Just five days after Brussels made surcharges on Chinese vehicle imports official, the Chinese government has announced the almost immediate introduction of customs bonds averaging around 35% on European brandies. French cognac is particularly affected, at an already difficult time for its exports.
An eye for an eye, a tooth for a tooth, and now cognac for electric vehicles! The law of Talion has taken on a new, modern twist with the trade war declared between China and the European Union.
On Tuesday, October 8, Beijing confirmed, more quickly than expected, the fears of European brandy producers, and French Cognac producers in particular.
In a press release published on Tuesday, October 8, 2024, the Chinese Ministry of Commerce announced that, from Friday, October 11,European exporters of cognac, armagnac and other spirits in the brandy family would have to lodge particularly penalizing customs bonds, averaging 34.8%.
French cognac in the firing line
These bonds will be debited retroactively if China decides to apply the “notifications of intention to levy” set at the end of August, as part of an anti-dumping investigation launched at the beginning of 2024. The Ministry did not detail how these deposits would then be reimbursed in the event of a settlement.
The product category chosen, Brandy, was selected because of its success with the Chinese. The first victim of the measure is French Cognac, which accounts for 95% of the Chinese brandy market…
Through its famous brandy, which is much appreciated by the Chinese, it is France that is particularly targeted by the Chinese. France was particularly active in the implementation of the surtax on Chinese electric vehicles, decided five days earlier by the Council of Ministers of the European Union (EU).
The measures announced for European brandies are therefore the answer from the shepherd to the shepherdess. Even if the shadow of this measure had already been hanging over European producers since early 2024, when Beijing opened an anti-dumping investigation into these products.
At the end of August, the Middle Kingdom concluded that dumping was taking place, with “the threat of substantial injury to the Chinese brandy industry”. But at the time, it had not decided to impose anti-dumping measures…
Scathing reply
A few months later, the tone changed in Beijing. The Chinese government was not at all pleased that its electric vehicles had to pay a surtax of up to 45% on entering the European market at the end of October, for a period of five years. And the retaliation has been scathing for European brandy producers, and cognac producers in particular.
According to the regional daily Sud Ouest, the vast majority of merchants had to pay a deposit of 34.8%, some a little less (30.6% for Martell), others a little more – 39% for Hennessy, the Number 1 in the sector, owned by LVMH. As for the companies deemed “uncooperative” for failing to meet the requirements of the Chinese anti-dumping investigation, they were outright targeted by a 39% bond!
This is very bad news at a time when not only is the Chinese market affected by the slowdown in the local economy, but the cognac market has already entered a lean period.
China, the second largest cognac market
China is, after the United States, its leading market, the second most important destination for cognac, accounting for 25% of its exports… And this despite the fact that 97% of cognac is exported…
The Chinese may appreciate old, expensive bottles, and luxury goods allow for greater price elasticity… but it’s to be expected that these ephemeral, festive goods will be further penalized by the gloomy mood. In fact,cognac sales have already been declining in the Middle Kingdom forthe past two years .
China’s retaliatory measures come at a very bad time for cognac. Between 2012 and 2022, its exports werebooming. But inflation cut its momentum, and by 2023, its international sales had fallen by 22%. Adding to the woes, wet weather and increased attacks of vine diseases such as mildew should penalize the 2024 harvest.
All this is a cause for serious concern for the French cognac industry, concentrated in the Charente and Charente-Maritime regions. This represents some 4,400 wineries, 270 négociants and 120 professional distillers, i.e. 15,000 direct employees and 70,000 indirectly.
Catastrophic consequences
“We’ve just come through 10 years of continuous growth, and for the past two years there’s been a global economic crisis that’s had a direct impact on us. If on top of that, we add the loss of our second largest market, the consequences will be catastrophic”, Anthony Brun, President of the Union générale des viticulteurs pour l’AOC Cognac, told Reuters.
The French government has assured the industry of its support. “Nothing justifies” the anti-dumping measures, Sophie Primas told Reuters on Tuesday. The French Minister for Foreign Trade has undertaken to challenge the decision, in conjunction with the European Commission, before the dispute settlement body of the WTO, the World Trade Organization. She has also promised to hold talks with her Chinese counterpart at the G20 meeting in Brasilia in mid-November.
But experts seem to have little confidence in a favorable outcome for French producers, given that the WTO has rarely been able to resolve disputes brought before its bodies for some time now.
Some evenfear that Cognac producers may not be the only collateral victims of the Sino-European power struggle in the luxury goods sector.
Other victims in the luxury sector?
Should we expect Chinese surtaxes to affect other European luxury exports, which are already being impacted by the slowdown in the Middle Kingdom?
Jean-Pierre Raffarin, for his part, doesn’t believe in such a catastrophic scenario: “There are a lot of discussions going on in many areas, such as pork and milk. And luxury is a sector in which the determining factor is often the Chinese clientele itself”, the former Prime Minister, now advisor to the French presidency in China, told Reuters.
Be that as it may, Cognac producers, and in particular some young farmers who recently went into debt to invest when the economy was still buoyant, are not celebrating…
Ironically, during his Chinese counterpart Xi Jinping‘s state visit to France , Emmanuel Macron offered him bottles of cognac… At the time, the French President was delighted that these would not be penalized by temporary taxes in the Middle Kingdom. Those days are long gone…
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Read also > Xi Jinping in France: a diplomatic visit awaited by cognac and luxury brands
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