Trade War Could Trigger China's "Deflation Export" to Europe: Knot

The potential for a US-China trade war looms large, with the incoming Trump administration threatening tariffs that could have significant repercussions for the global economy, including the risk of China "exporting deflation" to Europe by selling goods at discounted prices, according to European Central Bank Governing Council member Klaas Knot.

In an interview with Dutch newspaper Volkskrant, Knot warned that if the US imposes new tariffs, China might respond by offering its products to Europe at reduced prices to remain competitive.

"There is a chance that the Chinese will start offering their goods in Europe at lower and lower prices," Knot said. "We are already seeing that happening in the steel market. In this way, China is, as it were, exporting its deflation to us."

Knot's remarks echo concerns previously expressed by ECB Vice President Luis de Guindos, who stated earlier this month that a trade war would negatively impact global economic growth and inflation.

"If a trade war breaks out, it is extremely negative for the global economy, particularly for growth but also for inflation," de Guindos said.

Knot, referencing a recent trip to China, noted that President Xi Jinping "left the clear impression that China is prepared for anything that could come their way from the US."

Turning to domestic issues, Knot cautioned labor unions that excessive wage demands could exacerbate inflation in Europe.

"Everyone feels in their bones that a wage demand of 7% is not in line with a return of inflation to 2%," he stated.