(Bloomberg) -- The European Union’s new, tougher approach to China is being shaped by French concerns that Beijing’s trade practices have started to pose a critical threat to core industries.
The government in Paris has taken a key role in driving the policy shift, according to people familiar with its thinking, calculating that inaction now would put the bloc’s economy on a path to long-term damage.
Officials speaking on condition of anonymity recalled the solar industry debacle a decade ago, when cheap imports from China gutted European production. One of the officials said Europe’s auto industry could potentially be vulnerable in the same way and so the EU faces a binary choice: Either it affirms its power or submits to China.
The intention isn’t to turn Europe’s $900 billion-a-year trading relationship with China into a head-to-head battle like Beijing has with the US, but rather to establish a level playing field among the world’s largest economic blocs, the officials added.
French President Emmanuel Macron wants his EU partners to see Europe as a balancing force between the world’s two economic superpowers, one said. That would allow Paris and other capitals to cultivate special relationships with other potential allies such as India.
Still, the EU’s tougher stance has also provoked nervousness, with even officials in Paris concerned about what it means to turn French principles into practice.
One described Beijing’s response to the opening of an investigation into Chinese subsidies for electric vehicles as a worrying over-reaction, while another acknowledged the risk of a trade war.
It has also emerged that Tesla Inc. was among companies found during EU evidence-gathering to have likely benefited, according to people familiar with the matter. The US carmaker declined to comment.
Read More: China Urges EU to Show Restraint in EV Probe and to Use Caution
China’s vice premier, He Lifeng, expressed “strong concern and dissatisfaction” over the probe on Monday to the EU’s chief trade negotiator, Valdis Dombrovskis.
Macron has long championed a rethink of the EU’s economic goals to provide tools to protect declining industries and more state aid for key sectors. Yet French initiatives have often met pushback from countries including Germany, who fear retribution would hurt their exporters, and smaller nations worried about unfair competition from giant firms flush with public money.
Now the EU has begun a subsidies investigation that could lead to tariffs and raises the prospect of a sea change in European policymaking that would cast aside principles of free trade and open markets as the best way of defending the continent’s economic interests.
As Germany has taken a step back from leading European policy, this has left a vacuum for others including France and the European Commission to jostle for influence, according to Mujtaba Rahman, head of Europe research at Eurasia Group. Macron’s cause was also furthered by President Joe Biden’s plan for massive subsidies under the Inflation Reduction Act to drive home-grown industry in the climate transition.
“The big wakeup call was the IRA, which completely re-framed the debate and gave France a lot more leverage to say the Americans are ultimately implementing a much more actively managed economy and there’s a much greater role for industrial policy,” Rahman said.
The EU’s Dombrovskis said in Beijing on Tuesday that copying the US and Chinese use of subsidies to support domestic electric vehicle production is a “doubtful” idea for Europe and that such aid is discriminatory. He added that “while we are playing by the rules we are expecting others also playing by the rules and we need to be able to defend ourselves when we see the presence of trade-distorting subsidies in one form or another.”
Any provocation of China is a huge gamble for a bloc already struggling to emerge from the energy crisis and the worst bout of inflation in the history of the euro area. Adding to the unease, Chinese tariffs would be difficult to predict and could have the potential to entangle a range of the continent’s biggest firms, including French luxury groups for which Asia’s largest economy is a key market.
“If you look at it in a very simple way, you could say that if European measures on Chinese electric vehicles were to materialize, then there’s a risk of retaliation to which German cars could well be most exposed,” said Societe Generale Chief Economist Michala Marcussen. “But it won’t necessarily be as black and white as that. Will China really retaliate on the same goods? It risks being much more complex.”
What’s more, a tussle with China would be imbalanced.
According to calculations by Allianz Trade, if the EU were to impose a 1 percentage-point increase in tariffs, total losses for China — taking into account sensitivities to prices — would be around $8.4 billion. While that may be a large sum, it only amounts to 0.2% of Chinese exports compared with 1.5% of EU imports.
The dependence on Chinese goods could also transform into an asymmetric inflation shock, as Europe would have to accept higher prices for critical materials, while China could be more self-sufficient or turn to other markets to substitute European goods.
Against a backdrop of high inflation and a record monetary tightening campaign by the European Central Bank, the bloc could end up tipping into recession, according to Ana Boata, head of economic research at Allianz Trade.
Show of Strength
Macron’s ability to influence EU policy also ties in with his political brand, which he built on an embrace of the European project as the way to defend the interests of ordinary people. With EU Parliament elections in June next year, that vision will face another stress test against the France-first nationalist party of Marine Le Pen.
In the debate over whether to risk a trade war with China, one senior French official said voters care more about a show of strength than the interests of corporations that could get caught up in retaliation.
--With assistance from James Mayger.
(Updates with details on Tesla in eighth paragraph.)
©2023 Bloomberg L.P.