On Wednesday, the Chinese Communist Party announced that it is investigating whether European dairy producers have received unfair government subsidies. The European Union stated that they are closely monitoring the situation and will intervene as necessary. This is the latest indication of escalating trade disputes between China and Europe.
The Chinese Ministry of Commerce mentioned on Wednesday that they will investigate subsidies for dairy products from the EU and EU member states, and may impose tariffs on these dairy products exported to China.
The day before, the EU released a draft decision to impose tariffs on electric cars manufactured in China, following up on temporary tariffs announced last month. The Chinese government and car manufacturers expressed dissatisfaction with this decision.
The dairy product investigation will cover a range of products including fresh and processed cheeses, blue cheese, and milk and cream with a fat content exceeding 10%. The investigation will scrutinize subsidies under the EU’s Common Agricultural Policy, as well as subsidies provided by eight EU countries including Italy, Finland, and Croatia.
EU Commission spokesperson Olof Gill stated in a press release on Wednesday that the EU executive body will closely monitor Beijing’s investigation and intervene as necessary to ensure that China’s investigation complies with World Trade Organization rules.
“The Commission will vigorously defend the interests of the EU dairy industry and the Common Agricultural Policy (the EU’s official farmer support program),” he added.
The largest subsidy scheme in the EU is the €60 billion per year Common Agricultural Policy, accounting for roughly one-third of the EU budget. Alexander Anton, Secretary-General of the European Dairy Association, believed that the EU’s Common Agricultural Policy complies with WTO rules, and that the EU and China “will find constructive ways to resolve any bilateral disputes.”
The European Chamber of Commerce in China expressed that they were not surprised by Beijing’s actions and hoped that the investigation would be conducted “fairly and transparently.”
According to Bloomberg, Jose Saiz, a senior analyst at market intelligence provider Expana, stated, “In mid-June, Beijing announced an anti-dumping investigation into the European pork industry, so some market participants in the EU dairy industry were to some extent expecting this situation.”
He added that the EU anticipates weak demand in China this year and has already started to seek alternative markets for their products.
According to data from the EU Commission, the EU is one of the world’s largest exporters of dairy products, with China being the second largest destination for EU skimmed milk and whole milk powder. The UK and the US are the top two recipients of EU butter and cheese exports, with China ranking third and eighth, respectively. EU dairy exports to China last year amounted to around €1.8 billion, down from €2 billion the previous year, accounting for approximately 9.5% of the total EU dairy exports.
Rabobank reported that in the competitive and tightly regulated China infant formula market, China’s import market share for infant formula has declined from 51% in 2019 to 44% in 2023.
The declining birth rate in China has also prompted domestic and foreign dairy companies to introduce new products, tailored for elderly consumers.
According to estimates from the US Department of Agriculture in May this year, due to increasing domestic production, imports of dairy powder and liquid milk in China are decreasing this year. The report stated, “The growth in raw milk production continues to outpace consumption, leading to surplus supply in the Chinese market.”
The EU is ramping up efforts to protect itself from unfair trade practices, aligning its policies with the US and worsening the China-EU relationship. Earlier, during various stages of the EU investigation into Chinese electric car subsidies, the Chinese Ministry of Commerce initiated investigations into European brandy and pork exports. These tit-for-tat investigations between China and the EU have raised concerns about the outbreak of a full-scale trade war.
The EU’s chief diplomat Josep Borrell stated during an event in Spain on Tuesday that the EU “cannot be naive” and that a China-EU trade war “may… be inevitable.”
“We do not want to get involved in a trade war… but perhaps this is inevitable and logical,” he said.
Borrell noted that due to the US increasing tariff rates, including on cheaply manufactured Chinese products such as electric cars, these products are shifting towards the European market. “They (the US) will not ask us when to ban the import of Chinese cars, so where will these Chinese cars go… I am sure they will come to the European market, which will pose competitiveness issues for our industry,” he added.
He also expressed doubts about the prospects of reviving the China-EU investment agreement, which has been frozen as European lawmakers have been sanctioned by China and the European Parliament has refused to ratify it.
“The composition of the European Parliament has changed, some European parliamentarians who were sanctioned are no longer lawmakers, but the new lawmakers will not change their stance.”
“Therefore, if (Beijing) does not lower the sanctions, I cannot ask the European Parliament to approve the agreement,” Borrell said.