The beginnings of a trade war between China and the European Union could escalate into a damaging battle that might hurt the UK, economists have warned.
China this week responded to EU anti-dumping tariffs on solar panels with a levy on European wine, and warned it has “plenty of cards” still to play. By attacking wine producers, though, Beijing has potentially turned a straightforward tit-for-tat dispute over state subsidies between Germany and China into a full-blown European trade war.
France has effectively been targeted in retaliation for a levy designed to protect German manufacturers in what appears to be a deliberate attempt to inflame tensions within the EU.
In doing so, experts said, the relative newcomer to the power politics of global trade has demonstrated smart tactical acumen. Berenberg Bank’s chief UK economist Rob Wood said: “China looks like it knows how to play the game.”
The danger is that China may decide to target other seemingly innocent parties if the row escalates, and that might mean Britain. Such a move could be damaging as the UK is pinning much of its hope for export success on the growing Chinese market.
In the last five years, UK goods exports to China have virtually doubled to £15.9bn and, three years ago, David Cameron set a $30bn (£20bn) target by 2015 as part of a bi-lateral deal with Beijing.
China’s influence in the UK stretches wider, though. At the end of 2011, foreign direct investment into the UK from China totalled $1.76bn – the second largest in the EU after Germany. In the last six months alone, China’s telecoms giant Huawei has announced plans to invest £1.3bn in a new plant while ABP plans to spend £1bn developing Albert Docks.
The Government also hopes to attract Chinese money to invest in UK infrastructure as part of George Osborne's "Plan for Growth". In other words, China is a key plank of the Government’s economic recovery plan.
The importance of Britain’s relations with China was underlined yesterday by the Prime Minister’s assertion that UK trade links with Beijing were his “personal priority” in response to claims that Huawei’s telecoms equipment could be used for spying.
Greg Barker, the energy minister, has also sided with Beijing over the trade dispute, saying he was “deeply concerned by the European Commission’s proposals” which could see tariffs of up to 48pc levied on Chinese solar panels.
Europe claims that China is selling its solar panels below cost – a practice known as “dumping” that countries have a right to protect domestic industries against under World Trade Organisation (WTO) rules. Beijing retaliated by claiming that EU farm subsidies have resulted in Europe “dumping” wine on China.
“The risk now is that the trade war escalates by dragging in other countries. Plainly it would make a difference to us if UK exports were hit by this row,” Mr Wood said.
The threat to the UK isn’t just from a Chinese levy against British exports, but a trade war against the EU. “There is a danger that what starts off as a small dispute escalates and becomes a really big deal. That would depress growth by hampering world trade, because supply chains are integrated internationally,” Mr Wood said.
Sources at the WTO sought to inject a bit of balance into any sense of hysteria, though. The dispute over solar panels is just the latest in a long tradition of tit-for-tat trade wars, they said.
Just four years ago, the Chinese accused the US of “dumping” tyres on the Chinese market. Beijing took its cause to the WTO but lost a battle it should have won due to technical accession rules as it was a new member. In response, it introduced a levy on US exports of “broilers” – or left-over chicken feet used in Chinese soup, threatening an $800m industry.
As the chicken feet would otherwise have been thrown away, China was making a very literal point about “anti-dumping”.
Before China, the disputes were largely between the US and the EU – with the big battles waged over bananas and beef in the 1990s. WTO insiders suggested that China’s trade posturing over wine could be seen as a demonstration that it has come of age as a global superpower.
Making the WTO rules particularly complicated is the fact that China is not a full market economy. The US and Europe claim that by subsidising access to raw materials and credit, for example, China keeps costs below their true market value. Consequently, Chinese manufacturers undercut operators that pay the market price. China disputes the argument.
It is telling, though, that the US slapped anti-subsidy tariffs of about 15pc on Chinese solar panels last year with little reaction from Beijing. The scale of the EU tariff appears to be the main problem.
China did not expand on what cards it might play next, but the EU has a keen interest in keeping Beijing on side. China is Europe’s second largest trading partner, which could prove vital to a recovery. It has also been a big buyer of eurozone sovereign debt, and has the cash to help keep the single currency zone afloat.
The UK clearly doesn’t want to upset the world’s second largest economy, and it’s unlikely Europe has the appetite for a full trade war either.