How EU-China trade negotiations could play out

While last week’s Chinese threats of a potential retaliation to EU duties on electric vehicles were not deemed a gamechanger by analysts, the option of negotiations is increasingly seen as an alternative to hardline tariffs from Europe – where a potential preliminary tariff announcement could serve as an ‘opening bid’ for talks.

As of October last year, the European Commission has been investigating Chinese electric vehicles (EVs), which it suspects have benefitted from subsidies and have been sold at artificially low prices.

If such subsidies are confirmed, the EU can respond with tariffs or countervailing duties (CVDs) that mitigate the advantages Chinese carmakers have gained thanks to the subsidies.

In a letter sent to EU trade chief Valdis Dombrovskis, the Chinese Commerce Ministry threatened to retaliate by hitting the EU’s agriculture and aviation sectors, a Dombrovskis’ spokesperson told Euractiv on Thursday (30 May) after reports emerged last week.

Nevertheless, analysts interviewed by Euractiv expected the EU to announce findings and preliminary measures on June 10—the day after the EU elections—and then final measures within the next four months.

According to David Kleimann, a trade expert at UK-based global affairs think tank ODI, the provisional duty announcement could be seen as an “opening bid” for potential negotiations between the EU and China, meaning that the final level of duties could very well differ from what was announced in June.

“The four-month period between July and November, in which the provisional duties would apply, offers a perfect opportunity for China, the EU, member states and affected producers to enter into conversations and negotiations over possible alternatives to the definitive duties,” he said.

Definitive duties on Chinese carmakers could be blocked by EU countries, with a “qualified” majority of 15 countries representing at least 65% of the 27-country bloc’s total population.

Kleimann added that the ‘negotiations’ were already in preparation, as Chinese sources “provided the prospect of both retaliation, through tariffs on sensitive EU exports, and market opening in case the provisional CVDs would not be transformed into definitive duties in November.”

In an interview with Euractiv last week, German Transport Minister Volker Wissing (FDP/Renew) called tariffs the “wrong approach,” hinting that he would favour a negotiated solution.

“The approach must always be to create fair competition instead of working to hinder it.”

The threat of retaliation is unsurprising

German carmakers, in particular, are concerned about potential tit-for-tat restrictions that could affect their business in China –  the world’s largest car market.

John Clarke, a former head of international affairs at the Commission, told Euractiv that, within China’s messaging to Dombrovskis, the choice of the agricultural sector was unsurprising, given the sector’s heightened political sensitivity in the bloc – while threatening action against EU aeroplane maker Airbus was “an interesting choice.”

“Agriculture tends regrettably to be the first and easiest victim,” he said, pointing to numerous EU countries keen on pleasing the agricultural voter base, such as France, Spain, Poland, and Ireland.

Conversely, the Netherlands-headquartered aircraft multinational Airbus was a more interesting case because, “on the one hand, China needs Airbuses at the moment because [US competitor] Boeing is considered dangerous,” Clarke said, referring to safety concerns that have recently plagued the company.

“On the other hand, China may use this as an opportunity to accelerate its own domestic passenger airline industry” and construction capacity if it were to block Airbus from the market for a while, he said.

In any case, Clarke added, negotiations between the EU and China would have to be done “very discreetly and it would have to be deniable” as the EU insists that its procedure is evidence-based and not influenced by political considerations.

The EU would have a “considerable margin of manoeuvre,” he said. “As I see it, any negotiation would more logically take place after a decision on provisional duties to maximise leverage”.

Prospects for negotiation

Niclas Poitiers, a trade expert at EU policy think tank Bruegel, agreed that it was not “terribly unexpected” for China to ramp up threats of retaliation just before the EU announcement of preliminary duties.

“The preferred outcome from a European standpoint is for Beijing to engage with Europe, trying to find a way to deal with this subsidy issue in a cooperative way,” he said.

Voicing a different expectation from the other two analysts, however, Poitiers added: “I don’t think that is likely.”

He noted that the issue would be further complicated because many of the subsidies in question are not represented by traditional grants given by the Chinese central government but rather concern preferential access to loans from state-owned or state-controlled banks, as well as access to cheap land or certain public procurements.

So while the EU approach would be “still very much grounded in the WTO rules […] there might be some novel justifications here that could be legally interesting,” he said,  “and we might not know whether they end up being 100% WTO-compliant or not”.

The US government has recently hiked tariffs on Chinese electric cars from 25% to 100%, which experts said violates WTO rules. Poitiers said the EU should aim to explicitly clarify that its motivations are very different from the US and put forward strong evidence to support that.

Ultimately, however, Kleimann noted that the prospect of negotiations depends on the level of duties imposed, as “The profit margins for Chinese EV sales in Europe are so high that producers could easily absorb a 10% or even 20% countervailing duty rate.”

“The key question is whether the provisional duty rate will set strong enough incentives for China to even take any action at all,” he said.

[Edited by Anna Brunetti/Alice Taylor]

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