Beijing’s anti-dumping probe of French brandy could be the ‘first bullet’ in a Europe-China trade war

China’s decision to investigate expensive French liquor for dumping could be the start of an extended tit-for-tat trade dispute with the European Union, analysts warn. Beijing has often targeted bilateral trade as a tried-and-tested method to express its displeasure—and in most cases, they say, the tactic helps Beijing get what it wants.

“This is the first bullet the Chinese will shoot,” says François Chimits, an analyst at Berlin-based Mercator Institute for China Studies, referring to Beijing’s anti-dumping probe into brandy.

Last September, the European Union announced an anti-subsidy probe into a “flood” of Chinese electric cars entering Europe; formal investigations started the following month. European officials alleged that EVs made in China benefit from state subsidies, which allow them to undercut models made outside the country.

China’s surging exports of EVs helped make the country the world’s largest auto exporter in 2023, overtaking Japan. Chinese carmakers like BYD now see developed markets like Europe and Japan as their next targets. European investigators plan to visit BYD, Geely, and SAIC, Reuters reports citing people involved in the process.

Last week, Beijing revealed its response to the European probe: an anti-dumping investigation into brandy exports from France. China imported $1.57 billion worth of spirits from distilled grape wine from January to November 2023 last year, according to Reuters citing Chinese customs data. France accounts for 99.8% of all EU brandy exports.

French cognac makers argue that their discounts were too small to trigger a formal investigation. Brandy was discounted by just 15.88%, according to the Bureau National Interprofessionnel du Cognac, a trade association representing brandy makers.

“This investigation takes place in the context of a trade disagreement between the European Union and China on other industrial sectors, unrelated to our activity,” the BNIC said in a statement to trade publication Global Drinks Intel on Jan. 5.

Has this happened before?

It’s not the first time China and the European Union have tussled like this.

Just over a decade ago, the EU alleged that Chinese solar panels benefited from huge state subsidies, allowing Chinese manufacturers to undercut European producers. That, in turn, sparked retaliation from Beijing, which first probed steel tubes, then French wine. Europe was divided at the time, with Germany and 14 other states opposing punitive measures for fear of provoking further escalation.

The two sides ended up finding an “amicable solution,” in the words of then–EU trade commissioner Karel de Gucht, where Europe set a minimum price on imported Chinese solar panels.

Yet Chimits thinks the stakes are different this time. The EU is now taking a more assertive stance vis-à-vis China, at times calling it a “systemic rival.” The bloc is now embracing de-risking, or reducing dependence on China while also diversifying its supply chains. Backing down might risk the EU’s credibility.

“If you back down at the first shot of real fire, then your entire [political] capital is wiped out,” Chimits said.

What happens next?

While Europe likely won’t stop its anti-subsidy investigations into electric cars, Beijing’s probe is a sign that China can “take any measure and will not stop” in expressing its displeasure, Alicia García-Herrero, chief economist for Asia-Pacific at investment bank Natixis, says.

In choosing its target, Beijing is picking a “big enough” country that it thinks can exert influence in the European Commission, she says. With the solar panel dispute, it was Germany; now, it’s France.

Both Chimits and García-Herrero note that Beijing has often got what it wanted, or at least an outcome it was willing to accept, when it previously used these tactics.

García-Herrero pointed to both the EU’s earlier solar panel probe and Australia’s experience in its trade war with China during the COVID pandemic.

In 2020, then–Australian Prime Minister Scott Morrison called for an investigation into the origins of COVID-19, a sensitive topic for Beijing. Chinese officials retaliated by imposing tariffs on key Australian exports like wine, beef, and barley; anti-Australian rhetoric in Chinese state media also increased.

China and Australia have since worked toward mending relations. Beijing lifted its duties on barley last August, citing unspecified “changes in the Chinese market.” Australian ministers now believe that China will lift all remaining tariffs on Australian products, like those on wine and lobster, this year.

“We can grow the relationship while advancing our respective interests, if we wisely navigate when there are differences,” Australia Prime Minister Anthony Albanese said during his November visit to Beijing, the first by an Australian leader in seven years.

Chimits laid out one possible scenario on how both sides might resolve the dispute.

Europe’s decision to go with an anti-subsidy, rather than an anti-dumping, probe, means the regional bloc can go with a less harsh penalty, such as a 10% to 20% tariff, Chimits suggests. He adds that anti-dumping probes can lead to punitive tariffs of 30% to 40%. A lower anti-subsidy tariff would allow Europe to “demonstrate what it wants without hurting the Chinese market so much.” In turn, China could retaliate in a way where the country is seen as “forceful and not a bully.”

Yet he also warns that things might not turn out quite so rosy, especially if the EU’s EV probe escalates to a point that annoys Beijing further.

“French exports are extremely easy to target,” Chimits says, noting that around 60% to 70% of French exports to China are “luxury consumption.”

That means that Beijing can put the screws on France without hurting its economy too much. “The only effect on your economy is that the rich consumer might be a bit dissatisfied,” he says.

This story was originally featured on Fortune.com