The Fight Over EVs Spills Into Cognac --- Europe is in a weak position to wage a trade war

"Volkswagen and Stellantis might turn out to be bigger victims of China's investigation into European liquor than Remy Cointreau and Pernod Ricard.

Beijing has launched an antidumping probe into brandy imported from the European Union. The idea that France is dumping cognac on China might seem laughable, but that didn't stop investors from dumping cognac stocks on Friday. Shares in Remy Cointreau, the company behind Remy Martin, dropped 12%, while those of the larger Pernod Ricard, which makes Martell, ended 3.6% lower.

In trade jargon, dumping means selling something abroad below fair value, which typically happens when a country has excess production capacity. This in no way describes the cognac market, where prices are high and production tightly constrained by the need for aging and a limited geographical area around the town of Cognac in southwest France.

If the move makes little sense economically, the political logic is clear. In October, the EU launched its own probe into the illegal subsidization of Chinese electric vehicles after pressure from the French government. Paris was itself being intensively lobbied by local carmakers, most vocally Stellantis, which owns the Peugeot, Citroen and Fiat brands as well as Chrysler in Detroit. Germany's Volkswagen has as much to lose from an influx of Chinese EVs but, with a big Chinese business to defend, it has kept quieter.

This explains why Beijing's retaliation focuses on a French product that has become a luxury good in China. The country accounts for about 30% of operating profit at Remy Cointreau and 9% at Pernod Ricard, according to Citi. The largest cognac brand, Hennessy, is joint-owned by luxury giant LVMH and Diageo, spreading the pain. LVMH shares lost 1.1% Friday, and Diageo edged 0.7% lower.

The chances that the cognac probe turns into something that actually bites these companies seem slim. Besides the challenge of arguing a dumping case, there is the precedent of a 2013 Chinese investigation into European wine imports. That probe came a few weeks after the EU followed the U.S. in introducing tariffs on Chinese solar panels. It was retired when Brussels loosened its market protections, following an outcry among French winemakers. Wineries ended up doing just fine. The same can't be said of solar-panel manufacturers.

History could be repeating itself. There are differences, of course: The car industry under threat is far larger than the solar-panel sector ever was, raising the stakes.

 Still, Beijing's move on cognac is a reminder that Europe's own export success puts it in a weak position to wage a trade war. There are plenty more European industries China could go after if it needs to up the ante.

A trade-friendly resolution seems likely in the end and the stock-market selloffs for Remy Cointreau and Pernod Ricard will probably end up looking exaggerated. Investors might want to focus their concerns instead on the mass-market car brands in the sights of China's EV companies, notably Volkswagen, Stellantis and Renault. Rather than shut the likes of BYD out of their home market, Europe's automakers will eventually need to learn to compete with them." [1]

1. EXCHANGE --- Heard on the Street: The Fight Over EVs Spills Into Cognac --- Europe is in a weak position to wage a trade war. Wilmot, Stephen.  Wall Street Journal, Eastern edition; New York, N.Y.. 06 Jan 2024: B.12.