EU-China tariff war escalates, pushing global economy toward uncertainty

Trade relations between China and the European Union worsened on August 20 as the 27-nation economic bloc increased import tariffs up to 36.3 percent on Chinese made vehicles.

To protect European automakers from “unfair competition”, the EU accused China of flooding their market with electric vehicles (EVs) produced on heavy state subsidies, and went on revising tariffs for each China-based EV car manufacturer on top of a 10 percent duty that was already in place.

China, the world’s second-largest economy, retaliated the very next day by opening an anti-subsidy probe into dairy imports from the EU.

The Chinese commerce ministry said on August 21 it was beginning a probe into different types of cheeses, milks and creams that the EU exports to China for human consumption.

Going by the signs of growing protectionism around the world, it’s likely that the investigation will recommend jacking up the import duties on EU-produced dairy products.

Why does it matter?

Analysts expect that a trade-related tit-for-tat will lead to idle production capacities in Chinese factories on the one hand, and surplus agricultural production in Europe on the other. The disruption in trade flows will lead to a rise in consumer prices, thus destabilising the global economy with disastrous consequences for everyone.

China has taken the global lead in both production and sales of EVs. The Global EV Outlook by the International Energy Agency (IEA) shows that more than eight million electric vehicles were sold in China last year, about 60 percent of the global market.

It estimated that six of every 10 EVs sold in China in 2023 were cheaper than their average combustion-engine equivalent. In contrast, EVs were 10-50 percent more expensive than their combustion-engine equivalents in Europe and the United States, depending on the country and car segment.

For example, a BBC report stated that the starting price of BYD Seagull, a small Chinese EV, is roughly $9,600 within China. Its price “at least” doubles in the EU because of safety regulations once it’s exported to the 27-nation bloc. Yet the average European user gets to buy the China-made EV at a “very cheap” rate compared to the going price for EU-made EVs.

Beijing has been the largest external exporter of goods to the EU since 2005 when it overtook the US. China is also the third largest destination for EU exports.

One study estimates that the imposition of additional tariffs on EVs by the EU may cost China up to $4 billion in trade.

As for European farmers, a trade spat with China is expected to turn into a “catastrophe”. With an import value of more than $16 billion in 2023, China is the EU’s third-largest agri-food export recipient.

“The [European] Commission needs to make sure that we don’t pick up the bill for this dispute,” a Politico report quoted a senior policy adviser for trade at Copa-Cogeca, Europe’s largest farmer lobby, as saying.

The EU was China’s second-largest source of dairy products with at least 36 percent of the total value of imports in 2023, behind only New Zealand.

“We don’t like to get caught in the crossfire,” the lobbyist said, noting that the Chinese market is too crucial for the European pork sector.

China is a particularly lucrative market for EU farmers given that it’s the only bulk consumer that buys animal “waste”—byproducts otherwise known as offal—at the regular market price. Beijing is a big buyer of snouts, ears and tails—products that account for a fifth of the carcass weight but usually go to waste.

In a carefully worded statement on Wednesday, the EU Chamber of Commerce in China implied that the probe announcement by the Chinese government was unsurprising and “seemingly” a response “in kind” to the EU’s recent tariff revision.

Not a one-off standoff

What gives credence to the impression that the Chinese probe is indeed a response to the EU’s tariff revision announced a day ago is that it’s based on a complaint by the Dairy Association of China and the China Dairy Industry Association registered on July 29.

A report by Reuters news agency mentioned that China will examine as many as 20 support schemes from different EU member countries as part of its anti-subsidy probe.

Earlier in June, China announced an anti-dumping probe against EU suppliers following a complaint by the China Animal Husbandry Association. The EU’s share in China’s annual $6 billion pork imports during 2023 was more than half.

An anti-dumping probe usually takes months to complete. Authorities impose a protectionist tariff on the foreign product if the investigation reveals it is priced below the fair market value to drive out domestic competition.

In January, China initiated another anti-dumping investigation on brandy imported from the EU. Beijing opened that investigation after the EU shone a spotlight on the state subsidies extended to EV exporters in September last year.

China began another anti-dumping investigation in May that looked into POM copolymers, a type of engineering plastic that China imports from the EU among other suppliers.

“There is a strong potential for this to turn into a full-blown trade war,” Stephen Olson, Hong Kong-based analyst and non-resident fellow at Yeutter Institute, told TRT World in an interview in June.

“There won’t be any winners. Both sides will be worse off.”