"OP Corporate Bank": in critical sectors, EU imports from China are increasing, while efforts are being made to reduce dependency.

Growing Dependence of the EU and Lithuania

This week, China cut its key loan interest rates by 10 basis points in an effort to stimulate domestic businesses and the economy.

“In critical sectors, EU imports from China are growing – lithium batteries, steel, metals, and electric vehicles are being purchased. The country's increasing influence highlights the challenges faced by European clean tech companies and raises the EU’s dependency on China,” says Joona Widgrén, Senior Economist at OP Financial Group.

China has been the EU’s largest goods supplier for five consecutive years – last year, it accounted for 21.3% of imports worth €517.8 billion. The United States came in second, supplying 13.7% of goods.

Lithuania’s imports from China rose to 5.6% in the first quarter of this year (up from 4.5% a year earlier), with China climbing to fifth place among the country's most important import partners.

China remains the third-largest export market for the EU – 8.3% of EU-produced goods, worth €213.3 billion, were exported there last year. Lithuania exports very little to China – last year, the country accounted for only 0.58% of Lithuanian exports, ranking 28th among its most important export destinations.

“For wholesale and manufacturing companies in Lithuania and across the EU, it’s important to note that with exports to the U.S. becoming more expensive in the long term, Chinese companies will be even more persistent in offering their goods and raw materials to European buyers – large discounts or even price dumping are possible. This may be favorable for some companies, while others should prepare accordingly,” emphasizes Giedrius Dzenkauskas, Head of Sales at OP Corporate Bank’s Lithuanian branch.

Temporary Relief of Tensions

Following the announcement of a 90-day reduction in mutual import tariffs by the U.S. and China, the trade war has been temporarily halted. Under the agreement, the U.S. reduced import tariffs on certain Chinese goods from 145% to 30%, while China cut tariffs on U.S. goods from 125% to 10%. Both countries committed to continuing negotiations toward a long-term trade deal.

Under the current temporary tariff regime, Chinese goods in the U.S. have become slightly more expensive, as the average tariff before the trade war was 20.8%, now increased to 30% – a 44% hike, though still a relatively small part of final prices.

Meanwhile, U.S. goods in China have become cheaper – before the changes, China applied an average 21.2% tariff, now reduced by 53% to 10%.

According to G. Dzenkauskas, Lithuanian and European companies now have time to prepare for a potential flood of Chinese goods in the autumn, should the U.S. and China resume the tariff war.

OP economists estimate that if the U.S. and China fail to reach an agreement on tariffs, the resulting measures could slow China’s economic growth this year by 1–2%.

It is expected that the Chinese government will take stimulus measures to cushion the impact and maintain GDP growth, while actively seeking new markets.

Just a week after the temporary tariff deal, the State Bank of China decided to cut the one-year loan prime rate from 3.1% to 3.0% and the five-year rate from 3.6% to 3.5%.

According to OP economists, monetary policy easing is expected to continue throughout the year.

China’s Economic Challenges

In recent years, China has faced slowing economic growth – OP forecasts a GDP growth rate of 3.5% this year and 4% next year, significantly lower than in previous years.

Last year, China’s economy grew by 5%. The government has set a similar growth target for this year, but it may be difficult to achieve under current conditions.

“In early 2025, growth was supported by the industrial and export sectors. Domestic consumption remains weak, although there are small signs of recovery,” says J. Widgrén.

The trade dispute is further weakening consumer confidence in China, which the government is trying to restore. Consumer sentiment has been especially affected by the real estate market crash that began in 2020.

Since then, borrowing restrictions have been in place for property developers. According to the economist, China's real estate sector could recover over the next two years, with some unsold apartments being converted into social housing.

Inflation in China remains low – prices rose just 0.2% last year, and the 2% inflation target is unlikely to be met this year. The country’s public debt continues to rise and now equals 120% of GDP. Citizens are particularly concerned about high levels of local government debt.

Structural Changes Ahead

China also faces demographic challenges – although it remains the world’s second most populous country, it is estimated that over the next 10 years, about 300 million people aged 50–60 will exit the labor market.

By 2035, China’s pension system may face funding shortages, even as the retirement age is gradually being raised.

The majority of China’s foreign direct investment is directed to Asia (68%), followed by Latin America (20%), while Europe receives only 5%.

“Since 2020, the country has been implementing a Dual Circulation Strategy, aimed at boosting domestic consumption, innovation, and reducing dependence on imports,” says the economist.

According to J. Widgrén, openness to global markets, investment, and exports is being maintained, but the goal is for these not to be the primary drivers of economic growth.

China is increasingly focused on green technologies – investment is growing, more people are buying electric cars and bicycles, and there are cities where only electric taxis operate.

Nevertheless, energy demand remains high, imports of oil and gas from Russia are increasing, and coal remains widely used for energy production.

Europe’s Outlook

Over the past 50 years, trade volumes between China and the EU have grown hundreds of times and are at historically high levels. While EU imports from and exports to China declined by 0.5% and 4.5% respectively last year, ties remain very strong.

The EU is aiming to reduce economic dependence on China, especially in sensitive areas such as semiconductors, critical raw materials, and strategic technologies. Lithuania is also applying specific restrictions and security requirements, such as limiting the use of Chinese equipment in 5G networks and green energy.

Still, the EU’s position is described as risk reduction, rather than full decoupling from China, which is the U.S.'s stated goal.

According to OP economists, global trade uncertainty and China’s economic problems persist, and the temporary tariff relief has only paused tensions with the U.S.

“For businesses in Lithuania and the entire EU, it is essential to understand these evolving dynamics and adapt in time or take advantage of new opportunities – by reviewing supply chains, export markets, assessing the competitive landscape, and managing risks. We live in a rapidly changing environment, so summer will be a time to prepare for all potential scenarios in the fall,” notes G. Dzenkauskas.