FILE PHOTO: A view of the European Central Bank (ECB) headquarters in Frankfurt, Germany, March 6, 2025. REUTERS/Jana Rodenbusch/File Photo

FRANKFURT (Reuters) -Weak domestic demand rather than U.S. tariffs is the main reason China is dumping surplus product on European markets at rock-bottom prices at the expense of domestic producers, a European Central Bank study argued on Tuesday.

Pressure has been growing on the European Union to act on surging imports from China as U.S. tariffs force Beijing to find new markets for products it now struggles to sell.

"Escalating trade tensions between the United States and China might result in a further diversion of Chinese exports to Europe," the ECB argued in an Economic Bulletin article.

"However, the rise in China’s exports to the EU predates the latest tensions and coincides instead with the onset of weakness in domestic demand in China," the ECB added.

The ECB argues that the start of the current trend can be dated back to 2021, when a housing downturn in China depressed domestic demand and started weighing on housing investment, an import-sensitive sector.

Meanwhile state-led manufacturing investment, aimed at stabilising growth, created excess capacity and led firms into price wars, prompting them to redirect sales toward foreign markets, the ECB argued.

"To expand abroad, firms must gain competitiveness," the ECB argued. "They typically do so by reducing short-run marginal costs and prices, or by accepting narrower profit margins, and in some cases even losses."

Meanwhile a host of factors in China like weak consumer demand, trade policies and a strategic focus on the domestic manufacture of key products, keep curbing import demand and point to a lasting shift in China’s import behaviour, leaving the trade gap on a widening path.

(Reporting by Balazs Koranyi; Editing by Aidan Lewis)