China and EU agree to talks in bid to head off trade war

Shanghai: With billions of dollars in trade at stake, China and the European Union have agreed to engage in talks to try to resolve an escalating dispute over tariffs.

China's commerce minister, Wang Wentao, and Valdis Dombrovskis, the European Union trade commissioner, will hold discussions on the European Union's plan for tariffs on electric cars from China, the Chinese Commerce Ministry said late Saturday.

Hours earlier, Robert Habeck, Germany's vice chancellor and economic minister, said that the European Union was willing to hold consultations, and he expressed a hope that tariffs could be avoided.

This month, the European Commission, the executive body of the European Union, proposed tariffs of up to 38% on electric cars from China, atop an existing 10% tariff on imported cars. The commission said it found that China's electric car sector was heavily subsidized by the government and state-controlled banking system. China's exports of electric vehicles pose a growing challenge to Europe's automakers.

Habeck, speaking in Shanghai after meetings in Beijing, defended the tariffs. "These tariffs are not punitive," he said, adding that the tariffs are intended to offset subsidies that violate World Trade Organization rules.

It is unclear what a possible trade deal might look like. Executives at Volkswagen and other European automakers have called for Chinese manufacturers to build cars in Europe with European workers earning European wages, instead of importing cars from China.

But Chinese automakers have already built dozens of electric car factories in China with what the EU describes as extensive subsidies, and are still building more factories.

Before agreeing late Saturday to talks, Wang, China's commerce minister, who had met with Habeck, accused the EU of violating WTO rules.

The National Development and Reform Commission, China's top economic planning agency, said in a statement that "China will take all measures to safeguard the legitimate rights and interests of Chinese companies." It added that the tariffs were inconsistent with international efforts to address climate change.

The tariffs would put Germany in a tricky position. German automakers have extensive operations in China and worry that they will be hurt by retaliatory trade actions by Beijing.

On Saturday in Beijing, Habeck visited several Chinese economic ministries but did not meet with Premier Li Qiang, China's No. 2 official. Habeck then flew to Shanghai to hold a news conference, but declined to comment on why he had not met Li, who in some ways is his counterpart.

Habeck criticized China for supplying Russia with goods that have both civilian and military applications for its war on Ukraine. China's trade with Russia increased more than 40% last year, and half of the increase was related to these dual-use goods, he said.

"These are technical goods that can be used on the battlefield, and this has to stop," he said.

But the focus of Habeck's trip was the trade dispute. He was scheduled to speak Sunday in Shanghai with German business leaders and then visit nearby Hangzhou, a tech hub.

WTO rules allow tariffs intended to offset the effects of subsidies. For its part, China denies that it improperly subsidizes its electric vehicle companies and says that its leading role in the industry worldwide is a result of efficient manufacturing and innovation.

Anticipating the tariffs, China's Commerce Ministry in January took the first steps toward imposing tariffs on imports of cognac and other wine-based spirits, produced mainly by France, one of the countries that has led calls for tariffs on China's electric cars. On Monday, China's Commerce Ministry threatened to impose tariffs on pork imports from Europe.

And state-controlled media in China has reported in the past week that the Chinese auto industry is asking the Commerce Ministry to impose tariffs on imports of gasoline-powered cars from Europe, a move that would chiefly affect German automakers.

Wang called on Germany to help end the EU's tariffs. "It is hoped that Germany will play an active role in the EU and promote the EU and China to move toward each other," the ministry said in a statement Saturday.

China, the world's largest car market, has nearly halved its imports of German cars in the past five years as its domestic automakers have become increasingly competitive. China's car companies dominate the worldwide production of electric and plug-in hybrid gasoline-electric vehicles, which now nearly match sales of gasoline-powered cars in China.

But many of China's wealthiest customers still covet German brands. Mercedes-Benz sells more of its most luxurious cars, German-built Maybachs, in China than in the rest of the world combined.

German automakers also have joint ventures with Chinese companies to assemble cars in China. Volkswagen is making further large investments in manufacturing and engineering in China while beginning to cut staff in Germany.

Germany is crucial to China's efforts to stop the new European tariffs from being finalized this fall. That was also the case the last time that China and Europe engaged in a major trade dispute.

In 2013, under pressure from China, Germany rallied European governments to overturn proposed European Commission tariffs on solar panels from China. Chinese solar panel manufacturers quickly swamped Europe, and the European industry collapsed.

Leaders in Europe pushing for tariffs on China's electric vehicles argue that Europe's car industry now faces a similarly dire threat.

To block the tariffs, Beijing would need to persuade a majority of EU countries, representing at least 65% of the bloc's population, to overrule the European Commission.

In its response to Europe's tariffs, China is expected to target key countries, analysts said.

Possible tariffs on gasoline-powered cars would hit Germany, the bloc's most populous country, with 19% of the union's people. Italy is third in population and it, too, exports luxury gasoline-powered vehicles to China -- Ferrari and Lamborghini sports cars.

France is Europe's second-most populous country, and China's potential cognac tariffs are aimed at one of its national symbols.

Spain, the fourth-most populous country in Europe, is the leading European exporter of pork to China, a product Beijing has also threatened to penalize.

Beijing allowed German automakers, led by Volkswagen, to open car factories with Chinese manufacturers in the 1980s, bypassing China's 100% tariffs then on imported cars. China cut tariffs on imported cars to 25% in the years after it joined the WTO in 2001, and in 2018 further reduced tariffs on most imported cars to 15% in a move to ease trade tensions with the United States during the Trump administration.

In addition to the 15% tariff, China collects a 10% tax from buyers of gasoline-powered cars. Cars and SUVs with very large gasoline engines, which are mainly imported, pay an additional tax of 40%.