BRUSSELS — What do vanilla, steel pipes and electric cars have in common?
You guessed it: The European Union is investigating imports of these goods from China to find out whether they are being sold below cost or are being unfairly subsidized by Beijing. China, in return, suspects Europe of dumping premium cognacs on its market — and is dropping heavy hints that European luxury cars and pork meat could soon face restrictions.
The tit-for-tat dynamics suggest that the EU — which last year ran a bilateral trade deficit in goods of nearly €300 billion and now wants to narrow that gap — may soon slide into a trade war with China.
But are they in one already?
We’ll find out soon enough. Here’s POLITICO’s take on how this could play out:
Why is everyone talking about Chinese cars?
Trade nerds in Brussels — and auto industry bosses in Stuttgart, Munich and Wolfsburg — are nervously awaiting the outcome of the EU’s investigation into whether China unfairly subsidizes its electric vehicle industry.
European Commission President Ursula von der Leyen launched the probe last fall and, according to its timeline, any provisional duties would have to be notified to market players by early June — meaning trade could blow up as an issue in the final countdown to the European election, which is being held June 6-9.
European imports of Chinese EVs have surged in recent years — more than doubling between 2021 and 2023 to over 430,000 vehicles a year, worth €10 billion, the Washington-based Peterson Institute for International Economics estimates. European EV exports to China are negligible, meanwhile, and Brussels worries the EU market will be swamped, potentially wiping out its domestic industry.
While Brussels is sure to find evidence of unfair state aid, it’s not yet clear what level of import duties it will impose on Chinese electric vehicles made by companies like BYD. The EU currently applies tariffs of 10 percent on all imported cars — that would need to rise to 50 percent to level out the playing field, analysts at Rhodium Group estimate.
How Chinese are those cars really?
The Commission is in uncharted territory with this probe, given that EVs are such complex products and that these investigations usually relate to more upstream products that don’t involve such complex supply chains.
It’s also the first time in a long while that the bloc’s trade arm has started an investigation on its own initiative and not — as is usually the case — based on a complaint from the industry.
By scrutinizing subsidies for battery-making, car design or steel supplies, the EU is going after a sector where Chinese carmakers have gained momentum, but often with technological input from joint ventures with their EU counterparts. Germany’s Mercedes, Volkswagen and BMW all have plants in China and depend upon the world’s largest car market for the bulk of their revenues.
Unsurprisingly, not all European auto industry bosses share the Commission’s enthusiasm for the investigation.
Europe argues that the billions lavished by China’s leadership have spawned industrial overcapacity. Brussels, citing international economists, stresses that Beijing should rather boost consumer demand at home, rather than dump excess production on the global market.
Washington has gone further, with President Joe Biden quadrupling import duties on Chinese EVs to 100 percent. The difference, however, is that Chinese manufacturers have barely established a foothold in the U.S., while they are moving fast to penetrate the EU market.
But that’s not all, is it?
Absolutely, the EU has launched probe after probe this year. With the latest investigations into steel pipes, the food additive lysine and the taste component vanillin, the count stands at no less than 13. None are as high-profile as the electric vehicle case, but that doesn’t mean Beijing won’t take notice.
In addition, Europe is now wielding the economic armory it has assembled, using a combination of trade and competition tools to tackle Chinese bids for European wind park tenders and sales of airport security scanners, as well as Beijing’s own procurement of medical equipment.
How will China strike back?
Beijing (correctly) sees France as having instigated the EV probe and has hit back with a dumping probe of its own into “wine-distilled brandies from the EU” — a.k.a. French cognac. President Emmanuel Macron, hosting President Xi Jinping this month, claimed a win after their talks, saying the Chinese leader didn’t want to impose pre-emptive tariffs.
But cognac makers don’t believe it, saying fatalistically that they are doomed to become “collateral damage” in the fight over electric vehicles.
Now China is setting its sights on German luxury cars. In an interview with state media, Liu Bin, a top automotive adviser, recommended raising temporary tariffs on large-engine vehicles imported from Europe to 25 percent — a move that would hurt the likes of sports car and SUV maker Porsche.
While German auto brands are exposed to China, their premium models would be able to take such a hit, according to Matthias Schmidt, a European automotive analyst: “The models impacted are all high-end premium models that can either soak that up in higher pricing or lower margins but remain profitable.” Similarly, analysts expect Chinese exporters to be able to swallow whatever the EU decides in its subsidy investigation.
“No major economic damage is to be expected,” agreed Jürgen Matthes of the German Institute for Economic Research. Auto exports are declining as a share of gross domestic product , and now account for only about 0.3 percent. In addition, Beijing’s threatened tariffs on luxury cars are likely to reduce exports “only to a limited extent.”
On top of that, battery-maker CATL and EV giant BYD are already investing in Hungarian factories so they will be able to avoid the EU’s duties in a few years. They’re following a similar strategy in Mexico to skirt U.S. tariffs.
That reminds me of another trade war …
Bingo! The EU went on the attack more than a decade ago, aiming to slap duties of no less than 48 percent on Chinese solar panels because they were eroding the EU’s own production.
As soon as the Chinese leadership threatened to target EU wine and car imports, however, Brussels climbed down.
“The Chinese government is very good at mobilizing someone else to do their lobbying for them,” said trade lawyer Laurent Ruessmann, who has represented European solar producers. “Back then, it was the German auto industry, and now it’s the same thing with cognac. China just wants them to march up to Macron and say ‘We have to buckle!’”
So is this really a trade war?
That depends on who you ask. For a while, the EU has been coming up with new buzzwords to describe reducing its dependence on single countries — “de-risking” is the latest.
Of course, Eurocrats — and Beijing, for its part — stress they do everything by the World Trade Organization book, and that the bloc is simply upholding a rules- and evidence-based trading system. Since trade wars are inherently political, the EU will always deny any offensive exists.
Beijing’s response is also a matter of geopolitical timing. With Donald Trump a serious contender to retake the White House in November, and thereby likely upsetting the transatlantic alliance, Beijing could have an incentive to avoid an all-out trade war with Europe at this point, according to a senior European diplomat.
“China is playing the long game here,” said the diplomat, who was granted anonymity to speak candidly. “If it waits long enough for Trump to come back, Europe’s governments will be under much pressure from the business circle to befriend Beijing again.”
Jürgen Klöckner contributed reporting.
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