EU’s China trade weak spots hide in plain sight

Sticks of the trade. “The supreme art of war is to subdue the enemy without fighting”. Chinese strategist Sun Tzu may have been referring to actual conflicts rather than trade disputes when advancing his famous maxim. Still, President Xi Jinping and European Commission boss Ursula von der Leyen have good reason to scour their imports and exports to see if they can achieve a similar outcome.

China’s immediate motivation is tariffs on electric vehicles. Last week the European Union formally outlined provisional charges as high as 48% on the value of some Chinese-made cars. As these do not become permanent until November, Xi has an opportunity to persuade von der Leyen to rethink. Given that the EU last year exported goods worth $282 billion to the People’s Republic and received products with a value of $502 billion from its trading partner there is much to play for.

The art of trade spats is to target goods where restrictions hurt the exporter more than the importing nation. Beijing might therefore focus on products which account for a large proportion of the EU’s total exports but are of marginal importance to China. To get at this data, Breakingviews trawled through around 5,000 product categories compiled by the International Trade Centre, a joint agency of the World Trade Organization and the United Nations. We then filtered the numbers to focus on items where the EU’s exports to China exceed $1 billion a year.

Methodological complexities and statistical revisions mean Europe’s export data and China’s import figures don’t always perfectly align. But there’s sufficient clarity to gauge which imports may be too important for China to meddle with. For example, the ITC data shows that pharmaceuticals sourced from the EU accounted for 62% of China’s overall drug imports in 2023. Motor cars and parts made in the bloc were 59% of China’s total auto imports, while Beijing relies on the EU for 47% of its imported food and agricultural products. Retaliation here might hurt the Middle Kingdom’s own interests.

The EU’s weaknesses appear similarly easy to spot. The bloc’s biggest dependency is agricultural products: 28% of its overall exports go to the People’s Republic. Similarly, China is the destination for 22% of consumer goods, like Louis Vuitton handbags, that Europe sends overseas. This might make European farmers and luxury groups like $390 billion LVMH good targets for Beijing. Carmakers appear less vulnerable: only 10% of European global exports of vehicles and vehicle parts head to the world’s second-largest economy.

These headline figures aren’t a foolproof guide to where China can exert pressure, though. Beijing will also weigh up how vital the product is to China’s national interest, whether it can be easily substituted, and whether it constitutes a small proportion of the country’s overall consumption. Trade negotiators also pay close attention to which EU country produces the imported goods.

Take brandy. In 2023 China imported $1.8 billion of the spirit, with fully 99% coming from the EU. But unlike, say, the $14 billion of semiconductor equipment that made the same journey, brandy hardly counts as an essential material. This helps explain why China has already opened a probe into alleged EU dumping of the liquor.

Two other factors come into play. Nearly half of EU brandy exports come from France, which has been one of the driving forces behind the EU’s targeting of EVs. Handily, Xi’s government also frowns on Chinese elites’ conspicuous consumption of expensive imported luxuries.

Indeed, LVMH and other European luxury giants like Kering have reason to be nervous. A third of the $4.8 billion of EU leather and plastic handbags that headed to China in 2023 came from France. Luxury luggage is more expendable than, say, the $9 billion of Airbus planes and parts China imported last year.

The People’s Republic may also be more relaxed about restricting imports which account for only a small chunk of domestic consumption. Half of China’s imported pork comes from the EU, but this is only a small fraction of what the country eats: most of the latter is produced at home. Yet two-thirds of Spain’s swine offal exports go to the People’s Republic, giving Xi a potential way to exert pressure on one specific EU state.

Cars offer further proof that trade negotiators have to look beyond the headline numbers. Though the $20 billion of petrol-fuelled autos that China bought from the EU last year accounted for two-thirds of China’s imports of the vehicles, they might be ripe for tariffs.

Click here for an interactive version of the graphic.

One reason is that China is rapidly pivoting away from petrol cars and has a glut of internal combustion engine vehicles in its home market. Moreover, the gas guzzlers it imports from European carmakers like Porsche and BMW are more expensive than the cars it sends the other way, according to HSBC analysts, making them more like a luxury product. So when a government-affiliated research body suggests China should hike tariffs on petrol cars from 15% to 25%, it’s a credible threat.

How Xi will retaliate is hard to predict. China might prefer to use societal pressure to encourage its citizens to consume less of a particular product: a similar campaign saw domestic sales of South Korean cars plummet after 2017, Rhodium Group analysts point out. EU diplomats will be braced for different forms of reprisals. Yet as other governments flirt with protectionist policies, Beijing and Brussels will be mindful of a separate Sun Tzu pearl of wisdom: “There is no instance of a nation benefitting from prolonged warfare”.

Context News

The European Union will impose additional tariffs of up to 37.6% on imports of electric vehicles made in China, EU officials said on July 4. The European Commission’s provisional duties of between 17.4% and 37.6% are designed to prevent what Commission President Ursula von der Leyen has said is a threatened flood of cheap EVs built with state subsidies. There is a four-month window during which the tariffs are provisional and intensive talks are expected to continue between the two sides as Beijing threatens wide-ranging retaliation. China’s anti-dumping probe into Europe’s cognac industry is a tit-for-tat reaction to EU tariffs on Chinese electric vehicles, the finance chief at Hennessy cognac owner LVMH said on July 6, a day after Beijing announced plans for a hearing on European brandy imports.