Experts close to MOFCOM: China leaves room for flexibility in imposing temporary anti-dumping measures on EU brandy

The Ministry of Commerce of China announced that, starting from October 11, temporary anti-dumping measures will be imposed on imports of certain brandy originating from the European Union in the form of a deposit. The deposit rates for various companies will range from 30.6% to 39.0%. Specifically, the rates are 30.6% for Martell S.A., 39.0% for Hennessy S.A., and 38.1% for E. Rémy Martin & Co. S.A. Other companies that cooperated in the investigation will face a rate of 34.8%.

List of Deposit Rates by Company

1. Sampled Companies:

• Martell & Co – 30.6%

• Jas Hennessy & Co – 39.0%

• E. Remy Martin & C° – 38.1%

2. Other Cooperating Companies:

• H. Mounier SA – 34.8%

• SARL Ragnaud Sabourin – 34.8%

• André Petit et Fils SAS – 34.8%

• Compagnie Française Des Spiritueux SAS – 34.8%

• Société du Maine Drilhon SNC – 34.8%

• FTD SASU – 34.8%

Recently, experts close to MOFCOM pointed out that China's decision to implement temporary anti-dumping measures on EU brandy through the use of deposits, rather than directly imposing additional tariffs, reflects an effort to resolve trade disputes between the two sides through dialogue and consultation, aiming to maintain normal China-EU trade relations.

Yao Ling(姚铃), Director of the European Division at the Chinese Academy of International Trade and Economic Cooperation, explained in an interview with the media that this measure is a decision made by the investigative authorities based on China's relevant laws and regulations, as well as WTO rules, following an investigation. She emphasized that the decision is entirely fact-based and reasonable. "According to Chinese laws and regulations and WTO rules, temporary anti-dumping measures can be implemented either in the form of deposits or temporary anti-dumping duties. The choice of method is legally determined by the investigative authority."

Yao Ling analyzed that the initial deposit rates for the various companies range from 30.6% to 39.0%. According to the legal requirements, the investigative authorities must announce the final anti-dumping measures by January 5 of next year. This means that from October 11 this year until January 5 next year, EU exporters of the affected products to China must pay deposits according to the specified rates, which could increase financial pressure on exporters due to the added burden on their cash flow, although import tariffs will not be raised during this period.

Li Siqi(李思奇), Associate Professor at the China WTO Research Institute of the University of International Business and Economics, also told the media, "The Ministry of Commerce's decision to implement temporary anti-dumping measures in the form of deposits fully complies with WTO rules. Temporary anti-dumping measures typically last no more than four months, and at most, nine months." According to Article 7 of the WTO's Anti-Dumping Agreement, temporary anti-dumping measures can take the form of temporary duties or, more preferably, cash deposits or security guarantees.

Following the announcement of temporary anti-dumping measures, shares of French spirits producers opened with sharp declines. Shares of LVMH, the luxury group that produces Hennessy, dropped more than 3%, while Rémy Cointreau saw a decline of over 8%.

The European Union is the world's largest brandy-producing region, with 99.8% of brandy exported to China coming from France. China, as the second-largest market for French brandy, accounts for more than one-third of its export volume. Raphael Delpech, head of the French Cognac Producers Association, stated that the announcement sends a "further signal" indicating that China may impose tariffs. Delpech noted that major companies exporting cognac to China typically have import subsidiaries in the country and said, "We will have to raise funds to cover the deposit."

"The use of a deposit for the temporary anti-dumping measures reflects China’s effort to resolve trade disputes through dialogue and maintain normal China-EU trade relations," said Yao Ling. She added that if China implements final anti-dumping measures, the competitiveness of EU, and especially French, brandy exports to China will be significantly weakened, with French producers bearing the brunt of the impact.

According to French media analysis, if China decides to impose tariffs, the deposit could be retroactively deducted. Li Siqi explained that this depends on whether the final anti-dumping ruling includes retroactive tariffs. If not, the deposit should be refunded. If retroactive tariffs are applied, the principle of "refund the excess, no need to pay more" will apply: "If the temporary anti-dumping measures were higher than the final rate, the excess will be refunded. If the temporary measures were lower than the final rate, no additional amount will need to be paid."

It is noteworthy that the French government has consistently supported the EU's decision to impose tariffs on Chinese electric vehicles (EVs). Some EU media have speculated that China's move is a retaliatory measure against the EU's insistence on taxing Chinese EVs.

However, Li Siqi clarified, "China's temporary anti-dumping measures on EU-imported brandy are legitimate remedies to prevent continued harm to domestic industries during the anti-dumping investigation. They are not a response to the China-EU electric vehicle subsidy dispute." He further noted that the EU's imposition of countervailing duties on Chinese EVs, lacking substantial factual and legal basis, clearly violates WTO rules.

A spokesperson for the MOFCOM stated that the EU's anti-subsidy investigation into Chinese EVs was not initiated in response to industry requests. In fact, certain EU member states and industries have expressed strong opposition to this measure. The EU's actions are severely lacking in factual and legal foundation and clearly violate WTO rules, using trade remedies as a guise for protectionism. In order to firmly defend the legitimate development rights of China's EV industry, China has lodged strong representations with the WTO and will bring the relevant countervailing measures to the WTO's dispute resolution mechanism.

What impact will the implementation of the temporary anti-dumping measures have on the brandy and cognac supply chain?

According to the "2024-2030 China Brandy Market Competition Landscape and Investment Risk Forecast Report" published by ZhiYan Consulting, China's brandy industry has grown rapidly in recent years, with imported brandy flooding into the market, further fragmenting it and intensifying competition. Currently, the high-end segment of China's brandy market is dominated by well-known foreign brands, which hold over 70% market share, while local companies' market share remains relatively low.

"In the short term, the temporary anti-dumping measures will not have a significant impact on the domestic brandy market," said Yang Zhengjian(杨征建), Dean of WBO Wine Business Academy, in an interview with Cover News. He pointed out that from November last year to April this year, brandy import data surged, indicating that relevant French wine companies had stocked up in advance. As a result, current market inventory is relatively high. If these anti-dumping measures persist for a longer period, the impact on the market will gradually become apparent.

Rémy Martin, Hennessy, and Martell are the three major brands of imported brandy and cognac, often referred to in the industry as the "Big Three." Xue Dezhi(薛德志), Executive Director of Wine Dynasty, revealed that "the Big Three have been operating in China for many years and have established complete inventory and warehousing systems, with distributor channels holding stock sufficient for 1-2 years. Therefore, short-term price increases in the market are unlikely, and future pricing will depend on the manufacturers' policies."

Who will pay the deposit for the temporary anti-dumping measures on EU-imported brandy? Yang Zhengjian explained, "The Big Three" have their own companies in China and handle imports themselves before selling to distributors, so they may need to prepay the deposit. "Once the inventory runs out after about a year and a half, sales costs will rise, and Chinese consumers' long-term preference for French brandy may gradually decline."

Yang also predicted that the measures might alter the dynamics of the domestic spirits market, accelerating the substitution of brandy with whiskey, as the major spirits giants also produce whiskey. Additionally, domestic brandy producers like Changyu may seize the opportunity to fill some of the high-end market share.