Changes in China's trade pattern are putting downward pressure on developed market goods inflation

Overview

This report discusses how rising Chinese exports and falling imports affect developed market inflation through global goods supply and demand channels. Goldman Sachs argues that after the pandemic, China's exports to non-US developed markets grew rapidly, while Chinese imports remained below their pre-pandemic trend, reflecting trade diversion, export resilience, and policy-driven self-sufficiency. These changes have already created meaningful downward pressure on goods prices in non-US developed markets.

Core views

The report's core view is that changes in China's trade structure lower developed market prices through two channels. First, higher Chinese exports directly increase goods supply in receiving economies and reduce consumer prices. Second, lower Chinese imports release supply into global goods markets, creating a further disinflationary shock. Based on realized trade data, the two channels together have lowered goods prices in non-US developed markets by an average of 0.7% over the past two years and reduced annual headline and core inflation in developed markets by about 0.1-0.2 percentage points.

Analysis framework

The report builds a cross-country trade and inflation panel, mapping 6-digit HS trade data to 3-digit COICOP goods inflation categories and constructing comparable goods inflation indicators across countries. It then uses panel regressions to estimate separately the effects of rising Chinese import penetration and falling China's share of global import demand on developed market goods prices.

Methodology notes

• MacroeconometricsCross-country trade-inflation panel

  Matching trade data with consumer price classifications to estimate the effect of changes in trade patterns on goods prices.

  The report first uses a UNSD mapping table to convert 6-digit HS trade data into Eurostat CPA classifications, then uses a Eurostat bridge matrix to allocate them to COICOP consumption categories; for countries that do not report inflation by COICOP, it constructs comparable inflation indicators using the closest available categories.

• Price pass-throughChinese import penetration regression

  Measures the extent to which Chinese supply enters local markets using the share of Chinese exports in the receiving country's total consumption.

  After controlling for country fixed effects, each 1 percentage point increase in Chinese import penetration during 2024Q1 to 2026Q1 is associated with a 0.5% decline in goods prices.

• Global supply and demandInteraction term between China's share of import demand and import exposure

  Measures the indirect impact of weaker Chinese import demand on goods prices in other countries.

  For country-product pairs that are fully import-dependent, a 1 percentage point decline in China's share of global import demand is associated with a 1.3% decline in prices.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Developed market inflation

  Changes in China's trade pattern are creating downward pressure on goods inflation.

  Strengths

  Cross-country panel results show a significant negative relationship between prices and Chinese export penetration, and realized trade data can explain the decline in goods prices over the past two years.

  Weaknesses

  The estimates mainly cover goods prices, while services inflation and domestic supply and demand remain important determinants of overall inflation.

  Comparison

  The impact is larger in the Euro area and Japan, and smaller in Canada.

  Risks

  Pass-through lags, changes in trade policy, exchange rate moves, or a rebound in global demand could alter the inflation impact.

• Euro area macro assets

  Higher Chinese import penetration causes a more pronounced downward effect on Euro area goods prices.

  Strengths

  The report estimates that Euro area goods prices are lowered by about 1.0%.

  Weaknesses

  Differences across countries and categories within the Euro area may be large.

  Comparison

  The effect is greater than the 0.7% average for non-US developed markets.

  Risks

  European trade protection, supply chain restructuring, or energy price volatility could weaken the disinflationary effect on goods inflation.

• Japan macro assets

  Weaker Chinese import demand has a relatively large indirect impact on related goods prices in Japan.

  Strengths

  The report estimates that Japanese goods prices are lowered by about 1.1%, among the higher levels across major regions.

  Weaknesses

  Part of the impact comes from specific trade exposures and may not apply evenly across all consumer categories.

  Comparison

  The effect is slightly larger than in the Euro area and clearly larger than in Canada.

  Risks

  Yen exchange rate volatility, import price changes, and domestic wage inflation could offset part of the decline in goods prices.

• China external surplus theme

  China's export resilience and import substitution together increase supply pressure on global goods markets.

  Strengths

  The report notes that China's exports to non-US developed markets have risen by about 20% since 2024, and the China economics team expects the current account surplus to continue widening.

  Weaknesses

  This theme depends on external demand, industrial competitiveness, and the trajectory of trade frictions.

  Comparison

  The decline in exports to the US contrasts with export growth to other developed markets.

  Risks

  Escalating trade restrictions, weaker overseas demand, or policy changes in China could alter export and import paths.

Key data

• Increase in China's nominal exports to non-US developed marketsAbout 20%Growth since 2024, despite a clear decline in exports to the US.
• Estimated price impact of Chinese import penetrationEach 1 percentage point increase corresponds to a 0.5% price declineBased on cross-country panel regression from 2024Q1 to 2026Q1.
• Estimated impact of weaker Chinese import demandUnder full import dependence, each 1 percentage point decline corresponds to a 1.3% price declineEstimated using the interaction between changes in China's share of global import demand and country-product import exposure.
• Combined effect on goods prices in non-US developed marketsDown 0.7%Combined estimate of changes in China's trade pattern over the past two years.
• Contribution from the export increase channelDown 0.6%The main source of the overall effect.
• Contribution from the import reduction channelAbout a 0.1% declineAn additional modest drag on realized goods prices.
• Impact on developed market inflationAnnual headline and core inflation down 0.1-0.2 percentage pointsTransmitted through lower goods prices.
• Impact on Japanese goods pricesDown 1.1%A relatively large effect, partly due to weaker Chinese import demand from Japan.
• Impact on Euro area goods pricesDown 1.0%A relatively large effect, mainly due to higher Chinese import penetration.
• Impact on Canadian goods pricesDown 0.2%A smaller effect because the rise in Chinese import penetration was limited.

Impact & implications

From an investment perspective, the report reinforces the macro narrative of easing developed market inflation and a more accommodative policy environment. If Chinese export supply continues to increase and the current account surplus continues to widen, global goods inflation may remain under pressure, especially in economies such as the Euro area and Japan that are more sensitive to Chinese goods supply or changes in Chinese import demand.

Risks

• The panel regressions show correlation and cannot fully rule out omitted variables or limitations in causal identification.
• Inflation classification standards are not fully consistent across countries, and some countries require approximate categories to construct comparable indicators.
• Trade policy, tariffs, and geopolitical tensions could alter the direction of Chinese exports and price pass-through.
• Exchange rates, energy prices, wages, and services prices could offset the impact of lower goods prices on overall inflation.
• There is uncertainty around the persistence of China's import substitution and widening current account surplus.

What to watch

• Whether China's exports to non-US developed markets continue to grow.
• Whether the decline in China's exports to the US further drives trade diversion.
• Whether Chinese imports continue to remain below their pre-pandemic trend.
• Whether China's current account surplus widens as expected.
• Goods inflation subcomponents in major developed markets such as the Euro area, Japan, and Canada.
• Whether the lagged effect of trade changes passing through to consumer prices continues to emerge.
• Changes in tariffs, anti-dumping measures, and industrial policies in major economies.