China and the European Union should work together to manage trade differences through civilized dialogue and rule-based agreements, rather than resorting to protectionist measures, said Olivier Blanchard, a renowned French economist and former chief economist of the International Monetary Fund.

"If we do nothing and Europe imposes tariffs (on Chinese exports), this will reduce trade and lead to inefficient production," Blanchard told China Daily in an exclusive interview. His remarks come at a time when the trajectory of China-Europe trade relations has drawn increasing global attention following the recent truce in Sino-US tariff tensions.

"This would be a loss for both sides. It's much better if things are produced where they should be produced, rather than inefficiently at home," said Blanchard, who is also Robert M. Solow professor of economics emeritus at MIT and senior fellow at the Peterson Institute for International Economics.

Speaking on the sidelines of the 2025 Bund Summit in Shanghai late last month, he emphasized that "the issue of how China and Europe deal with each other is very important", adding that trade dynamics between China and the EU have attracted more attention as some Chinese exporters sold more to Europe amid trade barriers from the United States.

Both sides would benefit from managing differences about trade through "civilized and responsible "dialogue that should lead to a comprehensive set of agreements, rather than resorting to tariffs or restrictive actions, he said.

Stable bilateral economic ties are crucial for multinationals across the China-EU corridor, executives said. "The China market is very important for Philips. It's around 10 percent of our total global revenue," said Roy Jakobs, CEO of Royal Philips, a Dutch multinational industrial conglomerate.

China's Ministry of Commerce said last week that the country stands ready to deepen mutually beneficial cooperation with the EU, explore the possibility of negotiating agreements — including investment arrangements — and further facilitate trade and investment.

On China-US trade relations, while the world's two biggest economies have de-escalated their trade tensions, Blanchard said the true solution to their bilateral trade imbalance has yet to be reached — by reducing fiscal deficits in the US and boosting household consumption in China.

The US administration's tariff policy overlooks the fundamental cause of trade deficit — the gap between national savings and investment — meaning that without addressing this imbalance, tariffs cannot deliver the desired effect of reducing trade deficits.

Blanchard said he was encouraged to see China emphasizing the expansion of domestic demand, while more real progress should be made.

"From the point of view of global imbalances and trade tensions, expanding domestic consumption should be a higher priority for China," he said.

Recommendations of the Central Committee of the Communist Party of China for Formulating the 15th Five-Year Plan for National Economic and Social Development ranked achieving a notable increase in household consumption as a share of GDP as one of the major objectives in the coming five years.

The renowned economist also highlighted China's growing strength in artificial intelligence, saying the country's open and cost-efficient AI ecosystem — as represented by the rise of DeepSeek — could unleash what he described as the largest positive shock of productivity in human history.

He said China's approach to AI development — combining low costs with an open and accessible ecosystem — allows smaller firms to participate in innovation, thus fostering competition, driving faster technological progress and preventing excessive monopoly power by a few large firms.

At the same time, Blanchard cautioned that rapid advances in AI may bring new labor market challenges as workers with advanced skills — such as those in legal and analytical professions — may find it harder to transition if their jobs are disrupted by new technologies.

"We have to think very hard about what happens to people who are skilled and lose their jobs. And that should be a higher priority. If it is in China's 15th Five-Year Plan (2026-30) and it succeeds, then it's great," he added.