China's carrot-and-stick with EU trading partners start to pay off

By Mei Mei Chu, Joe Cash and Ellen Zhang

BEIJING (Reuters) -Beijing, as a vote on EU duties on China-made electric vehicles looms, employed a carrot-and-stick approach to deal with the 27-strong bloc, threatening trade retaliation while cajoling key EU states into one-on-one talks on deals and investments.

The potential blow of counter-tariffs on EU goods will fall mostly on states such as Spain, France and Italy that have voiced support for the EV duties, with pork, dairy and brandy exports to the world's second-biggest economy at stake.

European Union members such as Germany, Finland and Sweden that have not pushed for the tariffs would feel less impact, with little exposure to the export items singled out by China.

China's tactics appear to be working.

Spanish Prime Minister Pedro Sanchez wrapped up a China visit this week by sitting in a Chinese EV and saying it was an "honour". He then unexpectedly urged the EU to reconsider its position.

According to a Spanish government source, Sanchez's delegation came away feeling "Spain is more important now", and that an agreement over tariffs on its pork products was close.

As a sweetener, a Chinese company agreed to build a $1 billion plant in Spain to make machinery used for hydrogen production, in apparent backing for Spain's green ambitions.

With pork and dairy, China maximises the "domestic political cost" to the countries voting to impose EV tariffs, said Beijing-based economist Mei Xinyu, with the agricultural sector often playing a role in EU politics.

"These products count on China as one of their top export markets," he said.

Pork, dairy and brandy exports from the EU to China totalled about $10 billion in 2023, although not all products in those categories would be subject to tariffs. The bloc's exports to China last year totalled over $280 billion.

CRUNCH TIME

Still feeling the pinch of U.S. tariffs imposed during the Trump era, China does not want a trade war with the EU. But Beijing has made it clear it would fight if Brussels imposes additional EV tariffs of up to 35.3%.

China-made EVs exported to Europe rose 38% in 2023 to 656,000 units, including shipments non-EU countries. Europe accounted for more than 40% of EVs shipped out of China last year, according to Reuters calculations based on data from the China Passenger Car Association.

Chinese Commerce Minister Wang Wentao will visit Europe next week and hold talks with EU trade chief, Valdis Dombrovskis.

Wang will also visit Italy, which supports the EV tariffs while also seeking Chinese investment to build EV production capacity.

China needs at least 15 EU members representing 65% of the EU population to oppose the tariffs at a vote in October.

But positions within the EU remain diverse. Some smaller states are keeping their heads down. Others are prioritising ties closer to home.

"Ireland's exports to China are only a small fraction (of its exports), so Ireland will prioritise the EU market and relationship over China," said an Irish trade representative in China, speaking on condition of anonymity.

"China is still important, but business with China is hard and not growing as well as expected."

Ireland is the fifth most exposed EU producer in China's dairy investigation and sixth worst off in its pork probe.

'SHOCK AND AWE'

In contrast, China appears to allow no room for negotiations or concessions with Canada, hitting it on Monday with a probe into its rapeseed exports after Ottawa introduced a 100% tariff on Chinese EVs in August, accusing Beijing of unfair competition.

Unlike with Brussels, Beijing gave Ottawa no public prior warning of how it might hit back, signals often conveyed in Chinese state media such as Global Times.

He Yongqian, a Chinese commerce ministry spokesperson, said "evidence" showed Canada's rapeseed exports to China had been dumped and had damaged domestic industry, when asked to explain the difference in approach.

Canadian rapeseed producers play by a rules-based global trading order, a spokesperson for Global Affairs Canada told Reuters.

"We are following this closely," said the spokesperson.



On the contrary, Beijing has clearly been open to negotiation with the EU, said Even Pay, an analyst at Beijing-based Trivium China who specialises in agriculture.

"With Canada, they went straight for shock and awe," Pay said.

Source: Investing.com