(Bloomberg) -- China signaled it’s ready to unleash tariffs as high as 25% on imported cars with large engines, as trade tensions escalate with the US and European Union.

The China Chamber of Commerce to the EU said it was informed about the potential move by “insiders,” according to a statement posted on X. The levies would affect European and US carmakers and have a “significant” impact on relations with the EU, it added.

Shares of European carmakers that stand to be most affected by a potential tariff fell on Wednesday, with Mercedes-Benz Group AG and BMW AG both dropping more than 2% in early trading.

Beijing is ramping up threats of retaliation as a deadline looms for the EU to announce results of its probe into China’s electric-vehicle subsidies. The bloc must inform Chinese exporters whether it intends to impose tariffs by early June, and they could go into effect a month later, according to Eurasia Group.  

Trade tensions between the EU and China have soared since the EV probe was announced, with President Xi Jinping’s visit to Europe this month seemingly doing little to relieve the strain. Xi was seeking to dissuade the bloc from going down the same path as the US, which has unveiled a sweeping set of charges on imports from China — raising concerns in Beijing that American allies may follow suit.

“China’s retaliatory trade investigations and warnings are not deterring the EU,” Eurasia Group analysts wrote in a note on Tuesday. “Brussels is eager to send a strong signal to Beijing with its EV probe that the EU will counteract Chinese subsidies and overcapacity.” 

The Chinese chamber referred to an interview published by the ruling Communist Party’s Global Times newspaper on Tuesday in which Liu Bin, the chief expert at the China Automotive Technology & Research Center, called for temporarily increasing the tariff rate on cars with engines larger than 2.5 liters. 

China imported 250,000 cars in that bracket last year and World Trade Organization rules would permit a tariff of up to 25%, the report cited Liu as saying. The current charge on passenger car imports from Europe is 15%, according to the Ministry of Commerce’s tariff search page. The ministry didn’t respond to a request for comment. 

The carmakers most impacted would be Toyota Motor Corp., Mercedes-Benz Group AG and BMW AG, said Daniel Kollar, head of consultancy Intralink’s automotive and mobility practice. 

Most of China’s auto imports are in the luxury segment, with Porsche, Audi and Range Rover among the top 10 brands in 2023. Larger-engine models including the GLE SUV and S-class sedan from Mercedes and Porsche’s Cayenne SUV could be affected if the new tariff is implemented.

Toyota’s Lexus brand topped the overall import rankings last year with 180,000 sales, more than one-fifth of the total. If Beijing decides to implement the tariff across all nations, the Japanese company could become collateral damage in the trade spat with the EU and US.

In addition to the jab at the car trade, China has recently hinted it could impose tit-for-tat levies on European wine and dairy products, and begun an investigation into European exports of brandy. 

Amid global concern about China’s surging exports, the EV industry is drawing especially close attention. China produces more electric cars than anywhere else, as well as controlling a majority of the battery supply chain. With a price war and slowing economy at home, its auto makers are seeking to expand overseas. They exported 1.55 million EVs last year, about 40% of them to Europe. 

The Biden administration earlier this month announced 100% tariffs on Chinese electric cars, while the EU is investigating Beijing’s subsidies across a range of industries, which has prompted Chinese firms to pull out of rail and energy tenders. 

Asked about the auto dispute with Europe at a regular briefing in Beijing on Wednesday, Chinese Foreign Ministry spokesman Wang Wenbin said such issues should be resolved through dialogue. 

“We have taken note of the relevant statements from the European side,” he said, “and hope they will abide by their commitments to support free trade and oppose protectionism.” 

--With assistance from Charlie Zhu.

(Updates with European auto shares, Chinese foreign ministry)

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