China's warning to Europe

Europe vs. China: a new cold war?

2024-01-16 12:49:00

The announcement by China's Ministry of Commerce of an anti-dumping investigation into European wine spirits is a warning to European Union countries to retaliate.

The measures taken by some European countries do not suit Beijing. The Chinese authorities' statement on wine spirits followed a decision by the Netherlands to restrict exports to China of advanced equipment needed to produce state-of-the-art electronic chips. The decision was immediately enforced by Dutch giant ASML, which froze all exports of its chip-making machines to the former Middle Kingdom.

This tough decision followed the entry into force of a new environmental bonus that excludes all Asian cars from consumer subsidies for the purchase of electric vehicles. Justified on environmental grounds, the bonus is part of a broader drive by the European Commission to protect the European auto industry from competition from China, which is at the forefront of electric vehicle technology. In September, Brussels launched an investigation into alleged state aid to the Chinese auto industry.

Faced with such attacks, China was forced to respond. But, focusing only on a portion of European spirits, the reaction has been moderate. Especially if we remember that in the past China has in the past launched big guns to resolve trade disputes with the EU in its favor. A case in point was the freezing of a large number of aircraft orders for Airbus in 2012 in opposition to Europe's introduction of a system of trading CO2 emission permits on all flights, including those of non-European airlines. With the help of international law, Beijing forced Brussels to back down.

Today, the situation is different. China, already in trouble with the United States, has lost some of its superior economic credibility and is neither willing nor able to sever relations with Europe. Xi Jinping's government needs the Old Continent to support its economy, weakened by sluggish domestic consumption.

Still, China's cautious response is instructive. By targeting some high-end spirits, it is making clear what the next stage might be: hitting other strong symbols of Europe. In particular, the luxury goods and cosmetics industries. All of these are heavily focused on the Chinese market, often accounting for more than 30% of their sales.

So what can Europe do in response to Chinese threats?

One option is a symmetrical response, i.e. imposing anti-dumping duties on Chinese goods that compete with European goods. However, this could lead to an escalation of trade wars, which are already having a negative impact on the global economy.

Another option is a more flexible approach that would preserve trade relations with China but protect European interests. Such measures could include:

Whichever option Europe chooses, it needs to act decisively to protect its economic interests. China has already shown that it is willing to use trade weapons to achieve its goals.

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