Are EU trade barriers on China fair? Beijing's new probe demands answers after bloc action

Whether the European Union has adopted unfair trade practices in the course of targeting Chinese companies is the question Beijing wants answered with an in-depth investigation that adds heat to an already broiling trade dispute.

China's trade-and-investment-barrier investigation, which began on Wednesday, is looking at how the EU's Foreign Subsidy Regulation has affected Chinese companies.

Authorities will use questionnaires, public hearings and field inspections, and aim to be finished by January 10, the Ministry of Commerce said on Wednesday, adding that the half-year probe could be extended to April 10 under special circumstances.

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This came after the EU's additional duties of up to a revised 37.6 per cent on Chinese-battery electric vehicles (BEVs) took effect on Friday and will initially last for a maximum of four months. The ministry also recently refuted EU ambassador Jorge Toledo's remarks that China only recently responded to the EU on tariffs.

Mofcom said EU practices that fall under the scope of China's investigation include the bloc's probes into Chinese locomotives, solar panels, wind-power products and security-check equipment.

Gary Ng, senior economist at Natixis Corporate and Investment Bank, said that such an investigation "usually marks the beginning of trade retaliations".

"It is not the first time China has used such a policy tool, and it is possible to see more tariffs on selected European goods," he explained. "Still, the fragmented political landscape means the EU-China relationship is probably in a deadlock but may not significantly worsen further."

Lea Zuber, the EU's competition spokeswoman, said the commission was studying the details of China's investigation but added that "we are making full use of the tools we have at our disposal, including the Foreign Subsidies Regulation".

"Internally, the EU has an elaborate state aid control system in place - this is a key pillar to ensure fair competition and a level playing field across companies and member states within the Union," she told the Post.

"All companies, regardless of their seat or nationality, are subject to the rules set out in the Foreign Subsidies Regulation. This is also the case when applying state aid or antitrust rules," Zuber added.

On Sunday, ambassador Toledo said that China only recently responded to the EU on tariffs after the bloc had offered consultations to the Chinese government for months.

The ministry later stated that the ambassador's remarks were "grossly inconsistent with the facts", adding that China had been consulting with the EU since the investigation's launch last year, and it referenced seven unsolicited communications sent to the EU from October to June.

"Trade-protectionist measures are not conducive to the development of the global green industry or cooperation in the automotive sector," the ministry's spokesperson said, adding that China would take all necessary measures to safeguard its own rights and interests in the face of abusive rules.

However, some analysts said China's investigation into the EU's trade barriers does not necessarily reflect an "escalation" in trade frictions between the trade partners, and it could instead be a gesture following their recent negotiations.

"[This is] a normal move in trade negotiations, and it's likely a response from Beijing after recent talks with Brussels over tariffs on electric vehicles," said Ding Shuang, chief economist for Greater China at Standard Chartered.

"Negotiations need to ensure fairness on both sides, including not only the EU's investigation of China but also China's further investigation of the EU's probe," Ding said. "Whether trade frictions between the two sides will escalate depends on whether they can find common ground after negotiations."

Wednesday's move came as the Chinese commerce chamber has lodged complaints over the EU practices in the name of anti-subsidies starting from late last year.

"Since the investigation will be ongoing until January and could be extended ... it is still quite unclear what the outcome will be," said Dong Jinyue, principal economist at BBVA Research. "But historically speaking, there are two types of outcomes - one is to engage in retaliatory behaviour toward the EU, and the other is to solve the issue politically or get back to the negotiation table."

The EU's provisional countervailing tariffs on Chinese EV makers took effect on Friday, though the matter is still being negotiated with the Chinese side, and the final verdict is expected in four months.

Mei Yuan, assistant professor of economics at Singapore Management University, said that the EU's investigation is in line with the World Trade Organization's countervailing rules.

"We don't know whether the EU was more stringent or even differentiated between Chinese enterprises in the actual process, which is why [Mofcom] has to investigate the situation," he noted.

Zha Daojiong, a professor with Peking University's School of International Studies, said that "China is in an unfavourable situation" in this tit-for-tat interaction with the EU regarding the countervailing duties, because the odds that the EU will "relent" are "virtually nil".

"The EU can hope to incentivise an increase in Chinese EV investment in its member economies," he added, while China does not "necessarily have the option" of matching the EU with tariff levels on those products it investigates, to "avoid adversely pushing sales prices".

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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