keep manufacturing running and sell the excess abroad.
It used to be the U.S. – but since the first trade war started in 2018 under President Trump – it’s been declining. And it amplified in 2025.
Thus, as the U.S. tariffs rose on China, the goods they’ve been overproducing didn’t just disappear.
They went looking for a new home.
Look at the shape of these two lines. The U.S. deficit with China fell from $382.3 billion in 2022 to $202.7 billion in 2025 - nearly cut in half.
Yet over that same stretch, the EU's deficit did the opposite - climbing from €291.0 billion in 2023 back up to a record €359.9 billion in 2025 (and likely hit a new record this year).
This isn’t a coincidence – and that trend will only continue if Europe keeps absorbing the overflow.
But like the U.S. before it - Europe is now signaling (loudly) that it won't keep doing that indefinitely.
And this brings us back to the core issue - if the EU follows the U.S. and gets aggressive too, where do the Chinese goods go next?
There isn't another economy large enough to absorb what the U.S. and EU currently take in combined.
It can’t be India, Southeast Asia, or Latin America - none of them have the import capacity to soak up hundreds of billions in rerouted Chinese exports. Thus, if both doors close, China is looking at a big problem.
Of course, a trade war would hurt the EU too (nobody walks away unscathed).
But on a net trade balance basis, the pain lands lopsided.
China is the side running the surplus it needs to keep manufacturing alive. Europe and the U.S. are the sides that can absorb a hit to a relationship that was already lopsided against them.
That asymmetry is exactly why every trade war in this fight ends up cutting deeper into China's position than into either buyer.
The point is, China fighting one big trade war was annoying but doable.
But two? That’s a problem.
In the meantime, where the trade war goes next - if it goes anywhere - is the question I'll be watching and keep you updated.
Is China fighting a trade war with both the U.S. and the EU? Not officially, but tension is rising on both fronts at the same time. The EU's trade deficit with China hit a record €359.9 billion in 2025, while China's surplus with the EU-27 widened to $113 billion in just the first four months of 2026. Nothing's been declared, but both sides are already trading tariffs and threats.
Why is Europe's trade deficit with China growing while America's is shrinking? As U.S. tariffs made it harder for Chinese exporters to sell into America, that excess manufacturing output got rerouted toward Europe instead. The U.S. deficit with China fell from $382.3 billion in 2022 to $202.7 billion in 2025, nearly cut in half, while the EU's deficit climbed to a record €359.9 billion over roughly the same stretch.
How much has Germany's trade deficit with China grown? German Chancellor Friedrich Merz says the deficit has quadrupled in just five years, and Germany is now losing more than 10,000 manufacturing jobs a month because of it. German exports to China fell over 12% year-on-year in the first half of 2026, dropping China from Germany's second-biggest export market five years ago down to ninth place today.
Why is a weak yuan part of the problem? German officials, including Chancellor Merz, say the yuan is undervalued by 25-30% against the euro, which acts like a built-in discount on every Chinese export. That means even if the EU stacks on more tariffs, cheap Chinese goods can still undercut European producers, because the currency gap is doing most of the damage regardless of trade policy.
What happens if China loses both the U.S. and EU as export markets? No single market, including India, Southeast Asia, or Latin America, has enough import capacity to absorb the hundreds of billions in exports China currently sends to the U.S. and EU combined. That's why losing both markets at once is a real structural risk for China's export-driven growth model, unlike losing just one, which it could likely manage.
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