Europe's Inflation Fight May Depend on Chinese Supply Chains

The European Central Bank (ECB) raised interest rates by 25 basis points to combat inflation, but this may not be enough to bring down prices. ECB President Christine Lagarde noted that 'the current shock is longer-lasting,' meaning Europe needs reliable partners rather than new frictions.

China is an important trading partner for Europe, with deeply intertwined supply chains. The certainty of cooperation between the two economies outweighs the risks of confrontation. However, some in Europe are still hyping the so-called 'China shock,' framing Chinese manufacturing as a threat to European industry.

This narrative overlooks the real value of China's supply chain, which extends far beyond inexpensive goods. China has built the world's largest and most complete industrial system, with closely integrated upstream and downstream clusters spanning basic materials, component processing, and finished manufacturing.

European manufacturers are being squeezed from both sides by high energy costs and interest rate hikes. However, sourcing intermediate goods and high-tech components from China can help downstream European industries absorb energy price pressures and prevent unchecked cost pass-through to European consumers.