Is a Trade War Between China and the EU Inevitable?

Trade friction between China and the EU is intensifying. On October 4, the 27 EU member states voted in favor of imposing anti-subsidy tariffs on Chinese electric vehicles (EVs). Under this proposal, over the next five years, in addition to the existing 10% tariff, the European Commission may impose additional anti-subsidy duties ranging from 7.8% to 35.3% on Chinese EVs. These tariffs will take effect at the end of October, meaning that the total tariff rate on Chinese EV imports could reach up to 45%. Prior to this, both the United States and Canada had announced a 100% tariff on Chinese EVs.The EU is concerned that China’s cheap EVs will flood the European market, making it difficult for local European car manufacturers to compete. The EU claims that China has an annual surplus of 3 million EVs that need to be exported, which is twice the demand of the EU market.In this vote, the positions of Germany and France, two of the EU’s largest countries, were in sharp contrast. Ten countries, including France and Italy, voted in favor, while five countries, including Germany and Hungary, voted against, and twelve countries, including Spain, abstained. Spain, once a supporter of the tariffs, changed its stance during Prime Minister Sanchez’s visit to China in September, stating, “We do not need another trade war.”It is noteworthy that France was the primary driver behind the EU’s investigation into anti-subsidy measures on Chinese EVs.

On the other hand, Germany, with its automotive industry heavily reliant on the Chinese market, strongly opposed such measures. Another staunch opponent was Hungary. On October 9, Hungarian Prime Minister Viktor Orbán clashed with EU Commission President Ursula von der Leyen in a heated debate at the European Parliament, arguing that imposing additional tariffs on Chinese EVs would only lead to further unemployment.In response to the EU’s decision to impose tariffs on Chinese EVs, China’s Ministry of Commerce issued a statement on October 4, firmly opposing what it called unfair, non-compliant, and unreasonable protectionist practices. The Ministry of Commerce emphasized that China would take all necessary measures to firmly safeguard the interests of its enterprises. In September, Minister of Commerce Wang Wentao visited several European countries to lobby and held talks with EU officials, but was unable to persuade the EU to change its stance.However, China’s countermeasures were equally decisive. On October 8, the Ministry of Commerce announced the imposition of temporary anti-dumping measures on brandy imports from the EU, with a deposit ranging from 30.6% to 39%. The Ministry stated that the preliminary results of the investigation had determined that EU brandy dumping was threatening the domestic industry and causing “significant harm.”

Following China’s announcement, the stock prices of French wine merchants dropped. The French National Interprofessional Cognac Bureau (BNIC) issued a joint statement urging the French government to take swift action to push for European negotiations, calling the situation “unfair” and lamenting that the cognac industry was caught in a dispute that was unrelated to it. Last month, brandy producers and grape growers in the Cognac region of France held their first protest in 26 years against the EU’s tariff actions. Last year, France’s brandy exports to China totaled $1.7 billion, accounting for 99% of China’s brandy imports.The EU believes that China’s anti-dumping measures on European brandy are a direct response to the EU’s tariff actions, especially as France was a major proponent of these tariffs. The Ministry of Commerce responded that this was a legitimate trade remedy measure initiated in accordance with domestic industry requests and fully compliant with World Trade Organization (WTO) rules. In addition to the anti-dumping measures on brandy, China had previously launched investigations into European pork and dairy products. China is also considering raising tariffs on high-displacement vehicles.Jens Eskelund, president of the China-EU Chamber of Commerce, said this Wednesday: “If the current trend continues, a trade war is inevitable. Over the years, we will continue to see a decrease in Chinese imports, while Chinese exports to the EU are increasing, and at a faster pace.”

He pointed out that in the first seven months of this year, China’s exports to the EU surged to “historical highs,” while imports from the EU dropped significantly.Currently, analysts are reluctant to use the term “trade war” to describe the trade situation between China and the EU, but if the friction continues to escalate, similar concerns may arise.One question worth exploring is why the EU insists on imposing tariff actions against China despite significant opposition. As China has pointed out, increasing tariffs will not solve any problems and will only harm both sides. It is estimated that the tariffs will reduce European imports of Chinese EVs by a quarter and somewhat weaken the competitiveness of Chinese EVs, allowing European manufacturers to retain more market share. However, the future of European carmakers still depends on their own process of electrification transformation, and anti-subsidy tariffs will not reduce the challenges of this transition. Despite being fully aware of this, the EU may have taken this mutually damaging action because EU leaders believe it is a case of “choosing the lesser of two evils.”A possible “reluctant” mentality within the EU can be seen in an article published by the German media. The article sharply pointed out that the core of the China-EU trade friction lies in China’s sluggish consumption. The economy’s over-reliance on exports, particularly in recent years, has led the EU to resort to tariffs to express its dissatisfaction.