China weighs measured response to EU's EV tariffs

As the European Union (EU) unveiled tariff hikes on Chinese electric cars, reaching up to 48% starting next month, China finds itself in a precarious position, with limited options to retaliate without risking a full-scale trade war. The EU's move aligns with actions taken by the United States, Turkey, and other nations to curb the influx of Chinese imports. In response, China's Commerce Ministry and its chamber of commerce in the EU vehemently criticised the EU's decision.

While China may feel compelled to retaliate to discourage further trade-protection measures worldwide, it must tread carefully to avoid inadvertently strengthening trans-Atlantic cooperation against its interests. President Xi Jinping has been working to promote "strategic autonomy" in Europe, and an overly aggressive response could undermine these efforts. As Joe Peissel, an economic analyst at Trivium China, notes, "If China responds in kind with aggressive tariffs, they risk triggering a trade war. Beijing is desperate to avoid that."

China is already grappling with the potential for increased trade tensions with the United States, as former President Donald Trump, known for his multiple rounds of tariff hikes on Chinese goods during his first term, leads in some polls for the upcoming November election. Moreover, under President Joe Biden, advanced economies have increasingly coordinated their efforts against China, with the Group of Seven recently calling out the nation by name for distorting the global economy.

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Experts predict that China's retaliation will likely target agricultural products such as cheese and pork. In fact, Chinese firms have already filed a formal request for an anti-dumping investigation into pork imports from the EU, which could significantly impact Spain, the largest EU supplier of meat to China. Additionally, state-run media have hinted at the possibility of Beijing imposing tariffs as high as 25% on imported cars with large engines, a move that would affect a small portion of German carmakers' sales in the country.

However, as Jacob Gunter, a lead analyst at Merics, a Berlin-based research institute focusing on China, points out, "Beijing won't target the EU products it still needs." These products include machinery, high-quality industrial inputs, chemicals, and medical technology items.

The impact of the EU's tariff hikes may also be limited, as the efficiency of Chinese carmakers suggests they can still turn a profit even with the new tariffs in place. Furthermore, Chinese companies are rapidly establishing factories in Europe, which would mitigate the impact of measures on imports.

Ja Ian Chong, an associate professor of political science at the National University of Singapore, suggests that "Beijing probably wants to avoid a tariff war while continuing to enable its EVs to enter the European market. An overreaction could jeopardise both aims." Chong also notes that retaliatory moves could be tailored to target specific EU members or even particular districts to exert pressure.

Despite China's strident opposition and the Commerce Ministry's demand for the EU to correct its "mistake," there may still be room for negotiation. Tu Xinquan, dean of the China Institute for WTO Studies at the University of International Business and Economics in Beijing, suggests that "there's still space for negotiation. The final decisions will be made in a few months, so there's still time. Even after the tariffs are levied, it is still possible to coordinate positions."

China may also consider offering various incentives, such as the potential sale of Airbus SE aircraft to China, which is currently under negotiation. However, as Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA, warns, "This is just the beginning. China won't retaliate right away but eventually they will find a way."

As tensions continue to mount, the world watches closely to see how China will navigate this delicate situation, balancing its desire to protect its interests with the need to avoid a full-blown trade war with the EU.