Why is French wine at the forefront of an EU-China trade war?

BRUSSELS, Belgium — A trade war with its second-largest export market is just about the last thing the European Union needs.

Yet China and the EU are heading towards what could be a bruising tit-for-tat battle after Brussels announced this week it was slapping anti-dumping tariffs on $27 billion worth of Chinese solar panels, triggering a retaliatory threat from Beijing against European wine imports.

Fears of an escalation grew Friday with unconfirmed reports China is considering erecting barriers against luxury auto imports — with Mercedes, BMW and Ferrari among the likely targets.

"China does not want a trade war, but trade protectionism cannot but bring about a counter-attack," China’s official People's Daily newspaper warned Thursday. "A large number of European enterprises are set to suffer as a result."

With domestic demand crimped by austerity, Europe is increasingly dependent on exports to limit the impact of the recession and provide hope of recovery.

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Foreign trade has been one of the rare bright spots in Europe's economic landscape. In March, the euro zone recorded a $30 billion trade surplus with the rest of the world, more than three times the level in 2012.

While part of that can be put down to falling imports as recession-hit Europeans are buying less, the EU still estimates rising exports cut the depth of the recession by a factor of four last year.

China's contribution to those figures is immense and fast-growing. EU exports to China have doubled in the past five years, reaching €190 billion ($250 billion) in 2012. Only the United States buys more European goods.

Two-way EU-China trade tops $1.3 billion every day, and it's set to keep growing.

"China’s importance as a strategic market can only increase," said the EU's trade office on its website. It points out that every year 20 million Chinese households pass the $13,500 income threshold, the trigger for middle class consumer spending. "This translates into extraordinary growth opportunities for European businesses."

So why jeopardize all that over solar panels? The EU says it's a question of principle.

"Our response is balanced, legal and justified within international trade rules and designed to prevent the situation turning fatal" to 25,000 jobs in Europe's solar panel industry, EU Trade Commissioner Karel De Gucht told reporters. "This is not protectionism. Rather it is about ensuring international trade rules also apply to Chinese companies — just like they apply to us."

De Gucht pointed out that the United States last year slapped its own punitive tariffs on Chinese solar panel products after it also found they were being dumped at below production cost.

Not everybody in Europe was happy about the decision, however. Germany — the EU's biggest exporter — had lobbied hard for De Gucht to back down, fearing a wider impact on trade relations with China.

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"It's a grave mistake," Germany's Economics Minister Philipp Rosler said of the decision, in an interview with Welt am Sonntag newspaper. "Punitive import duties are the wrong instrument."

Beijing seemed to have recognized Germany's support with its initial response — the threat to European wine imports which are dominated by France, followed by Spain and Italy, which all backed the solar panel decision.

European winemakers may have winced at old tales of Beijing nouveau riche mixing Coke with vintage Bordeaux, but their sales growth relies on the Chinese market.

Wine bars where sophisticated young Chinese sip Claret and Rioja are now common in Chinese cities and the Asian nation is already the world's biggest importer of Bordeaux. Chinese drinkers knocked back 48 million bottles of the stuff last year.

Overall France shipped $660 billion worth of wine to China last year, more than two-thirds of all European wine sales there. "It's vital for the survival of producers in the Bordeaux region," winemaker Jean-Louis Trocard, told the Paris business daily Les Echos.

Still, Europe's $1 billion wine sales to China are small beer compared to the $29 billion value of Chinese solar panel exports to Europe — and Beijing has made clear it could strike against other sectors.

The reports that Germany's luxury carmakers could be targeted will be incentive for Berlin to keep up pressure on Brussels to back down before December when the EU must decide whether to make the solar panel sanctions permanent.

China is a crucial market for Germany's top range auto brands. BMW enjoyed its most successful year ever in 2012 after Chinese sales jumped by 30 percent with over 327,000 cars sold.

China has been focusing its European diplomacy on Germany. New Prime Minister Li Keqiang traveled to Berlin last month on his first visit to the EU since taking office. He flattered his hosts by saying the two countries could form an economic "dream team" by working together.

That approach has irked other EU nations and diplomats at the bloc's headquarters who fear Beijing is using divide-and-rule tactics.

This fall the EU and China will celebrate 10 years of "strategic relations" and the Europeans are hoping to boost relations in fields like urbanization and environment — areas where China values Europe's expertise. European diplomats optimistically suggest the EU's lack of strategic rivalries with China in the Asia-Pacific region could give it an edge over the US in fostering ties.

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However, as US President Barack Obama was hanging out with his new Chinese counterpart Xi Jinping in California this weekend, the solar panel spat has cast a dark cloud over hopes for closer China-Europe relations.

"This is turning into something much worse that I would have expected," said Shada Islam, an expert on EU-Asia relations at Friends of Europe, a Brussels think tank.

"It's affecting the whole mood of the relationship. There's a real toxic mix. They need cool heads on both sides to stop this going beyond trade to affect how they cooperate, on North Korea or Iran for example."

For the moment, however, the view from Beijing is that Europe needs to wake up to the new world reality.

"Times change and power rises and falls. Still this has not changed the deep-rooted, haughty attitudes of certain Europeans," the People's Daily wrote.