Brandy probe may very well be ‘first bullet’ in EU-China commerce battle

China’s determination to investigate costly French liquor for dumping may very well be the beginning of an prolonged tit-for-tat commerce dispute with the European Union, analysts warn. Beijing has typically focused bilateral commerce as a tried-and-tested technique to specific its displeasure–and usually, they are saying, the tactic helps Beijing get what it desires. 

“This is the first bullet the Chinese will shoot,” says Francois Chimits, an analyst at Berlin-based Mercator Institute for China Research, referring to Beijing’s anti-dumping probe into brandy.

Final September, the European Union announced an anti-subsidy probe right into a “flood” of Chinese language electrical automobiles into Europe; formal investigations began the next month. European officers alleged that EVs made in China profit from state subsidies, which permit them to undercut fashions made exterior of the nation. 

China’s surging exports of EVs helped make the nation the world’s largest auto exporter in 2023, overtaking Japan. Chinese language carmakers like BYD now see developed markets like Europe and Japan as their subsequent targets. European investigators plan to go to BYD, Geely, and SAIC, Reuters reports citing individuals concerned within the course of.

Final week, Beijing revealed its response to the European probe: an anti-dumping investigation into brandy exports from France. China imported $1.57 billion price of spirits from distilled grape wine from January to November 2023 final 12 months based on Reuters citing Chinese language customs information. France accounts for 99.8% of all EU brandy exports.

French cognac makers argue that their reductions had been too small to set off a proper investigation. Brandy was discounted by simply 15.88%, according to the Bureau Nationwide Interprofessionnel du Cognac, a commerce affiliation representing brandy makers. 

“This investigation takes place in the context of a trade disagreement between the European Union and China on other industrial sectors, unrelated to our activity,” the BNIC mentioned in an announcement to commerce publication Global Drinks Intel on Jan. 5.

Has this occurred earlier than?

It’s not the first time China and the European Union have tussled like this.

Simply over a decade in the past, the EU alleged that Chinese language photo voltaic panels benefited from big state subsidies, permitting Chinese language producers to undercut European producers. That, in flip, sparked retaliation from Beijing, which first probed metal tubes, then French wine. Europe was divided on the time, with Germany and 14 different states opposing punitive measures for concern of scary additional escalation.  

The 2 sides ended up discovering an “amicable solution,” within the phrases of then-EU commerce commissioner Karel de Gucht, the place Europe set a minimal value on imported Chinese language photo voltaic panels.

But Chimits thinks the stakes are completely different this time. The EU is now taking a extra assertive stance vis-a-vis China, at instances calling it a “systemic rival.” The bloc is now embracing de-risking, or decreasing dependence on China whereas additionally diversifying its provide chains. Backing down would possibly danger the EU’s credibility.

“If you back down at the first shot of real fire, then your entire [political] capital is wiped out,” Chimits mentioned.

What occurs subsequent?

Whereas Europe seemingly received’t cease its anti-subsidy investigations into electrical automobiles, Beijing’s probe is an indication that China can “take any measure and will not stop” in expressing its displeasure, Alicia Garcia-Herrero, chief economist for Asia-Pacific at funding financial institution Natixis, says. 

In selecting its goal, Beijing is selecting a “big enough” nation that it thinks can exert affect within the European Fee, she says. With the photo voltaic panel dispute, it was Germany; now, it’s France. 

Each Chimits and Garcia-Herrero be aware that Beijing has typically acquired what it needed, or at the least an end result it was keen to just accept, when it beforehand used these ways.

Garcia-Herrero pointed to each the EU’s earlier photo voltaic panel probe and Australia’s expertise in its commerce battle with China through the COVID pandemic.

In 2020, then-Australian prime minister Scott Morrison known as for an investigation into the origins of COVID-19, a delicate matter for Beijing. Chinese language officers retaliated by imposing tariffs on key Australian exports like wine, beef and barley; anti-Australian rhetoric in Chinese language state media additionally elevated. 

China and Australia have since labored in direction of mending relations. Beijing lifted its duties on barley final August, citing unspecified “changes in the Chinese market.” Australian ministers now believe that China will elevate all remaining tariffs on Australian merchandise, like these on wine and lobster, this 12 months. 

“We can grow the relationship while advancing our respective interests, if we wisely navigate when there are differences,” Australia Prime Minister Anthony Albanese mentioned during his November visit to Beijing, the primary by an Australian chief in seven years. 

Chimits laid out one potential situation on how either side would possibly resolve the dispute.

Europe’s determination to go along with an anti-subsidy, quite than an anti-dumping, probe, means the regional bloc can go along with a much less harsh penalty, corresponding to a ten% to twenty% tariff, Chimits suggests. He provides that anti-dumping probes can result in punitive tariffs of 30 to 40%. A decrease anti-subsidy tariff would permit Europe to “demonstrate what it wants without hurting the Chinese market so much.” In flip, China may retaliate in a method the place the nation is seen as “forceful and not a bully.”

But he additionally warns that issues won’t end up fairly so rosy, particularly if the EU’s EV probe escalates to some extent that annoys Beijing additional.

“French exports are extremely easy to target,” Chimits says, noting that round 60% to 70% of French exports to China are “luxury consumption.”

That signifies that Beijing can put the screws on France with out hurting its economic system an excessive amount of. “The only effect on your economy is that the rich consumer might be a bit dissatisfied,” he says.