Goldman Sachs Says China Competition Weighs More on EU Growth Than Trade Deficit

China’s growing dominance in global manufacturing is putting greater pressure on the European Union’s economy through lost market share than through its widening bilateral trade deficit, according to a Goldman Sachs report released on Thursday. The investment bank said increasing competition from Chinese exporters is becoming a more significant challenge for European industries, particularly in international markets where both regions compete.

Goldman Sachs noted that Chinese manufacturers have expanded aggressively into overseas markets as weak domestic demand and excess industrial capacity continue to drive exports. This has intensified competition for European companies across the Asia-Pacific region, Latin America, and Eastern Europe, reducing the EU’s ability to maintain its traditional export strength.

The findings come as the European Central Bank recently lowered its economic growth outlook for the remainder of the year, reflecting persistent concerns over slowing activity and external trade pressures.

According to Goldman Sachs, the primary impact on Europe stems from losing business in third-country markets rather than from the direct trade imbalance with China. The bank estimated that China’s exports to the European Union climbed approximately 16% during the first five months of the year, while EU exports to China increased by less than 10% over the same period.

Manufacturing industries have been the hardest hit, particularly transport equipment, industrial machinery, and other capital goods where Chinese producers continue to benefit from lower production costs and stronger price competitiveness.

The report highlighted the long-term shift in global export leadership. Europe’s share of worldwide capital goods exports has declined to around 43%, down from 54% in 2005. Meanwhile, China’s share has risen sharply to approximately 24% from just 7%, with machinery exports to Europe alone increasing by roughly 50%.

Earlier this month, European Union leaders discussed additional measures to address the growing trade imbalance with China and protect domestic industries from rising import competition.

Despite expectations that the EU will adopt a firmer trade stance, Goldman Sachs believes Brussels is unlikely to implement sweeping tariffs similar to those imposed by the United States. Instead, the bloc is expected to pursue targeted trade policies aimed at sectors experiencing the greatest competitive pressure.

The brokerage said Europe remains cautious about taking overly aggressive action because it depends on China for critical raw materials, including rare earth elements that are essential for advanced manufacturing, clean energy technologies, and defense industries.

Goldman Sachs expects future EU policy measures to focus first on industries most affected by Chinese competition, including steel, industrial machinery, and basic chemicals. Such targeted actions would allow the bloc to support strategic sectors while avoiding broader trade measures that could disrupt supply chains and access to vital resources.

The report underscores the growing challenge China’s export-driven manufacturing model poses to European economic growth and highlights the balancing act facing EU policymakers as they seek to protect domestic industries without damaging important trade relationships.