European Luxury Shares Slip Amid Concerns of Retaliation from China

By Casey Hall
SHANGHAI (Reuters) – European luxury shares have fallen on investors' worries that Hermes handbags and Dior shoes might be the next targets in China's retaliation, following the EU's tariffs on Chinese electric vehicles (EVs). However, analysts suggest this is an unlikely scenario.

Patrice Nordey, CEO of the innovation consultancy Trajectry, states, "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."

So far, China's response in the ongoing trade tensions with the EU has mainly targeted brandy, pork, and dairy products—sectors crucial for France, which pushed for the tariffs on Chinese EVs.

Luxury brands like LVMH, which includes Hennessy cognac, Hermes, Kering, Ferragamo, and Burberry saw shares drop 2%-6% after China announced temporary anti-dumping measures on brandy imports.

Jacques Roizen, from Digital Luxury Group, notes that targeting luxury goods contradicts China's favorable policies towards the luxury sector, which seeks to retain consumer spending domestically rather than allowing it to shift overseas. He highlights the example of Hainan, a major duty-free area benefiting from luxury spending within China.

"When luxury goods sales are happening in China, it generates significant tax revenue," Roizen adds. He explains that any shifts in fiscal strategy forcing luxury brands to raise prices domestically would drive consumers to spend abroad—counterproductive to government goals.

Jelena Sokolova, senior equity analyst at Morningstar, estimates China's luxury market to reach 25% of the global total this year, contributing to European luxury shares' volatility regarding Chinese policy announcements. Furthermore, even the potential of new tariffs or higher taxes on imported luxury items could negatively impact French luxury conglomerates.

Last year, French brandy exports to China totaled $1.7 billion, encompassing 99% of China’s brandy imports, while European luxury goods worth €11 billion ($12 billion) were imported into China.

Despite these figures, the luxury industry's extensive nature might render it a less likely target for Beijing. Albert Hu, a professor at the China Europe International Business School, believes both the EU and China are reluctant to engage in a full-scale trade war that could damage their economies. He argues that China's careful selection of retaliatory measures suggests a desire to negotiate a compromise with the EU.

The unique nature of luxury goods complicates claims of dumping, as Jelena Sokolova points out: "It's hard, logically, to justify a case for dumping $2,000 handbags."

($1 = 0.9122 euros)