Cars? Pork? Perfume? China has many options if a trade war breaks out with Europe

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BEIJING (AP) — Now that Europe has announced tariffs on electric cars made in China, the continent is preparing to see if the other shoe will drop.

Will China retaliate by imposing tariffs on European cars, targeting German companies such as BMW and Mercedes? Will it impose customs tariffs on agricultural products, targeting politically influential farmers in Europe? Or luxury goods from Italy and France?

Analysts warn of the potential for an escalating trade war, raising prices for consumers and hurting exporters and their workers on both sides. They are both major markets for each other – China, an emerging economy with a population of more than 1 billion, and Europe, with a relatively affluent population of more than 400 million.

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“It's a bit like watching a slow-motion traffic accident unfold,” Jens Eskelund, president of the European Chamber of Commerce in China, said earlier this year. “The accident has not happened yet and… a way out can still be found. The matter has become urgent.”

The Chinese government said it would take “all necessary measures to protect our legitimate rights and interests” in response to the tariffs on electric vehicles but did not specify what those measures would be.

China launched an anti-dumping investigation into European brandy exports last January, a warning shot aimed at French cognac. France was a supporter of the EU investigation that led to the electric car tariff announcement on Wednesday.

The EU is also investigating subsidies to Chinese wind and solar companies and whether China is unfairly restricting access to its market for medical devices, a long-standing complaint of European manufacturers.

The European Union said it had reached out to China to discuss the results of the investigation into electric cars, and that tariffs would take effect on July 4 if the two sides failed to resolve the issue. The tariffs will be temporary and will not be finalized until four months later.

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Chinese newspaper Global Times reported that Chinese companies plan to ask the government to conduct an anti-dumping investigation into some pork products in the European Union and an investigation into subsidies provided to some dairy products.

The state-owned newspaper also quoted a leading Chinese auto industry expert calling for raising tariffs on imported cars with larger engines to reduce carbon emissions, a move that would hurt German luxury exports from Mercedes and BMW.

Volkswagen expressed concern that the tariffs imposed by the European Union on Chinese electric cars may lead to an escalation in trade conflicts, and said that the European Union is encouraging the continuing trend towards protectionism, nationalism and isolationism.

Volkswagen said in a statement: “The negative effects of this decision outweigh any potential benefits for the European auto industry, especially the German one.”

Research firm Sanford C. Bernstein noted that the impact on German manufacturers would be weak due to the fact that most of their cars sold in China are made domestically. Only 2% of Volkswagen's sales in China are exposed to imports that are vulnerable to high tariffs, along with 15% for BMW and 19% for Mercedes-Benz.

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China could also impose retaliatory tariffs on French and Italian luxury goods, cosmetics, wine, chocolate or furniture, Gabriel Wildau, a China analyst at consultancy Teneo, wrote in an analysis ahead of the announcement.

While Germany fears retaliation from automakers and chemical producers, France and Italy have been major advocates within the EU for tariffs on electric vehicles, he wrote.

It is unclear how much impact the temporary tariffs will have on Chinese electric vehicle sales. Some Chinese companies may still be able to sell at a profit, even with tariffs of up to 30%.

The temporary tariffs range from 17.4% to 38.1%, depending on the automaker, and come in addition to the current 10% tariff on vehicles. The Chinese Chamber of Commerce with the European Union said the new rates would pose a serious market barrier to Chinese electric vehicle exports.

Calculations by Rhodium Group found that five of six models from BYD, China's largest electric car maker, would make a profit with a 30% tariff, while a China-made Tesla Model 3 would be sold at a loss.

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