China Scrutinizes French Brandy in Latest EU Trade Friction

Armagnac, a brandy produced in the Armagnac region in Gascony, southwest France.

The Lede: China’s Ministry of Commerce announced on Friday that it was opening a trade investigation into the price of brandy imported from the European Union. The move is seen as a retaliatory measure following a decision by the European Commission to launch an investigation into Chinese state subsidies for electric vehicles, which they argue have unfairly undercut their own car brands.

What We Know:

The anti-dumping investigation was reportedly launched at the request of local liquor producers in China. Observers view it as a way for Beijing to send a message in the tit-for-tat trade clash that has emerged over recent months as the EU follows a trend of launching investigations and imposing tariffs on Chinese imports.
Shares of luxury consumer goods groups fell in response to the announcement. EU Commission spokesperson Olof Gill said that the organization was assessing the documentation received from Chinese authorities and would be assisting in close cooperation with EU liquor companies.
While the announcement did not explicitly name any countries or distillers, China’s inquiry is expected to target cognac, Armagnac, and other brandies from groups like Remy Martin or Hennessy as it focuses on ‘spirits made from distilled wine’ to the exclusion of other types of spirits.

The Background: China has become a significant importer of spirits in the past decade with French brands particularly popular as luxury items. France is the largest source of alcoholic beverages imported into China and represents 99 percent of brandy imports. In September, European Commission President Ursula Von der Leyen argued that the flood of cheap EVs onto the global markets propped up by excessively generous state subsidies put European carmakers at a severe disadvantage. The EU Commission has cracked down on cheap imports from China in recent months. These include temporary tariffs on certain plastic products in November and biofuels in December. EU leaders met with Chinese President Xi Jinping and other officials in Beijing last month where they discussed disagreements regarding trade, subsidies, and the war in Ukraine as Europe continues to pursue a path of de-risking from Chinese supply chains.

Likely Outcomes:

The investigation could result in China imposing tariffs on the import of French brandy. It may occur in a similar fashion that Australian wine was curbed by measures from Beijing in 2020 after such an investigation. Many Australian wine producers were severely impacted and French spirit producers likely fear the same effects, likely a period of heavily depressed sales.
This move could sour the upcoming visit to China next week by Belgian Prime Minister Alexander de Croo, who took over the presidency of the EU Council at the beginning of the month, and trade relations with Europe in general. The investigation may put pressure on the EU’s investigation into Chinese EV subsidies, but perhaps not enough to change decisions on tariffs.

Quotables:

"[Brandy imports] may not be very big in size, but (the probe) has a very big impact in terms of warning Europe, especially France in this case, what may happen if the anti-subsidy investigation into European NEVs (new energy vehicles) continues.” – Alicia Garcia Herrero, chief economist for the Asia Pacific at Natixis

“China is following a well-established pattern on applying economic pressure while limiting the damage to its own economy." – Max Zenglein, chief economist at the Mercator Institute for China Studies

“When the EU retaliated against the U.S. on steel, which products did they target? Those made by Harley Davidson, Levi’s, different whiskey makers: well-known, dominant US consumer brands. The Chinese are taking a page out of the EU’s playbook here.” – Laurent Ruessmann, a partner at Fieldfisher

Good Reads:

China targets EU brandy in tit-for-tat anti-dumping probe (Reuters)

Chinese liquor probe escalates trade tensions with Brussels (Politico)

China targets French brandy imports in escalating trade dispute (FT)

Industry experts react to China's anti-dumping probe into EU brandy (Reuters)

China and Europe’s trade spat escalates as Beijing targets French brandy (CNN)