Market Views: Are China and Europe heading towards a trade war?

Tit-for-tat tariffs and investigations threaten to derail the crucial trade relationship between Brussels and Beijing. Will we see further escalation? Market experts share their views.
Market Views: Are China and Europe heading towards a trade war?

Trade tensions between the European Union and China have escalated dramatically following the EU's announcement that it plans to impose significant tariffs on imported Chinese electric vehicles (EVs).

The EU claims these tariffs, ranging from 17.4% to 38.1% on top of existing duties, are a necessary response to unfair subsidies provided to Chinese EV makers, which Brussels argues are harming European competitors.

China has reacted swiftly, denouncing the EU's move and launching its own anti-dumping investigations into EU pork and brandy imports.

This retaliatory action highlights Beijing's willingness to target sectors where the EU is vulnerable, particularly agriculture and automobiles, in an attempt to exert pressure.

While China has expressed a desire to avoid a full-blown trade war, it appears determined to defend its interests with targeted countermeasures.

Adding to the complexity of the situation, Germany, with its car industry heavily reliant on the Chinese market, is urging a negotiated settlement to prevent further escalation and economic damage.

The situation remains fluid for now, with both sides engaging in dialogue while simultaneously preparing retaliatory measures.

AsianInvestor asked market experts if they expect the EU-China tensions to escalate into a full-blown trade war or eventually dial down, and what the investment implications are in either scenario.

The following responses have been edited for brevity and clarity.

Alicia García Herrero, chief economist for Asia Pacific
Natixis CIB

Alicia Garcia Herrero

Trade tensions between the EU and China are bound to escalate with further financial decoupling as a consequence.

The announcement by the European Commission to impose countervailing duties on Chinese electric vehicles should not be seen isolation.

In fact, it is only one of the many investigations started by the commission on China’s green tech (whether solar panels or wind turbines) as well as legacy chips among others.

All of those investigations coming to life together need to be seen as a change in direction by the commission, from a free-market champion defending multilateralism towards a more geopolitical and interventionist one.

The are two reasons why there is no turning back for the European Union. The first is that the EU’s change is a response to the world having changed first.

China plays a huge role in such change as its massive industrial policy, combined with its large size, has had enormous consequences for the rest of the world. A very important one for the EU is the United States’ own turn towards industrial policy and protectionism.

The second reason why we should not expect the EU to revert its position is the increasing populism governing European governments and, more recently, the European Parliament in the latest elections.

Populist governments are bound to push the EU inward rather than outward.

Carlos Casanova, senior economist, Asia

Carlos Casanova

The provisional findings of the EU anti-subsidy investigation indicated that the entire electric car value chain benefits from unfair subsidies, which contravenes EU rules.

Tariffs on Chinese exports that are subject to domestic subsidies are neither new nor unexpected. China knew these were coming.

Tariffs were lower than expected, ranging from 17.4% to 38.1%. 

Given lower manufacturing costs in China – not to mention declining factory prices – Chinese electric cars should be able to retain their cost-competitiveness, even after factoring in EU tariffs.

We do not think this will precipitate both regions into a full-fledged trade war.

We have already seen a strong rebuke from the authorities. Besides the usual rhetoric, some tariffs on EU products could also ensue, for example pork.

These should be quite measured, in line with the nature of EU tariffs on Chinese electric cars.

Moreover, the impact of EU tariffs on Chinese carmakers should be muted. Although the EU is a large auto market, it pales in comparison to China’s in terms of unit sales.

China is the largest auto market in the world, followed by the United States.

Although a large proportion of Chinese auto exports do end up in markets such as Belgium and the United Kingdom, exports to Southeast Asia and Russia have been increasing in the past years, offsetting potential declines from Europe.

Paradoxically, electric cars made by European companies in China are also subject to tariffs.

The tariff levels of 21% may be higher than that imposed on Chinese carmakers in some cases.

It is not entirely certain that the measures will benefit European carmakers.

Key member states are likely to raise such concerns in the coming months, which may lead to changes. It is unlikely that China will overreact during this process. 

Brock Silvers, distressed portfolio management
Morgan Stanley Infrastructure Partners

Brock Silvers

A negotiated settlement seems increasingly unlikely as long as China continues to focus on an export-driven rebound. 

China has a significant problem with excess industrial capacity and faces mostly unappealing options as it seeks to reinvigorate its economy. 

Increasing exports may be the least objectionable course of action and Beijing seems determined to defend that choice. 

For its part, the EU may have finally hit a turning point with regard to China.  European spines seem to have comparatively stiffened.

The responding escalations have already begun and the trade situation will likely worsen before it can improve. 

Germany’s deep China interests are an easy retaliatory target, especially as the EU deems China’s auto exports to somewhere between ‘unfair’ and ‘predatory.’

Therefore, it’s no secret why Germany may still prefer a negotiated solution, however unlikely. 

Moreover, an increasingly likely Trump victory in November will only increase global trade tensions. 

Raymond Ma, CIO, Mainland China and Hong Kong

Raymond Ma

Trade tensions between the EU and China may impact market sentiment in the near term. However there is reason to expect these will only minorly influence China’s global trade in the longer term. 

Despite such geopolitical noise and the introduction of some trade barriers, our long-term investment focus in China remains intact based on sound economic fundamentals.

The momentum of China’s exports remain strong, increasing by greater than the market expected at 7.6% year-on-year in May.

Market reach was also expanding with increasing trade especially to ASEAN countries as well as Latin America and Africa. We expect this momentum to be sustained.

The latest data also show China’s imports remained solid and on an upward trajectory.

China is the EU’s third largest export market and a major growth driver for European goods. Given the size of the trade relationship, these two economies have major incentives to negotiate constructively and find a suitable resolution.

Ultimately, the re-globalisation theme will continue, where we expect Chinese companies will become further enmeshed in the world supply chain.

Chinese companies are poised to benefit significantly by expanding their supply chain and global footprint, including the likely transfer of production overseas to developed markets like the EU.

Meanwhile, Chinese companies are highly competitive in key growth segments of the future green economy, with export opportunities across developed and emerging economies.

This re-acceleration of globalisation and the fundamental competitiveness of Chinese companies will bring benefits across economies and unlock opportunities for global investors.


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