US economy

The all-American cheat sheet to Europe’s trade weak spots

Sam Lowe is a partner at Flint Global, where he advises clients on UK and EU trade policy. He is also a senior visiting fellow at Kings College London and runs Most Favoured Nation, a newsletter about trade.

In the wake of Biden announcing a performative hike in tariffs on largely non-existent imported Chinese electric vehicles, the EU will soon (probably, to a lesser extent, and less arbitrarily) do the same.

And European firms are starting to get jittery. 

As mainFT reports, the EU is trying to convince their Chinese counterparts to “exclude agriculture from a series of commercial disputes”  (GLWT!) and VW’s brand chief has warned that tariffs on imported Chinese EVs could lead to “retaliation”. 

Well, yeah.

As well as the EV tariffs, the EU has instigated two foreign subsidy regulation investigations into Chinese firms bidding for solar contracts and a general investigation into Chinese wind companies operating within the EU (read Alan Beattie’s latest for more on the foreign subsidies regulation). 

If the EU continues to penalise China’s green exports there is a non-zero chance Beijing will push back. So, assuming China does retaliate, how would it do so, and which sectors could be targeted? 

In terms of how, I usually break it down into three – very much non-definitive – broad categories: quasi-legal, grey area, and downright coercive.

Quasi-legal retaliation can take the form of China initiating its own trade investigations into EU products or bringing a challenge against the EU’s measures at the WTO. One example of this is China’s decision, taken at the beginning of the year, to launch an investigation into whether French brandy was being dumped on the Chinese market. (Note: while the appeals function of the WTO’s dispute settlement process is broken, both the EU and China have signed up to something called the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) which allows for appeals to be adjudicated over.) Over the weekend, China announced a new anti-dumping investigation into EU and US thermoplastics. 

A grey area response could involve EU-linked factories in China suddenly facing issues, health inspections and like. Or it could simply just become more difficult to sell certain products, such as cosmetics, in China for reasons that are not entirely clear. Indeed, this already happens in several sectors – the EU is currently engaging in a new effort to convince China to stop its seeming discrimination against European medical devices in procurement bids. See this chart by ECIPE:

If we’re going downright coercive, well that could include locking up foreign executives, raiding local offices, deleting a country from its customs database, etc. Y’know, the scary stuff. 

In terms of what to target: beyond the obvious (EU-linked carmakers), the general rule of thumb is that countries try to hit companies that care at least a bit about sales in their market, are politically influential at home, and will be furious about being dragged into a tit-for-tat that has absolutely nothing to do with them. I would note that producing these lists of targets is, by all accounts, one of the most fun government trade jobs a person can have.

For example, in response to Trump’s trade war tariffs on steel and aluminium, the EU retaliated by applying a 10 per cent tariff to, among other things, US playing cards (see the relevant implementing legislation here; CN code 950440).

Why? Well, I’m not saying it’s definitely because one of the US’s largest playing card producers is headquartered in Kentucky, and Mitch McConnell, the then-Republican Senate majority leader, is the senator for Kentucky … but, y’know, probably. 

So, what might China decide to target? 

You would assume it will focus its energy on the countries most supportive of the EU investigations into Chinese imports … which would mean France. 

But this isn’t necessarily the optimal approach, because France is a big economy and might be prepared to take something of a hit. 

What about the member states that are less enamoured with the investigations? Might China target their companies to get them to put pressure on France to change its approach? Quite possibly. 

Usefully, I guess, the US has already drawn up a list of politically-sensitive EU products both in the context of the currently paused Boeing-Airbus trade dispute and, more recently, back when it was thinking about slapping specific EU member states — Austria, France, Spain and Italy — with tariffs because of their various attempts to introduce a digital services (DST) tax

Now, the US lists obviously may not directly transpose onto EU-China, given the composition of EU exports to each is different. But it is indicative for these purposes, so let’s roll with it.

On the DST lists you have some of the obvious things, like luxury handbags from France:

For Austria, you have binoculars and grand pianos, which my intimate knowledge of the Austrian Mittelstand some quick Googling informs me is something they’re pretty good at making:

For Italy, as well as the suits and perfume they targeted designer tracksuits, ties and cravats because, well, Italy innit:

For Spain, the list includes [obviously] prawns and rice:

And on all of the various lists, there are large quantities of agricultural products. 

I don’t expect this to happen, but were China to apply tariffs to all of the EU exports (note: not just the exports of the individual member states) identified for tariffs by the US, you’d be looking at around $10bn of politically sensitive goods. And that’s just using lists covering four of the 27 EU member states. 

With a major health warning – the values provided here are overstated because the data is only available at the 6-digit tariff code level, rather than the 8 digits provided by the US lists, meaning that other non-sensitive products will be included in some instances, AND that there is some double counting, particularly with the France and Spain lists – this is what the breakdown would look like were China to impose tariffs on EU exports of the goods identified as politically sensitive by the US:

All of which is to say that while I expect the EU to go a bit Biden and introduce new tariffs on Chinese EVs — probably in the range of 10-20 per cent on top of the existing 10 per cent — I don’t expect the EU to go full Biden.


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