At a time when Europe is struggling to drag its way out of its worst recession since World War Two you may be surprised to hear that the struggling region is on the verge of a trade war with the world’s second largest economy, China.
The dispute involves a variety of industries as the two sides squabble over tariffs and unfair advantages. The latest incident sees China complaining over luxury cars being imported from Europe. On Wednesday the Chinese authorities launched a trade inquiry into sales of European wine and revealed that it had received complaints over the car imports.
The dispute has escalated since the EU imposed new 12% tariffs on Chinese made solar panels. The European Commission has accused China’s state-subsidized panel makers of flooding European markets with unfairly cheap products.
In retaliation the Chinese took action against EU wine in an attempt to get back at the French and other wine growing nations that backed the solar panel tariffs.
In a public statement, China’s Ministry of Commerce said it had “received requests from domestic wine companies, accusing European wine companies of entering the Chinese market by dumping products, receiving subsidies and other unfair measures. Based on these requests, the Ministry of Commerce will initiate a serious investigation according to laws and regulations.”
“This is what we call ‘strategic play’ in game theory. It is an action which is intended to have benefits in negotiation,” says Dr. Xu Bin, Professor of Economics and Finance at the China Europe International Business School, or CEIBS, in Shanghai.
China is smart to pick on Europe’s wine industry, adds Xu, because it is “not core to Europe’s economy” yet “symbolic enough” that it will have an “immediate impact” on people’s hearts and minds.
If a trade war does break out it will most likely be the EU that backs down first. The European region is struggling with its economic downturn and any offensive action taken by the Chinese could really hurt countries such as Belgium and France. The Chinese meanwhile are in a better situation economically and could wait out their EU rivals even though an escalation will lead to a weakening of Chinese exports.
“Ideally it would be better for both sides to retreat from their current positions,” says Xu of CEIBS. “I understand the European economy is not in good shape, so there is a lot of pressure from domestic lobbies for protection from other countries.”
“In the end, both will yield some inches,” says Xu.
“There is no winner in a trade war.”
In such a situation the Euro is likely to weaken as investors seek shelter in safer currencies and as confidence will likely be damaged.
Current Euro (EUR) Exchange Rates
The Euro/US Dollar Exchange Rate is currently in the region of: 1.3211
The Euro/Pound Sterling Exchange Rate is currently in the region of: 0.8504
The Euro/Australian Dollar Exchange Rate is currently in the region of: 1.3947
The Euro/ New Zealand Dollar Exchange Rate is currently in the region of: 1.6790
The US Dollar/Euro Exchange Rate is currently in the region of: 0.7559
The Pound Sterling /Euro Exchange Rate is currently in the region of: 1.1775
The Australian Dollar/Euro Exchange Rate is currently in the region of: 0.7174
The New Zealand Dollar/Euro Exchange Rate is currently in the region of: 0.6014
(Correct as of 16:30 pm GMT)