Leading economists have warned that the United Kingdom is set to receive a significant influx of low-cost Chinese imports, a development with the potential to further dampen inflation as the global trade landscape shifts under the weight of new US tariffs.
The "Second China Shock" and Trade Diversion
The trigger for this predicted wave of goods is the aggressive tariff policy implemented by former US President Donald Trump. Official data from Beijing reveals that China's trade surplus soared past $1 trillion (£750bn) in the year to November, a record high achieved despite a dramatic 29% year-on-year plunge in exports to the United States.
Manufacturers have sidestepped these American levies by redirecting shipments to other markets. Exports to the European Union rose by 15%, while those to the UK saw a 9% increase compared to the same period last year. Stephen Millard, Deputy Director at the National Institute of Economic and Social Research, confirmed the trend, stating there is a clear expectation that China will divert trade away from the US, with the UK being a likely destination.
Impact on UK Inflation and Economic Policy
This trade diversion is already on the radar of the Bank of England. In its November monetary policy report, the Bank noted that Chinese exports to the UK and euro area had increased while those to the US declined. Catherine Mann, an external member of the Bank's Monetary Policy Committee, told the Treasury Committee she had observed early signs of this dynamic affecting UK import prices, describing the impact as having a "slightly disinflationary" effect.
With headline inflation currently at 3.2% and forecast to fall close to the government's 2% target by mid-2026, cheaper imports could accelerate that decline. China is already the UK's second-largest source of imports after Germany, sending £70bn worth of goods in the year to June. Key categories include cars, telecommunications equipment, and sound apparatus.
Jack Meaning, UK Chief Economist at Barclays, forecasts a deceleration in core goods inflation through 2026, partly due to a global slowdown and a reorganisation of excess demand. The Bank of England has already begun to respond to cooling price pressures, cutting the base rate to 3.75% this month, with financial markets anticipating further reductions in 2026.
European Alarm and Domestic Tensions
While consumers may benefit from lower prices, the prospect of a surge in cheap imports has sounded alarm bells for European manufacturers fearful of being undercut. French President Emmanuel Macron has warned the EU may need "strong measures" to address the growing trade imbalance with China.
In the UK, the government faces a balancing act. Ministers have pledged to shield domestic industries, such as steel producers, from global gluts often fueled by subsidised Chinese output. However, the potential for these cheaper imports to suppress inflation presents a complex policy challenge, offering relief for household budgets while threatening competitive pressures on local manufacturing.
As Stephen Millard summarised, while the direct impact on UK inflation may not be enormous, a fall in the price of Chinese imports as they attempt to sell more into the British market "could have a reasonable effect on our import price index," adding another layer to the nation's economic outlook for 2026.
