European Luxury Shares Drop Amid China-EU Trade War Concerns

European luxury shares have seen a significant drop, driven by investor fears that iconic brands such as Hermes handbags and Dior shoes might become the next casualties in the ongoing China-EU trade conflict. These concerns arose after the European Union imposed tariffs on Chinese electric vehicles (EVs), prompting speculation about how Beijing will respond. However, experts suggest that luxury goods may not be Beijing's next focus.

Beijing's Response to EU EV Tariffs: Luxury Goods Unlikely Target

According to Patrice Nordey, CEO of Shanghai-based innovation consultancy Trajectry, while escalation is expected, luxury goods are not likely to be targeted. "It's a question of how Beijing will respond to the EV tariffs. Is there going to be an escalation? I think yes. Is it going to go after luxury goods? I don't think so," Nordey stated.

China has so far targeted sectors like brandy, pork, and dairy, major industries in France—a country that led the push for tariffs on Chinese-made EVs. Following the announcement that Beijing imposed temporary anti-dumping measures on brandy imports, European luxury shares, including LVMH (owners of Hennessy cognac), Hermes, Kering, and Burberry, dropped between 2% and 6%.

China's Policy on Luxury Goods: Favorable Despite Tensions

Despite these concerns, experts argue that targeting luxury goods would go against China's favorable policies toward the sector. Jacques Roizen, managing director at Digital Luxury Group, pointed out that Beijing has long encouraged domestic luxury spending to keep consumers from shopping overseas.

"Hainan is a prime example, developed into a major duty-free hub because policymakers understand that luxury spending in China benefits the country," Roizen explained. He added that any move to raise prices on luxury brands in China would likely drive consumers to shop abroad, counteracting the government's goals of boosting domestic luxury sales.

China's Luxury Market: A Global Powerhouse

The Chinese luxury market is forecasted to account for 25% of the global total this year, despite a recent slowdown, according to Jelena Sokolova, senior equity analyst at Morningstar. This explains why European luxury shares are so sensitive to any developments in China. Even the threat of tariffs or increased consumption taxes on luxury imports would significantly affect French luxury conglomerates.

France's brandy exports to China, which amounted to $1.7 billion last year, account for nearly 99% of China's total brandy imports. Furthermore, 11 billion euros worth of European luxury goods were imported into China in the same year. Given the size of this market, analysts believe it's less likely Beijing will target luxury brands in retaliation.

Avoiding a Full-Scale Trade War

Albert Hu, professor of economics at the China Europe International Business School, emphasized that neither China nor the EU wants a full-scale trade war. "I think at this point, neither the EU nor China wants a trade war that would hurt both economies," Hu said, noting China's cautious approach in selecting retaliatory measures.

Luxury goods, due to their high price points and unique nature, are also not easily targeted by anti-dumping claims. "It's hard, logically, to justify dumping claims on $2,000 handbags," Sokolova added.

As the trade tensions between China and the EU continue, investors remain on edge, but experts suggest that luxury goods may not be directly impacted—at least not in the immediate future.