What cards does China hold in trade dispute with EU?

In the ongoing trade dispute between China and the European Union (EU), analysts at Citi said in a note this week that China is strategically preparing for potential retaliation while maintaining a restrained stance.

Following the EU’s imposition of provisional tariffs on Chinese electric vehicles (EVs) on July 4, 2024, China has responded cautiously, focusing on negotiation but also signaling readiness to retaliate if necessary, according to a recent Citi note.

The bank explained that China’s initial retaliatory measures include targeted investigations into brandy and pork imports from the EU. The Ministry of Commerce (MofCom) announced an anti-dumping investigation into brandy imports from the EU, with a particular focus on France, which accounts for 99.3% of China’s brandy imports.

Despite this, Citi says any potential tariffs on brandy are expected to have limited impact on China’s alcohol market, which recently resumed imports from Australia after lifting tariffs imposed in 2021.

Similarly, they explain that an anti-dumping investigation into EU pork imports is underway. China, the world’s largest pork consumer, imported $6.9 billion worth of pork in 2023, with 47.9% coming from the EU.

The investigation is said to target major suppliers such as Spain, the Netherlands, Denmark, and France. Despite ample domestic supply and a deflationary consumer price index, any tariffs on pork could leverage China’s position in negotiations, says Citi.

Additionally, the bank says China has initiated a broad investigation into EU trade practices and barriers, affecting products like railway locomotives, photovoltaics, wind power, and security equipment.

This probe, which could last until mid-April 2025, reflects China’s response to earlier EU investigations into Chinese subsidies and market access.

Furthermore, the bank believes China’s strategic patience indicates that it prefers negotiation to escalation. As a significant surplus economy, China aims to avoid decoupling from global markets and supply chains.

According to Citi, Beijing is likely to offer reasonable concessions in trade talks with the EU while remaining calibrated in its responses until the disputes potentially escalate.

In conclusion, Citi believes China holds significant retaliatory options in the trade dispute with the EU, from targeted investigations to broader trade barrier probes. However, they feel its primary focus remains on negotiation, seeking to resolve disputes amicably while preparing for all eventualities.