Now that Europe has announced tariffs on China-made electric cars, the continent is bracing to see if the other shoe drops.
Will China retaliate with tariffs on European cars, taking aim at German makers such as BMW and Mercedes? Would it put tariffs on agricultural products, targeting Europe's politically influential farmers? Or luxury goods from Italy and France?
Analysts warn that an escalating trade war could break out, raising prices for consumers and hurting exporters and their workers on both sides. Both are major markets for each other — China, a rising economy of more than 1-billion people, and Europe with its relatively well-off population of more than 400 million.
“It’s a little bit like seeing a slow motion traffic accident unfolding,” Jens Eskelund, the president of the European Chamber of Commerce in China said earlier this year. “The accident has not happened yet and ... it is still possible to find an off-ramp. It is getting urgent.”
The Chinese government has said it will take "all measures necessary to protect our legitimate rights and interests” in response to the tariffs on electric vehicles but it hasn't specified what those might be.
China launched an anti-dumping investigation into European brandy exports in January, a warning shot aimed at French cognac. France was a supporter of the European Union investigation that resulted in Wednesday's EV tariff announcement.
The EU is also investigating subsides given to Chinese wind and solar companies and whether China is unfairly restricting access to its market for medical devices, a long-running complaint of European manufacturers.
The European Union said it had reached out to China to discuss the findings of the EV investigation, and that the tariffs would take effect on July 4 if the two sides fail to resolve the issue. The tariffs would be provisional and finalized only after four months.
China's Global Times newspaper has reported that Chinese companies are planning to ask the government to launch an anti-dumping investigation into certain EU pork products and an investigation of subsidies for some dairy products.
The state-owned paper has also quoted a leading Chinese auto industry expert calling for raising the tariff on imported vehicles with larger engines to reduce carbon emissions, a move that would hit high-end German exports from Mercedes and BMW.
Volkswagen expressed concern that the EU tariffs on Chinese electric vehicles could result in an escalation of trade conflicts and said the European Union is promoting an ongoing trend toward protectionism, nationalism and isolationism.
“The negative effects of this decision outweigh any potential benefits for the European and especially the German automotive industry,” VW said in a statement.
Research firm Sanford C. Bernstein noted that the impact on German makers would be muted by the fact that most of their cars sold in China are made locally. Only 2% of Volkswagen’s China sales are imports vulnerable to higher tariffs, along with 15% for BMW and 19% for Mercedes-Benz.
China could also impose retaliatory tariffs on French and Italian luxury goods, cosmetics, wine, chocolate or furniture, wrote Gabriel Wildau, a China analyst at the Teneo consultancy, in an analysis ahead of the announcement.
While Germany fears retaliation against its automakers and chemical producers, France and Italy have been the primary advocates within the EU for tariffs on electric vehicles, he wrote.
How big an impact the provisional tariffs would have on Chinese EV sales is unclear. Some Chinese companies might still be able to sell at a profit, even with duties as high as 30%.
The provisional tariffs range from 17.4% to 38.1%, depending on the carmaker, and come on top of an existing 10% tariff on vehicles. The new rates would pose a serious market barrier to Chinese EV exports, the China Chamber of Commerce to the EU said.
Calculations by the Rhodium Group found that that five of six models from BYD, China's largest EV maker, would earn a profit with a 30% tariff, while a made-in-China Tesla Model 3 would sell at a loss.
