China intensified its trade dispute with the European Union (EU) on Friday by announcing a hearing into European brandy imports, just as the EU's provisional tariffs on Chinese-made electric vehicles (EVs) came into effect. This development marks another chapter in the escalating tensions between the two economic giants, each grappling with the other's trade policies and protectionist measures.

China's commerce ministry stated that it would hold a hearing on July 18 to discuss the anti-dumping investigation into European brandy imports. This inquiry, initiated in January, examines allegations that European producers, including prominent brands such as Martell, Remy Martin, and Hennessy, are selling brandy in China at below-market rates. These companies will have the opportunity to defend their pricing practices in person for the first time at the hearing.

The investigation follows a request from Martell, Societe Jas Hennessy & Co., Remy Martin, and other stakeholders, indicating a coordinated effort to address the allegations head-on. The ministry's statement emphasized that the hearing was essential for ensuring a fair assessment of the claims.

EU Tariffs on Chinese EVs Take Effect

Simultaneously, the European Commission implemented provisional tariffs ranging from 17.4% to 37.6% on Chinese-made electric vehicles. This decision stems from a nine-month anti-subsidy investigation, which concluded that heavily subsidized Chinese EVs were flooding the EU market, thereby harming European manufacturers. The tariffs, which took effect on Friday, have sparked significant backlash from China, which has repeatedly urged the EU to cancel them and engage in further negotiations.

A four-month window exists during which these tariffs are provisional, providing a period for intensive talks between Brussels and Beijing. The hearing on European brandy imports is strategically scheduled two days before the deadline for EV makers to comment on the provisional tariffs, adding further pressure to the ongoing negotiations.

Tit-for-Tat Investigations and Trade War Fears

In a tit-for-tat response, China launched a second probe into EU pork shipments in June and has threatened additional investigations into European dairy imports and large-engined petrol cars. The Chinese state-backed Global Times has also suggested that officials are considering an anti-subsidy probe into these sectors, further escalating the trade tensions.

Analysts suggest that China's focus on brandy and pork is a tactical move to sway France and Spain, two of the firmest supporters of the EU's curbs on Chinese EVs, to reconsider their positions. France, which accounts for about 99% of all EU brandy imports into China, would be significantly impacted by any new duties imposed as a result of the investigation.

China's Strategic Response and Calls for Negotiation

China's commerce ministry has consistently advocated for the cancellation of the EU's EV tariffs and called for resumed negotiations. At a press conference on Thursday, a ministry spokesperson reiterated Beijing's willingness to negotiate, stressing that a trade war was undesirable but that China would take necessary steps to protect its firms.

Despite these diplomatic overtures, European officials remain firm. Valdis Dombrovskis, a European Commission vice-president, dismissed concerns of potential trade war retaliation from Beijing, stating that the EU's actions were justified and necessary to protect its automotive industry.

Market Reactions and Economic Impact

The announcement of the brandy investigation and the imposition of EV tariffs have had immediate market implications. Shares of Chinese EV makers, including Geely Automobile, fell sharply, with Geely dropping 4.1% to its lowest level since March 7. Geely's unlisted parent company faces additional duties of 19.9% on top of the EU's standard 10% duty on car imports.

In response to the tariffs, Chinese brands MG and NIO indicated potential price increases in Europe this year. Meanwhile, U.S. EV maker Tesla, which has a manufacturing plant in Shanghai, found itself indirectly drawn into the dispute, with Chinese media broadening their protest against the tariffs to include Tesla.