Week That Started With WTO Warning Ended With Trade Battle

The warning from the World Trade Organization in Geneva early this week was unambiguous: A global economy split into rival trading factions would reduce real incomes 5% — maybe double that amount in poor countries.

(Bloomberg) — The warning from the World Trade Organization in Geneva early this week was unambiguous: A global economy split into rival trading factions would reduce real incomes 5% — maybe double that amount in poor countries.

The next day, the European Union launched what some of the 27-nation bloc’s most well-known industries — ranging from Airbus SE to cosmetic producers and wine makers — worry could land them on the punishing end of a trade war with China.

Since the European Commission’s announcement Wednesday of a new anti-subsidy inquiry into Chinese electric vehicles, which might lead to duties on Made-in-China EV imports, European businesses are scrambling to assess their exposure to a potential tariff barrage between two of the world’s largest economies.

That’s because President Xi Jinping’s government has shown a determination to respond to punitive trade measures — like former US President Donald Trump’s tariffs — with its own reciprocal restrictions. The most powerful tool Beijing can wield is restricting access to its huge domestic market.

French Finance Minister Bruno Le Maire, speaking to Bloomberg Television on Friday, signaled that perhaps a new era has arrived, one where “the EU starts thinking about its own interest.”

‘Powerful Signal’

With the Chinese subsidy investigation, Brussels “wanted to send a powerful signal,” former EU Trade Commissioner Cecilia Malmstrom told Bloomberg News in an interview. With Chinese imports flooding in — unlike in the US where 27.5% tariffs are in place — she said “there is fear of competition.”

The fretting might be justified. The auto sector accounts directly or indirectly for nearly 14 million jobs — or 6.1% of the EU workforce.

The potential impact for exporters is also huge. Last year, the EU shipped $240 billion worth of goods to China, making it Europe’s third-largest market abroad, behind the US and the UK, according to data compiled by Trade Data Monitor, a Geneva-based platform that compiles official figures.

China’s response “could be official retaliation, or just making life more difficult for European firms with a significant China presence,” said trade expert Sam Lowe, a partner at consultancy Flint Global in London.



The EU, meanwhile, downplayed the potential of a harsh Chinese response to the bloc’s investigation EV subsidies. 

“There is no specific reason for retaliation,” Paolo Gentiloni, the EU’s economy chief, told reporters on Friday. “But retaliation is always possible in this kind of thing.”

The probe, which is of strategic importance for Europe, will be discussed with Chinese officials during a high-level visit to China next week, European Commission Vice President Valdis Dombrovskis said on Saturday.

Tensions between Europe and China have been brewing for years following the implosion of Europe’s bilateral investment deal with China due to EU allegations of forced labor in Xinjiang. 

Now, the prospect of European tariffs on $7.2 billion worth of Chinese electric vehicles could soon spill over into a tit-for-tat trade war between Brussels and Beijing. If the EU investigation results in new tariffs on Chinese EVs, it would have a bigger impact, by far, than any of the bloc’s previous anti-subsidy actions on Chinese imports.

“We have to ensure that trade is based on fair rules,” France’s Le Maire said on BTV. “We are not here to trigger any kind of trade war, we are just here to ensure that fair rules are being implemented by all partners.”

China lashed out at the EU, saying the move will harm relations, and Beijing has several ways to retaliate.

To be sure, the investigation was just the start of a process that may take a year or longer, so it’s too soon to know whether it will result in new tariffs or potential countermeasures from Beijing.

“The key point is the question of the fairness with which a product is being sold on the European market,” said Hiddo Houben, deputy head of the EU mission to the WTO. “If the investigation finds that there have been subsides, then under WTO rules you can, in a sense, equalize the amount of the subsidy.”

–With assistance from William Horobin.

(Adds Dombrovskis on talks with China in 12th paragraph)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.