China Strikes Back with 39% Cognac Tariff Following EU’s EV Tariff Approval

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China has announced a 39 percent import tax on European brandy, a move widely seen as retaliation for the European Union’s decision to impose tariffs on Chinese electric vehicles. This development, which targets France in particular, is part of a broader trade dispute between China and the EU, involving both the automotive and luxury sectors.

The Chinese Ministry of Commerce confirmed the introduction of these anti-dumping measures on Tuesday, indicating that importers of European brandy will be required to pay a deposit worth up to 39 percent of the product’s value. The deposit is intended to cover potential future tariffs and will be applied retroactively if necessary. This measure comes after an investigation by China into alleged dumping of European brandy in its market.

Retaliation Against EU Tariffs

China’s decision follows the European Union’s investigation into the subsidisation of Chinese electric vehicles (EVs). France has been a key advocate for this investigation, given the significant role of its automotive industry, including companies such as Renault and Stellantis. China initiated its own inquiry into European brandy earlier this year, and the new tariffs are seen as a direct response to Europe’s scrutiny of Chinese EV subsidies.

By focusing on European brandy, and cognac in particular, China is striking at a major French export. Cognac accounts for 95 percent of European brandy imports to China, and the Chinese market represents roughly a quarter of France’s overall cognac exports. The new tariffs are expected to have a significant impact on French spirits producers, especially those heavily reliant on the Chinese market.

Market Repercussions

The announcement of the import tax had immediate effects on financial markets. Shares in French beverage companies such as Rémy Cointreau and Pernod Ricard fell by nearly 9 and over 4 percent, respectively. These companies, which are heavily invested in the Chinese market, stand to lose significantly if the tariffs are enforced long-term.

The impact was not confined to the drinks industry. Investors also expressed concern about the broader luxury goods sector, with major French fashion and luxury groups like Kering, Hermès, and Richemont experiencing declines on the stock market. The fear is that the ongoing trade dispute between China and the EU could dent consumer confidence and spending on luxury goods, a sector where Chinese demand plays a crucial role.

Broader Implications for the Auto Industry

In addition to the measures against European brandy, China has also launched a new anti-dumping investigation into European luxury vehicles with powerful combustion engines. This is another area where France is vulnerable, but Germany could suffer even more, as its car manufacturers, including BMW, Mercedes-Benz, and Volkswagen, are heavily reliant on the Chinese market.

The stock prices of these companies dropped following China’s announcement, with BMW falling by more than 3 percent and Mercedes-Benz by over 2.5 percent. Porsche and Volkswagen also saw declines of around 2 percent.

China’s focus on luxury vehicles follows its earlier steps to investigate European pork imports, which are another significant export for the EU. Countries like Spain, which has a large pork industry, are particularly anxious about the outcome of this inquiry.

Strategic Trade Conflict

China’s move to impose tariffs on brandy and investigate European luxury cars appears to be a calculated response to Europe’s tariffs on Chinese EVs. While Europe’s investigation into Chinese EV subsidies is aimed at protecting its domestic car industry from what it perceives as unfair competition, China is using its significant market leverage to push back.

France, with its prominent automotive and luxury goods industries, has found itself at the centre of this trade dispute. Cognac is not just a key export for France; it is a symbol of its luxury goods industry. Similarly, French automakers have been vocal about their concerns over Chinese competition, and the new tariffs on cognac could be seen as a message to Paris about the costs of continuing to push for stricter EU trade measures against China.

The trade tensions are occurring against a backdrop of shifting global economic alliances, with Europe becoming increasingly wary of its reliance on Chinese imports, particularly in critical industries like automotive and technology. At the same time, China is looking to assert itself as a dominant global economic player, capable of retaliating against what it views as protectionist measures.

Potential for Escalation

The new tariffs on brandy and the investigation into luxury vehicles may only be the beginning of further economic skirmishes between the EU and China. The EU’s focus on Chinese EVs and China’s retaliation against iconic European products could result in a cycle of escalating trade measures.

As both sides dig in, industries that rely heavily on international trade, such as automotive, agriculture, and luxury goods, may find themselves increasingly vulnerable. European governments, particularly France, will now have to navigate the dual challenges of supporting domestic industries while managing the potential fallout from a prolonged trade dispute with one of their largest trading partners.

In the short term, European companies with significant exposure to the Chinese market are likely to see continued pressure on their share prices, and the broader impact on industries like automotive and luxury goods may worsen if no resolution is found. The escalating tensions could lead to more protectionist policies on both sides, further straining relations between China and the European Union.

Main image source: www.cheeseconnoisseur.com

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