China moves to stave off wider EU trade war with hybrid deal

WITH an agreement to curb exports of hybrid vehicles to the EU, China is betting it can sidestep harsher restrictions from the 27-member bloc with a gesture that has little immediate prospect of reshaping the overall trade relationship.

Talks between China and the EU ended late on Friday (Oct 9) with a 16-point consensus spanning trade and investment, export controls and intellectual property rights.

The EU said China agreed to slash millions of hybrid car exports, with people familiar with discussions saying the bloc intends to use safeguard measures to curb imports.

EU leaders meet on Thursday to decide whether to adopt a more forceful response to the surge in Chinese exports, which threaten to hollow out European manufacturing industries and decimate millions of jobs.

Germany and France last week called for stronger tools – including an instrument that could cut off China from the bloc’s massive single market – to defend sectors hit by surging subsidised Chinese imports.

The agreement on Friday buys time for further negotiations, with the two sides planning for more talks in January and March, said Joe Peissel, lead macroeconomist at research firm Trivium China.

He called it a strategic win for China, saying in a research note that “Beijing has played a blinder”.

“In exchange for reviews, dialogue, and ‘understandings’, it has conceded little on the structural drivers of the EU’s massive trade deficit,” he wrote.

“Beyond vehicles and modest tariff relief, nothing in the 16-point agreement suggests a significant rewiring of China’s trading terms with the EU.”

EU leaders are seeking ways to stop China from flooding the continent with goods that have led to a trade deficit now exceeding 1 billion euros (US$1.1 billion) a day.

Weak consumption at home has left China increasingly reliant on a world-beating manufacturing sector and overseas demand to support its sluggish domestic economy.

China’s Ministry of Commerce on Friday said the two sides reaffirmed their commitment as key trading partners to properly manage differences under World Trade Organization (WTO) rules.

They also agreed to maintain stable bilateral economic and trade ties while making them “more balanced”.

Friday’s joint statement said the two sides had reached an “understanding on trade in hybrid vehicles in a WTO compliant manner”.

Chinese hybrid car sales have escalated in part because they escaped the EU’s 2024 tariffs on EVs.

In August, Chinese car brands accounted for about a quarter of European hybrid sales.

Safeguard measures planned by the EU typically take the form of tariff-rate quotas, which apply a levy on imports above a certain volume to curb excess flows.

That would comply with WTO rules – something both China and the EU have said is a requirement.

EU ambassadors briefed by trade chief Maros Sefcovic on Sunday broadly welcomed the result while stressing that they viewed it as just the beginning of the process to rebalance the trade relationship, according to people familiar with the talks, who spoke on the condition of anonymity.

The goal is for the EU safeguard measures to apply from Dec 1.

Chinese carmakers like Chery Automobile have massively stepped up vehicle shipments to the EU in response to a slump in their home market, exacerbating a deceleration plaguing European peers, which are among the worst-performing globally.

Mercedes-Benz Group car sales dropped by 8 per cent in the third quarter, while Volkswagen in September slashed its profit forecast following a similar warning from BMW in June.

Renault chief executive officer Francois Provost called the deal with China a “major milestone” that will help foster a future for Europe’s automotive industry.

He was among business leaders who met with Sefcovic ahead of his trip to China for the talks.

“I had urged him to seek an agreement quickly,” Provost said in an interview on Sunday.

“Without one, we would be looking at a trade war with China, which would be a lose-lose situation for everyone.”

The timing of the EU-China agreement “indicates that China is keen to ease tensions” before the bloc’s leaders meet, said Henry Gao, a law professor at Singapore Management University.

“Given its ongoing trade frictions with the United States, Beijing is unlikely to want a simultaneous escalation with Europe.”

“If the EU insists on strictly WTO-consistent approaches, such measures may not be particularly effective in addressing the surge of Chinese exports, as past cases have demonstrated,” Gao added.

“WTO-compliant trade remedies can provide some relief, but they are often limited in scope and may not significantly alter broader trade flows.”

France and Germany have called on the EU to investigate whether subsidised imports are harming sectors like chemicals and plastics – probes that could produce more tariffs.

The proposal was seen as a pressure tactic targeting Beijing, putting Germany’s weight behind forceful moves it had previously opposed.

“It has taken a tremendous amount of political capital for European officials to get this far on autos, and it’s not clear that the approach could be easily copy-pasted to other industries,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics.

Beijing has preemptively warned the EU against adopting what it called protectionist measures.

China’s dominance of critical rare earth supplies – leverage it has already wielded in trade negotiations with the US – gives Beijing a powerful deterrent as Europe simultaneously tries to curb Chinese imports and secure the materials its factories need.

“Sweeping trade barriers and tariffs would probably incur retaliation from Beijing, and Chinese officials have the nuclear option of threatening to restrict rare-earths exports,” Beddor said.

“But at this stage, they seem more inclined to cut a deal.” BLOOMBERG