China’s decision to retaliate against the European Union’s tariffs on electric vehicles is a double-edged sword. Time will tell if it is a clever move.
Night really does follow day! On Tuesday (20 August) the European Union announced its planned anti-subsidy tariffs on Chinese electric vehicles, a hefty 36.3%.
On Wednesday (21 August), China retaliated by opening an investigation into EU subsidies for cheese. Affected parties – the European Union, EU member states, dairy producers exporting to China – have twenty days to respond.
Clever move?
This move by China is either very clever or very stupid. Or possibly both. Let’s unpick it.
The first observation to make is that the EU will not have been taken by surprise by the opening of this cheese subsidy case. China invariably retaliates when its trading partners impose restrictions on its exports. In its announcement of the investigation China in fact refers to consultations having taken place with the Commission two weeks ago.
It is not impossible that it was even choreographed between China and the Commission, so that the Commission can demonstrate to EU member states that there will be a high price to pay if in November the EU imposes definitive duties on electric vehicles.
EU dairy producers in many member states pay the price for a trade spat in a wholly unrelated sector.
Why cheese? European wine and charcuterie producers must be heaving a sigh of relief as I write, as they were assuming they would yet again be the target of the obligatory retaliation.
China chose its target carefully. Cheese is a politically high-profile product in European eyes, it comes from a large range of member states – “there’s a cow in every member state” the saying goes. So, the pain will be distributed across the whole of the EU.
Yet at the same time exports to China – that famously lactose intolerant nation – are limited. In 2023 the EU sent to China just € 190 million worth of cheese. That figure pales in comparison with China’s € 20 billion of electric vehicle sales in Europe now to be hit with a up to 36.3% extra duty.
This means that the eventual imposition of anti-subsidy duties on Gouda and Pecorino Romano is unlikely to sway member states when they are called on in November to agree definitive duties on Chinese cars.
China’s announcement is above all political and symbolic, aimed at creating a bit of leverage over the EU but calibrated so as not to represent the opening salvo in a real trade war.
‘As close as lips and teeth’
So far so good. But from another angle one can argue that this Chinese move is misguided and it may come to regret it.
The investigation was triggered by a request from the domestic industry.
Knowing how intertwined government and industry are in China – “as close as lips and teeth” as the Chinese proverb has it – it is hardly fanciful to imagine that China’s government instructed industry to lodge the request.
It is common knowledge that Beijing has a metaphorical drawer of oven-ready dumping and subsidy requests ready to brandish if political circumstances so warrant.
China has taken great pains in recent years to replace a vacuum left by the United States by arguing that they are reliable multilateralists, wedded to the rule of law.
An anti-subsidy case launched for purely political and tit-for-tat retaliatory reasons hardly inspires confidence in China’s attachment to those multilateral principles, quite the opposite. It blows China’s narrative out of the water. Trust, once gone, takes an aeon to restore.
EU agriculture subsidies proven WTO-proof
The officials in the Chinese ministry of agriculture will have been tossing and turning in their sleep these last few days. It will be difficult for China to prove that EU cheese benefits from trade distorting subsidies paid to milk producers.
As an EU official until last year, I was involved in a series of cases in which various trading partners were trying to prove that the income support to farmers paid by the Common Agricultural Policy somehow ended up as a subsidy for the finished product.
We successfully demonstrated that, in the jargon, there is no “pass through” of money from the primary producers, whether it be with Canada on sugar, the US on table olives, or Australia and Peru on tomato paste or canned tomatoes. In all cases the World Trade Organization or our bilateral dispute settlement courts rejected the other countries’ claims.
The EU also successfully rebutted claims that direct income support to farmers – who get their dosh irrespective of what they produce or even whether they produce – is product specific and thus a distorting subsidy.
China will face the same arguments, facts and hurdles in its investigation, along with several WTO precedents and findings that they now cannot ignore.
The European Dairy Association issued a breezily confident statement declaring the WTO conformity of the CAP toolbox of support schemes from which they benefit. They are right.
The dog that chased a bus
Chinese agricultural officials must feel even more ambivalent over the claim – set out in the relevant ministry of commerce notice – that the EU’s environmental payments to farmers represent a distorting subsidy.
China is following in the EU’s footsteps by progressively paying its farmers to adopt eco-schemes and other forms of environmentally friendly farming practices.
China would therefore be mortified if its own investigation into EU cheese subsidies were to conclude that green farm payments were trade distorting and thus countervailable.
This would expose China’s own green subsidy schemes to challenge in the WTO and deal a systemic blow to any country providing green support. China will not want this to happen.
I am reminded of the story of the dog that used to chase a bus. One day to its surprise it caught the bus. Having caught it, it did not know what to do with it. This is what China may have done in opening this anti subsidy case.
I am confident nonetheless that if this investigation runs its course, China will determine, will have to determine, that the payment schemes to milk producers do not represent a subsidy to cheesemakers.
Unless the political relationship with the EU sours dramatically, China will do little more than introduce some minor face-saving duties on cheese, if anything.
Conclusion? The Chinese action is neither clever nor stupid. Only time will tell.
John Clarke is a former Director for International Relations at the European Commission and senior EU trade negotiator. He previously headed the EU Delegation to the WTO and UN in Geneva.
To read the commentary as it was published on the Borderlex webpage, click here.