Germany hopes to head off trade war with China

SHANGHAI – With billions of dollars in trade between China and the European Union at stake, Germany’s second-highest Cabinet official called Saturday for the two sides to engage in talks to try to resolve an escalating dispute over tariffs.

Robert Habeck, Germany’s vice chancellor and minister for economic affairs and climate, said that he expected talks to begin soon between China and European officials. He expressed a hope that tariffs could be avoided.

Still, he added that tariffs could be justified if the European Commission’s concerns about China’s subsidies for its electric car industry were not resolved.

This month, the commission, the executive body of the EU, proposed tariffs of up to 38% on electric cars from China, on top of 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.

“These tariffs are not punitive,” Habeck said, adding that the tariffs are intended to offset subsidies that violate World Trade Organization rules.

But Chinese officials strongly criticized the European tariffs after meeting with him. Wang Wentao, the commerce minister, described them as protectionist and called on Germany to help end them. “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.

The National Development and Reform Commission, China’s top economic planning agency, said in a separate statement that the tariffs were inconsistent with international efforts to address climate change. The commission also warned that “China will take all measures to safeguard the legitimate rights and interests of Chinese companies.”

There is little doubt that the tariffs put Germany in a tricky position. China’s exports of electric vehicles pose a growing challenge to Europe’s automakers, including Germany’s. But German automakers have extensive operations in China and worry that they will be hurt by retaliatory trade actions by Beijing.

Habeck visited several of China’s most influential economic ministries Saturday in Beijing, but conspicuously did not meet with Premier Li Qiang, China’s No. 2 official. Habeck then flew to Shanghai, arriving earlier than expected to hold a news conference.

Habeck 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.

Habeck is 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 the 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. China’s Commerce Ministry declined Thursday to comment.

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 build 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 needs 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.

German automakers have long played a central role in China’s industrial development. When the country started opening up to international trade nearly half a century ago, Chinese officials were wary of automakers from Japan because of long-standing enmities, and dubious about those from Detroit because of concerns about American military strength in East Asia.

Beijing allowed German automakers, led by Volkswagen, to open car factories with Chinese manufacturers, bypassing China’s 100% tariffs 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.

But Beijing has continued to pressure foreign automakers to build cars in China using nearly all parts made in China. Volkswagen said a decade ago that cars assembled by its joint ventures in China were approaching 99% local components.

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%.

This article originally appeared in The New York Times.