China targets French brandy imports in escalating trade dispute

China has launched a new anti-dumping investigation into French brandy imports, escalating a trade dispute between Beijing and Brussels.

Officials at the Chinese commerce ministry said its probe into brandy imported from the EU was prompted by complaints from domestic manufacturers. Brandy is the most-imported spirit into China, and comes primarily from France.

The investigation comes four months after European Commission president Ursula von der Leyen announced an anti-subsidy probe into imports of Chinese electric vehicles, supported by French car executives and officials.

“Global markets are now flooded with cheaper Chinese electric cars,” she said in September. At the time, Brussels warned of likely Chinese retaliation.

Shares in major producers of the liquor fell on Friday, with Rémy Cointreau down more than 12 per cent and Pernod Ricard down 3.6 per cent. Shares in Diageo and luxury group LVMH, which owns Hennessy cognac, also traded down 2.1 per cent and 1.3 per cent respectively.

France’s cognac industry association, the BNIC, said it would “fully co-operate with Chinese authorities” to address their concerns. It said it was confident French products “fully comply with Chinese and international regulations, and that [the] EU and China will find a constructive way to resolve any bilateral disputes”.

France’s economy ministry said that, with the European Commission, it would be “fully mobilised to ensure the defence of our companies”, adding that there was no indication any French brandy maker was guilty of dumping practices.

Pernod Ricard, which owns cognac brands Martell and Augier, said that the case brought to Chinese trade officials by an anonymous domestic producer argued that import duties on the liquor should be raised to 16 per cent, up from about 5 per cent now, to level the playing field. Such a rise would be significant but below similar duties in other countries such as Brazil, with an import levy of 20 per cent, Vietnam at 24 per cent and Thailand at 60 per cent.

“This level is significantly lower than that used in other [anti-dumping] investigations,” the company said.

Olof Gill, the commission’s spokesperson on trade, said: “We are now assessing the documentation we have received, and will intervene in the framework of the investigation, as appropriate, in close co-operation with the EU industry concerned.”

Brussels has in recent months launched several other investigations into allegedly unfair Chinese trade practices, imposing punitive tariffs on imports of plastic for bottles and opening a probe into suspected dumping of biofuel.

Von der Leyen has complained about the bloc’s record trade deficit with China — which was close to €400bn in 2022, the most recently published figure — and led calls to de-risk relations, finding alternative sources of supply for critical products. The commission is also proposing tighter national controls on investments and exports.

Beijing has strongly criticised the EU over the probes, saying late last month that it “firmly opposes protectionist practices” and the “abuse of trade remedies”.

The commerce ministry on Friday said the brandy investigation should be completed within one year, but could be extended for a further six months.

“This . . . is just a warning shot,” said Hosuk Lee-Makiyama, director of think-tank Ecipe in Brussels. “The EU has not actually done anything [on EVs]. The big one is yet to come.”

China imported alcoholic drinks worth about $4.5bn in 2022, according to Daxue Consulting, a China-based market research group. This included roughly 37.5mn litres of French brandy.

Premium liquor sales — particularly for cognac — were already under pressure as pandemic-era drinking habits and the effervescence of bars reopening post-lockdown faded.

LVMH, Rémy Cointreau and Pernod Ricard all reported declining cognac sales in their third-quarter earnings, largely because of weaker US demand.

China is the other major market for cognac, where the ongoing recovery from strict zero-Covid lockdowns had been expected to help balance slower sales in the US.

Export volumes of cognac fell 18.9 per cent between August 2022 and the end of July 2023, according to the UGVC, the cognac producer’s association. The US is by far the largest consumer of the drink, importing more than half the bottles produced, according to the Bureau National Interprofessionnel du Cognac, with China in second place.

Trevor Stirling, spirits analyst at Bernstein, said cognac producers would be adversely affected by any tariffs imposed on exports to China. “This is unlikely to be resolved quickly,” he said. “It will hang over the industry for at least six months.”

Alongside the EU probes, France has taken its own steps to promote Europe-made products. In a decree to be published this month, it is restricting purchasing subsidies for electric vehicles so they cannot apply to most cars made in China, based on their environmental record.

Additional reporting by Wenjie Ding in Beijing, Andy Bounds in Brussels and Sarah White in Paris