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European Market at Risk Following US Tariff Hike on Chinese Goods

European Market at Risk Following US Tariff Hike on Chinese Goods

May 15, 2024

European Market at Risk Following US Tariff Hike on Chinese Goods

Brussels is urgently seeking a strategy to avoid being entangled in the escalating trade tensions between the United States and China. Following President Joe Biden's announcement on Tuesday of new tariffs on a range of Chinese goods, European officials are concerned about the potential redirection of these products to the European market.

President Biden imposed a 100 percent tariff on Chinese electric vehicles and increased tariffs on steel and aluminum to thrice their original rate. Additionally, tariffs on solar cells were raised to 50 percent, and he stated that semiconductor tariffs would double starting in 2025. "The US has sent a very clear message that it wants minimum Chinese participation in its green transition," said Yanmei Xie of Gavekal Research.

EU officials admit that Brussels lacks the resources to engage in a trade war on the scale of the US and China. The US measures are expected to exacerbate Europe's trade deficit with China, which stood at €290 billion in 2023. "The EU cannot stay idle since it will be the key target for Chinese products. This means more pressure to impose countervailing duties," remarked Alicia García-Herrero, chief economist for Asia-Pacific at Natixis.

Chinese President Xi Jinping's recent visit to Europe did not result in any commitment to address issues of overcapacity, despite EU leaders' requests. García-Herrero expressed a stark view that "The EU cannot do much but lift tariffs. I think we are heading for a trade war."

A senior EU official noted efforts to coordinate with Western allies on addressing Chinese overproduction to avoid inconsistent actions. However, the EU's commitment to World Trade Organization (WTO) compliance limits its responses. Another EU official stressed that breaching WTO rules could worsen the situation for all involved.

Experts predict that EU tariffs on Chinese EVs may reach 25 percent following a subsidy probe, significantly lower than the US's 100 percent tariff. The Rhodium Group, a US consultancy, suggested that such EU tariffs would still make sales in Europe more profitable for Chinese firms than domestic sales, thereby having a minimal deterrent effect.

The EU is divided over adopting stronger measures against China, partly due to concerns of retaliation affecting European businesses. German Chancellor Olaf Scholz and Swedish Premier Ulf Kristersson have both cautioned against tariffs on Chinese vehicles due to the potential backlash from China.

Despite these concerns, the EU has taken firm actions against Chinese companies, such as raiding Nuctech, a scanning equipment manufacturer, and leveraging new powers to interrupt Chinese bids in the solar and train sectors.

As the US increases tariffs on Chinese goods, Brussels is left in a difficult position, attempting to protect its own markets without instigating a full-scale trade war and maintaining WTO compliance.

Financial Times Article


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