Navigating trade tension: Potential impacts of China’s probe into EU dairy subsidies

In June 2024, the European Union announced it would raise tariffs on Chinese electric vehicles (EVs) on top of the existing 10% duty. After completing an anti-subsidy probe, Brussels made its decision more definitive on August 20, 2024. Pending approval by EU member states, the higher tariffs would range from 17% to 36.3%, depending upon the EV manufacturer, and would apply for five years after implementation, which is expected by October 31, 2024.

A day after the EU announced its revised tariffs on Chinese EV imports, China’s Ministry of Commerce announced it would launch an investigation into subsidies provided by the European Union and EU member countries for certain dairy products. In contrast, China’s recent probes into EU pork and cognac exports are anti-dumping investigations.

China’s governmental investigation will review EU subsidy programs provided to the EU's 27 member states under the Common Agricultural Policy (CAP), as well as the national subsidy plans of eight EU countries, including Ireland, Austria, Belgium, Italy, Croatia, Finland, Romania, and Czechia. The basis of the investigation is that certain subsidized EU dairy products have negatively impacted China’s domestic dairy industry. Many EU companies potentially impacted by the investigation and their national dairy federations have registered as interested parties following a request from the European Commission. The commission also suggested that the European Dairy Association (EDA) coordinate the reactions of the EU dairy industry. The European side is confident that the CAP is compliant with World Trade Organization requirements.

The probe is expected to continue through most of 2025 but could be extended an additional six months. As a result, RaboResearch anticipates that a market impact is not likely until at least 2026. During the investigation period, EU exports of these products are not banned. Nevertheless, China is an important export destination for some European companies that sell investigation-targeted products, such as liquid cream and fresh, grated, processed, and blue-veined cheeses. In 2023, EU trade of the targeted products totaled USD 572.5 million, with France accounting for 37% of the total. However, the probe does not include categories with the most significant Chinese import volumes, which include whey-derived products, whole milk powder, skim milk powder, and butter (see figure 1). Nevertheless, some dairy industry participants are concerned that China could expand the scope of investigation-targeted products.

In recent years, China has reduced its dependence on probe-targeted products, but it still imports more than 50% of its needs of these products (see table 4). If additional tariffs are implemented, it is likely that products sourced from Australia, New Zealand, and the UK will displace less competitively priced European products. For example, China’s imports of cream (HTS #0401500) from New Zealand totaled nearly 147,500mt in 2023, compared to nearly 97,000mt from the EU (see table 1). Likewise, China’s imports of Australian and New Zealand cheese (HTS#0406) tallied 20,920mt and 107,000mt, respectively, compared to 32,550mt from the EU (see table 2). The US could also step in and fill the cheese gap, should one arise. However, US President Biden announced in May that he would raise the import tariff on Chinese EVs from 25% to 100% over a three year period, starting in 2024. To date, China hasn’t announced how it might retaliate against these tariffs.

It is noteworthy that this investigation is happening at a time when China’s domestic milk production is outpacing domestic demand growth. There is a clear industry focus on a diversified dairy-processing pathway to mitigate the cyclical market imbalance of milk supply and demand. This could result in utilizing more of the domestic milk supply to manufacture value-added dairy products (such as cream and cheese) to displace imports and/or support exports.

Chinese dairy players are keen to expand the value-added dairy segments and allocate surplus milk into streams with better returns. In recent years, domestic players have invested in supply chain improvements, including overseas manufacturing facilities, to gain access to high-quality and price-competitive milk sources. They adopted an organic growth and acquisition strategy to grow value-added segments and integrated them into their existing supply chains and distribution networks. China’s trade tensions with the EU could easily benefit New Zealand and Australian exporters. Tensions could also accelerate the expansion of onshore facilities to manufacture products and offset imports. There will be an opportunity to explore new business models and maximize expertise in R&D through partnership and collaboration with offshore players.

In summary, increased trade tensions could have a spillover impact on global markets. Under the current scope of this investigation, the selected products could be sourced from other markets. It would be an unfortunate development for European exporters but not an insurmountable one, given the targeted categories are not the most significant Chinese import volumes. Likewise, it could provide some trade opportunities for Australia, New Zealand, the UK and the US, assuming that trade tensions with China do not escalate in those countries.