The Irish and European dairy sector reacted angrily after China launched an investigation into EU subsidies paid for dairy production.

Farmer representative organisations all had the same message - the trade dispute with China has nothing to do with dairy.

When China launched an investigation into pork imports from the EU in June, it was met with a similar response from farmers.

On the face of it, the farmer organisations have a strong point. A spat over tariffs on cars should have no effect on trade in dairy and meat products. However, this does not take account of how trade disputes normally evolve.

Trade between China and the EU totalled nearly three-quarters of a trillion euro in 2023, with the EU imported €2 of goods from China for every €1 exported to the country (see Figure 1).

The volume of trade has doubled in the past decade, while consistently remaining very much in China’s favour.

In recent years, Chinese exports to the EU have moved to higher-value, more technologically advanced sectors, with the car market being the most obvious to ordinary consumers.

Recent reports suggest that the EU market accounts for one third of all Chinese electric vehicle (EV) exports.

Rather than being a hub for low-cost manufacturing, China is in a position where it is starting to offer serious competition to EU manufacturers for high-value consumer goods.

Investigation

The EU reaction to this has been to conduct an investigation into how the EV industry in China is being supported by the government there.

That investigation concluded that Chinese manufacturers “benefit from unfair subsidisation, which is causing a threat of economic injury”.

Earlier this week, the European Commission released the extra duties it proposes adding to EVs manufactured in China.

Tesla faces an additional 9%, BYD 17%, Volvo owner Geely 19.3% and state-owned SIAC, which owns the MG brand, 36.3%.

The decision by the Commission will be presented to member states in the coming months, who can overturn them if a qualified majority votes to block the measure.

China has reacted by targeting the EU’s agricultural sector. The choice is obvious for two reasons. Firstly, there is no denying that farmers in the EU are in receipt of subsidies - China’s complaint published this week listed 20.

Secondly, by targeting agriculture, China is more likely to put pressure on member states who are less reliant on a domestic car industry, increasing the chance the Commission’s recommendation could be overturned.

Ireland, for example, has a lot more to lose on dairy export restrictions than it has to lose on cheap car imports.

Fundamental problem

This comes to the fundamental problem with trade disputes. Both sides look to put maximum pressure on the other. That means that escalation is usually fairly rapid at the outset of trade disagreements as both sides look for the other’s weak point.

Compared with the trade war that broke out, and rapidly escalated, between the Trump-led US and China in 2018, the current problems for the EU are relatively small.

China’s targeting of cheese imports this week can be seen as a significant move, but it is long way from the all-out hostility the country employed in 2018 when it hiked import tariffs on soybean imports from the US in response to Trump’s introduction of punative tariffs on a range of Chinese goods.

That war continued with talks and tariffs over the following two years. Chinese economic growth slowed, while US exporters and farmers called for a resolution to the dispute to allow them to regain full access to the market of over one billion people.

A United Nations report on the US-China trade war said that the tariffs are “economically hurting both countries”, leading to higher costs for manufacturers and lower returns for farmers in the US, while curtailing output from Chinese companies.

The current dispute between the EU and China is progressing at a much slower pace. The tariffs being suggested by the EU on Chinese EVs are relatively small in most cases, while the Chinese response has been to open investigations rather than to pull the trigger on imposing tariffs immediately.

There is still room for negotiation to contain the fallout from the dispute. However, it is very unlikely that the EU will completely back down on EV tariffs.

China will feel it has to respond and it seems likely that could end up being extra tariffs on some agricultural imports in the medium term.

Neither side will be a winner in this and consumers in both China and the EU will end up paying the cost through either higher prices or reduced competition.

Farmers, the innocent victims in all this, can only hope that further escalation from either side is avoided and damage to market access can be kept to a minimum.