Sino-European commercial relations are going through a rough patch. Beijing is suing the European Union (EU) at the World Trade Organization (WTO) over Brussels’ decision to impose heavy tariffs on battery electric vehicles (BEVs) imported from China.
But while China-EU tensions are clearly on the rise, scrutiny of the dispute reveals that the two sides are heading toward a more selective commercial engagement rather than a full-blown trade war.
On November 4, the Chinese Ministry of Commerce confirmed that it filed a lawsuit against the EU over its late October decision to increase tariff rates on BEVs imported from China. Including the baseline 10% import tax on all cars brought into the EU, the new tax rates on Chinese BEVs range between 18-45%. The EU’s decision comes after an anti-subsidy investigation launched in October last year.
Apart from confronting the EU in front of the WTO, China has adopted a host of countermeasures against what it sees as “unfair trade protectionism.” Earlier this year, Beijing started its own anti-subsidy inquiries against EU pork and dairy products.
At the beginning of October, China slapped tariffs on brandy imported from the EU and threatened to raise duties on petrol-powered cars. Two days after the EU decision, the Chinese government reportedly asked automobile manufacturers to halt mega-investment plans in European countries that voted for the tariffs.
A superficial look at the current Sino-European tit-for-tat might suggest an impending trade war. A closer inquiry of the emerging structure of EU-China commercial relations and geo-economic dynamics, however, reveals that the two sides are in the process of recalibrating their economic engagement.
That is, Brussels is “de-risking, not “decoupling” vis-à-vis Beijing. The EU is heavily reliant on Chinese products and raw materials in critical sectors such as pharmaceuticals and green technology. Brussels seeks to reduce this dependence while maintaining constructive economic ties. This entails mitigating vulnerabilities in critical sectors while sustaining trade in less sensitive areas.
Beijing is likely to be open to such an engagement. Escalating the trade dispute is not in China’s interest because that would mean a multi-pronged trade war.
In September, the US finalized tariff increases on a variety of products imported from China. In October, Canada put extra tariffs on Chinese electric vehicles, steel and aluminium products and “critical manufacturing sector products.”
In this geo-economic environment, it makes more economic sense for Beijing to do damage control rather than opening new trade war fronts in Europe. China’s economic countermeasures against the EU in this context are about surgically targeting key sectors and EU member states to put pressure on Brussels for a settlement.
Against this backdrop, China and the EU are more likely to seek compromise in the BEV trade dispute. Beijing and Brussels are no strangers to bargains, as they worked out a deal to avoid extra tariffs during a solar panel trade dispute in 2013.
The recent dynamics of the China-EU BEV trade dispute reveal that Beijing and Brussels are in the process of shifting away from comprehensive bilateral trade toward more selective engagement.
The implication of this trend goes beyond governments, impacting business communities. Chinese corporates operating in sectors prioritized by the EU—biotechnology, critical raw materials, clean technologies, among others—have to expect more limited access to European markets, as the EU seeks to reduce dependence in the areas.
At the same time, EU businesses that operate in key sectors and member states must be prepared for to be a target of trade defense measures adopted by China.
Daniel Balazs, PhD, is a Research Fellow of the China Programme at the S Rajaratnam School of International Studies, Nanyang Technological University. His research focuses on Chinese foreign policy, China-India and China-Europe relations.