China on Monday opened an anti-dumping investigation into the import of European pork, marking a further deterioration in relations between two of the world’s top-three trading partners. Chinese state media also suggested a probe into European dairy exports may be in the works, and other signals hint at tariff risks for Europe’s automotive, aviation, and consumer luxury sectors.
The move followed last week’s announcement by the European Commission (EC) of provisional tariffs of between 17.4% and 38.1% on electric vehicle (EV) imports from China, in response to what it calls illegal state subsidies. These new tariffs are on top of the current 10% rate, with the exact level varying by manufacturer based in part on their cooperation with the probe.
The EU’s action comes after the US’s move last month to quadruple tariffs on Chinese EV imports to 100%.
While we don’t see this spilling over into a broader trade war, we do see several important takeaways for investors:
The exchange of criticism between top trading blocs has been intensifying. The communiqué of G7 leaders on 14 June expressed concerns over what they called “China’s persistent industrial targeting,” which they said created “distortions and harmful overcapacity in a growing range of sectors, undermined our workers, industries, and economic resilience.” Meanwhile, China’s top economic planning agency, the National Development and Reform Commissions, has recently accused the EU of “weaponizing” trade.
Despite heated criticism, China’s retaliation so far looks targeted and unlikely to provoke an escalating trade war. While China is the EU’s largest single overseas market for pork, exports were worth USD 1.83 billion last year, compared to total exports of USD 282 billion, based on official data reported by Bloomberg. China’s decision also appeared aimed at pressuring individual nations without sparking a broader trade conflict. China’s pork probe poses the largest risk to Spain, followed by the Netherlands, Denmark, and France.
Spain and France were reportedly in the camp pushing for the tariffs, and the Netherlands has been at odds with China over semiconductor equipment. Potential tariffs on EU dairy would impact the Netherlands foremost, followed by France and then Germany. But overall, German politicians and automakers have been vocal in seeking to water down the EV tariffs. So far, the European auto sector, where Germany is the largest producer, has not been targeted by China.
Rising trade tensions mean investor selectivity will be more important. The stocks of Chinese electric vehicle companies facing lower-band tariffs rallied on the initial news, suggesting investor confidence in their ability to hike EU prices and maintain margins while still remaining competitive. By contrast, the EV makers hit with the higher-band tariffs could face a much higher threshold for profitability when exporting to the EU in the future. China’s probe into pork prices marks a first retaliatory measure; Australia’s experience with China’s wine import ban underscores the economic and political pain agricultural restrictions can inflict.
So, while tensions have clearly worsened, we believe both the EU and China will be keen to avoid a full-scale trade war. China needs external demand, and Europe does not want inflation. Tariffs may serve to speed more Chinese EV maker investments into European factories and partnerships to reduce their tariff burdens. We continue to recommend a selective approach within China’s EV sector and European automakers.
Within European equities, we continue to prefer consumer discretionary with a tilt toward established high-end luxury goods, though we acknowledge some risk of higher tariffs given significant revenue exposure to China. Higher tariffs on greentech also pose obvious risks to decarbonization and emission reduction targets, and we recommend investors seeking exposure to focus on sustainable infrastructure.
