A new trade war is unfolding between the European Union (EU) and China, with luxury brands like LVMH, Pernod Ricard, and Remy Cointreau at the center of the storm. The dispute, sparked by EU tariffs on Chinese electric vehicles (EVs), has escalated into China imposing heavy tariffs on European brandy, severely impacting French cognac exports. This tit-for-tat retaliation threatens to harm some of France’s most prestigious luxury brands, which rely heavily on the Chinese market.
EU Imposes Tariffs on Chinese EVs, China Strikes Back at Brandy
In a move to protect the domestic electric vehicle market, the EU introduced tariffs of up to 45.3% on Chinese-made electric vehicles, arguing that China’s EVs are being unfairly subsidized. This action has created a ripple effect, with China retaliating by targeting European brandy imports, including those from top French brands like Moët Hennessy, the luxury goods conglomerate behind LVMH.
The new tariffs, which came into effect on October 30, mark a significant escalation in the EU-China trade tensions. China accused European brandy makers of “dumping” their products at unfairly low prices, undermining local producers. As a result, China imposed a temporary deposit of up to 39% on brandy imports from the EU, threatening to make it a permanent tariff if the situation persists.
French Brandy Makers Feel the Heat of Retaliatory Tariffs
The immediate impact of China’s tariff measures was felt on the stock market. Shares of major French brandy producers like LVMH, which owns Hennessy, dropped by nearly 4%. This decline was triggered by fears that the tariffs would significantly affect French cognac exports, which make up 99% of China’s brandy imports.
In 2023, French brandy exports to China reached an impressive $1.7 billion, making it the second-largest market for cognac after the United States. However, with the tariffs now in place, French cognac producers are scrambling to adapt. Hennessy is exploring options to bottle cognac in China to circumvent the tariff, while Remy Cointreau has announced price hikes in the region.
The French Government’s Firm Stance on EV Tariffs
Despite the challenges facing French brandy makers, the French government has refused to back down on its stance regarding the tariffs on Chinese electric vehicles. President Emmanuel Macron has described China’s brandy probe as “pure retaliation” and has emphasized that the two issues — EV tariffs and brandy trade — are unrelated.
French officials maintain that China’s measures are politically motivated, meant to punish France and the EU for taking a hard stance on Chinese EV imports. Unions representing brandy workers are concerned that the tariffs could lead to French companies shifting bottling operations to China, potentially costing jobs in France.
The Broader Implications: EU-China Trade Tensions Escalate
This new wave of tariffs is part of a broader trade dispute between the EU and China. Over the past year, EU countries have voiced concerns over China’s growing ties with Russia and the trade imbalances with China. Some EU nations, including Germany and Hungary, even opposed the tariffs on Chinese electric vehicles, fearing retaliation from China, particularly on agricultural exports like pork and dairy products.
China has already launched anti-dumping investigations into European pork imports, potentially targeting Spain, the Netherlands, and Denmark. These tensions highlight the growing economic friction between the two global powers, with each side accusing the other of unfair trade practices.
Can EU and China Resolve the Trade Dispute?
While the tariffs on Chinese EVs have triggered tensions, both sides are still engaged in ongoing negotiations. German carmakers, who are heavily dependent on the Chinese market, are hopeful that an agreement will be reached soon to resolve the EV tariff dispute. According to Bernd Lange, chair of the European Parliament’s Trade Committee, the EU and China are “close to an agreement” that could see China offer e-cars at a minimum price in the EU to remove the competition distortion caused by subsidies.
What’s Next for LVMH and the Brandy Market?
Despite the short-term setbacks, LVMH remains optimistic about the long-term outlook. The company has downplayed the immediate impact of the brandy tariffs, noting that demand for cognac in China has been weak in recent months. Third-quarter sales for LVMH showed a 3% decline, marking the first drop in quarterly sales since the pandemic. This downturn reflects broader economic challenges in China, where the post-pandemic boom has lost momentum due to factors like the property crisis and a sluggish recovery.
A Brewing Trade War with No Clear Winner
As the EU and China continue their trade clash, luxury brands like LVMH are caught in the crossfire. The ongoing conflict over tariffs on Chinese EVs and European brandy is a reminder of the delicate balance between global trade relations and the interconnectedness of industries. For now, LVMH and other French brandy makers will have to navigate these challenging waters, balancing the impacts of tariffs with the hope that diplomatic negotiations will eventually bring a resolution to the trade dispute.
