(Bloomberg) --
China is investigating whether to raise tariffs on European large-engine vehicles and will start collecting levies on brandy, escalating a trade spat after the European Union decided to impose tariffs on Chinese electric vehicles.
The Ministry of Commerce said Beijing is looking into increasing duties on imported gasoline cars with large engines, according to a statement Tuesday, shortly after it announced that importers of EU brandy will have to pay a deposit of as much as 39% from Oct. 11. Shares of European firms slumped.
The action against European car and brandy exporters comes after the EU decided last week to impose tariffs of as high as 45% on imports of Chinese electric vehicles for five years. Talks between the two parties are continuing, and the Chinese announcements may represent an attempt by Beijing to put pressure on Brussels to find an alternative to the tariffs.
Trade tensions have strained China-EU ties in recent years. A trade war could hurt both sides, particularly with the US election looming that could bring more uncertainty across the world. The prospect of new Chinese tariffs on cars and other products would further hurt European firms already grappling with a slowdown in Asia’s largest economy.
The EU will challenge the Chinese measures on brandy at the World Trade Organization, according to a statement from the European Commission. “We believe that these measures are unfounded, and we are determined to defend EU industry against abuse of trade defence instruments,” Olaf Gill, a commission spokesman, said in the statement.
Chinese policymakers are also under pressure on the domestic front as they battle to reach their growth targets for 2024. Beijing last month announced interest rate cuts and pledged as much as $340 billion to support the stock market, but held back from unleashing more stimulus on Tuesday.
Shares of European carmakers and beverage firms tumbled, particularly those with high exposure to China. BMW AG shares fell more than 3%, while Mercedes-Benz Group AG dropped about 2%. French distiller Remy Cointreau SA sank as much as 9.3%, Hennessy Cognac owner LVMH Moët Hennessy Louis Vuitton SE fell 6.8% while Pernod Ricard SA dropped 4.6%.
France “cannot abandon us and leave us alone to face Chinese retaliation that does not concern us,” the Cognac lobby group BNIC said in a statement Tuesday. “The impact of these taxes would be catastrophic for our industries and our regions.”
The European Commission must publish the final results of its EV investigation by the end of this month, after which the tariffs would come into effect. Chinese state media and trade groups had hinted that Beijing could raise tariffs on car imports in response to EU moves, and this is the first official confirmation by the ministry.
The EU’s economy chief Paolo Gentiloni said he wasn’t worried about the risk of a tit-for-tat tariff escalation.
“We had a serious investigation concerning risks of overproduction in some sectors,” Gentiloni told reporters in Luxembourg. “We took appropriate and very proportional decisions and I don’t think there’s any reason to react to these proportionate decisions with retaliation.”
Germany and Slovakia, which both voted against the tariffs, are most exposed if China does impose tariffs on car imports. Volkswagen AG Chief Executive Officer Oliver Blume has said that any possible Chinese tariffs would be particularly risky for the German automotive industry, and that the company would face significant disadvantages in the Chinese market.
As for brandy, most of China’s imports come from France, which voted for the tariffs on Chinese cars. The statement from the ministry specifically mentioned European spirits makers controlled by Remy Cointreau and Pernod Ricard, among others.
China announced an anti-dumping probe into European brandy in January this year after the start of the EU investigation into its electric vehicle subsidies. The Asian nation said in August that it found evidence of dumping by European spirits producers in a preliminary probe but withheld levying tariffs then.
China’s brandy industry is comparatively small. The country imported almost $1.8 billion in spirits from distilled grape wine last year, with more than 99% coming from France.
The EU had criticized China’s investigation into brandy and other goods, with European trade chief Valdis Dombrovskis telling Chinese Commerce Minister Wang Wentao last month that they were “unwarranted, are based on questionable allegations, and lack sufficient evidence.”
Dombrovskis had requested that China end these probes and said Europe would “do its utmost to defend the interests of its industries.”
--With assistance from Yujing Liu, Alberto Nardelli, Richard Bravo, Ben Sills, Jorge Valero, Angelina Rascouet and Sabah Meddings.
(Updates with comments from French Cognac lobby group BNIC; LVMH share price reaction)
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