China Targets EU Car, Brandy for EV Tariff Retaliation

(Bloomberg) —

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China is investigating whether to raise tariffs on European large-engine vehicles and start levying tariffs on brandy after the European Union decided to impose tariffs on Chinese electric vehicles.

The commerce ministry said Beijing is looking at raising tariffs on imported petrol cars with large engines, a statement said on Tuesday, shortly after announcing that EU brandy importers would have to pay a deposit of up to 39% from October 11. Share prices of European companies fall.

The move against European car and brandy exporters comes after the EU decided last week to impose tariffs of up to 45% on imports of Chinese electric cars for five years. Talks between the two sides continue, and the Chinese announcements may represent an attempt by Beijing to pressure Brussels to find alternatives to the tariffs.

Trade tensions have strained China-EU relations in recent years. A trade war could hurt both sides, especially with the U.S. election coming up, which could bring more uncertainty around the world. The prospect of new Chinese tariffs on cars and other goods will further hurt European firms already struggling with a slowdown in Asia's largest economy.

According to a statement from the European Commission, the EU will challenge the Chinese move on brandy at the World Trade Organization. “We believe these measures are unfounded, and we are determined to protect EU industry against the abuse of trade defense instruments,” Olaf Gill, the commission's spokesman, said in the statement.

Chinese policymakers are also under pressure on the domestic front as they struggle to meet their growth targets for 2024. Beijing announced interest rate cuts last month and pledged $340 billion to support the stock market, but held back on Tuesday from revealing more stimulus.

Shares of European carmakers and beverage companies fell, especially those with high exposure to China. BMW AG shares fell more than 3%, while Mercedes-Benz Group AG fell nearly 2%. French distiller Remy Cointreau SA sank as much as 9.3%, Hennessy Cognac owner LVMH Moët Hennessy Louis Vuitton SE fell 6.8% while Pernod Ricard SA fell 4.6%.

France “cannot abandon us and leave us alone to face Chinese retaliation which does not concern us,” Cognac lobby group BNIC said in a statement on Tuesday. “The impact of this tax will be catastrophic for our industry and our region.”

The European Commission must publish the final results of its EV investigation by the end of this month, after which the tariffs will take effect. Chinese state media and trade groups have indicated that Beijing may raise tariffs on car imports in response to the EU move, and this is the first official confirmation from the ministry.

Paolo Gentiloni, the EU's chief economist, said he was not worried about the risk of tariff hikes.

“We have carried out a serious investigation into the risk of overproduction in some sectors,” Gentiloni told reporters in Luxembourg. “We made appropriate and very proportionate decisions and I don't think there is any reason to react to these proportionate decisions with retaliation.”

Germany and Slovakia, which both voted against tariffs, are the most exposed if China imposes tariffs on car imports. Volkswagen AG Chief Executive Officer Oliver Blume said any potential Chinese tariffs would be particularly risky for the German automotive industry and that the company would face significant difficulties in the Chinese market.

As for brandy, most of China's imports come from France, which voted in favor of tariffs on Chinese cars. The ministry's statement specifically mentioned European spirits makers controlled by Remy Cointreau and Pernod Ricard, among others.

China announced an anti-dumping investigation against European brandy in January this year after the EU launched an investigation into its electric vehicle subsidies. The Asian country said in August that it had found evidence of dumping by European spirits producers in a preliminary investigation but then stopped short of imposing duties.

China's brandy industry is relatively small. The country imported about $1.8 billion worth of spirits from grape wine last year, more than 99% of which came from France.

The EU criticized China's investigations into brandy and other products, with European trade chief Valdis Dombrovskis telling Chinese Commerce Minister Wang Wentao last month that they were “based on unreasonable, dubious allegations and lacked sufficient evidence.”

Dombrovskis requested that China stop these investigations and said that Europe “will make every effort to protect its industrial interests.”

–With assistance from Using Liu, Alberto Nardelli, Richard Bravo, Ben Sills, Jorge Valero, Angelina Rasquet, and Sabah Meddings.

(Update with comments from French cognac lobby group BNIC; LVMH share price reaction)