Luxury goods unlikely to be next target of China’s EU trade retaliation, analysts say By Reuters

(This Oct. 9 story has been corrected to set the analyst’s estimate of China’s market size at 25 percent, not 35 percent, of the global total in paragraph 9)

By Casey Hall

SHANGHAI (Reuters) – European luxury shares slipped on investor concerns that Hermes bags and Dior slingbacks could be Beijing’s next targets for retaliation following the EU’s decision to impose tariffs on Chinese electric vehicles, but analysts say that such a move is unlikely.

“It’s a question of how Beijing will respond to electric vehicle tariffs. Will there be an escalation? I think so. Will it go after luxury goods? I don’t think so,” Shanghai CEO Patrice Nordey said. Consulting in the field of Trajectory innovation.

So far, China’s moves in the ongoing trade dispute with the EU have targeted brandy, pork and dairy, all of which are major industries for France, which has lobbied for tariffs on Chinese-made electric vehicles imported into the EU.

Shares in LVMH, which also markets high-end Hennessy cognac, Hermes, Kering (EPA: ), Ferragamo and Burberry fell 2%-6% on Tuesday after Beijing said it would impose temporary anti-dumping measures on cognac imports.

Jacques Roizen, managing director of China consultancy at Digital Luxury Group, said targeting luxury goods in China would run counter to favorable policies for luxury firms in the world’s second economy, where Beijing is keen to keep more luxury spending . rather than seeing their consumers taking pleasure in overseas markets.

He points to the example of Hainan, which has been built into a major duty-free hub, largely due to the recognition by policymakers that luxury spending in China is good for the country.

“When luxury goods sales happen in China, it means more tax revenue, and it’s significant,” he said.

“If there was a new tax environment that forced luxury brands to raise their price in China, it would create an additional incentive for Chinese consumers to do their luxury spending outside of China, which is the opposite of what they want the government”.

The size of the Chinese luxury market, even given its recent slowdown, is expected to account for 25 percent of the global total this year, according to Jelena Sokolova, senior equity analyst at Morningstar.

That helps explain the reaction of European luxury stocks to every announcement coming out of China, she said, but it also means that even the threat of introducing tariffs or raising domestic consumption taxes on imported luxury goods would hit French luxury conglomerates where it would hurt.

French brandy shipments to China reached $1.7 billion last year and accounted for 99 percent of the country’s spirits imports, while 11 billion euros ($12 billion) in European luxury goods were imported in China last year.

But the sheer size of the luxury goods industry could make it a less likely target for Beijing, according to Albert Hu, an economics professor at the China Europe International Business School in Shanghai.

“I think at this point neither the EU nor China want a full-scale trade war that would damage both economies,” he said, adding that China’s relatively careful orchestration of retaliatory targets so far indicates that Beijing is keen to continue negotiating and work towards a compromise with Brussels.

The nature of the luxury goods industry also makes it difficult for China to reasonably support allegations of dumping.

“It’s hard, logically, to justify that there’s a case for throwing away $2,000 handbags,” Sokolova said.

(1 USD = 0.9122 euros)