(Bloomberg) -- China is launching an anti-dumping investigation into liquor products like brandy from the European Union, in a relatively modest step after the bloc opened a probe last fall into its electric vehicle subsidies.

The investigation, which Beijing said was prompted by an application from a domestic liquor association, targets French cognac, a niche but lucrative product in China for producers like Pernod Ricard SA and Remy Cointreau SA, and sent their stocks plunging. France was the main backer of Brussels’ probe into Chinese EVs, with French carmakers Renault SA and Stellantis NV particularly exposed to the threat of imports.

The brandy industry is a small one — China imported $1.57 billion worth of spirits from distilled grape wine in 2023 through November, while exporting about $12.7 billion worth of electric vehicles to the EU in the same period — and appeared aimed at negotiating with Brussels.

The European Commission is assessing the documentation it received and will intervene “as appropriate, in close cooperation with the EU industry concerned,” spokesperson Olof Gill said in response to a query from Bloomberg.

A trade group for the cognac industry said the Chinese probe is taking place in the context of an unrelated spat between the EU and Beijing.

“We are confident that our products and commercial practices fully comply with Chinese and international regulations and also that EU & China will find a constructive way to resolve any bilateral disputes, as has happened in the past over other matters,” Valerie Mabin, a spokesperson for BNIC, said in an emailed statement.

“France has the biggest exposure to the investigation into brandy,” said Bruce Pang, chief economist at Jones Lang LaSalle Inc. “China is trying to add pressure on the biggest supporter of the EU’s Chinese EV probe.”

News of the probe sent Remy Cointreau tumbling as much as 12.5% in Paris while Pernod Ricard fell as much as 5.6%. These companies sell French brandy called cognac in China under brands like Remy Martin and Martell.

Analysts for Jefferies Financial Group Inc. wrote in a report that the selloff in Pernod shares was “overdone,” since China accounts for about 10% of Pernod’s overall sales, of which about 8% are cognac. A 2013 China dumping probe into EU wine imports, launched in response to tariffs on Chinese solar panel imports, was dropped within a year, the analysts noted.

Beijing has a history of using trade to help it achieve its policy goals. It previously looked into foreign liquor imports when geopolitical tensions flared with Australia, resulting in the imposition of anti-dumping tariffs on Australian wines, decimating what had been one of the country’s major overseas markets. As ties improved, China started to review the curbs.

“China is showing Europe what retaliation could look like if it slaps duties on Chinese EVs,” said Noah Barkin, senior adviser at Rhodium Group. “This move would hit wine-producing countries like France the hardest — and that is probably no coincidence. Macron’s government was the strongest supporter of the EU’s anti-subsidy probe into EV imports from China.”

While China represents a major market for European liquor brands, which have been struggling with a sharp drop in US demand, it is a small industry in a country that largely drinks the local alcohol called baijiu. 

China’s investigation will focus on brandy products that come in smaller than 200 liter containers from the EU, China’s Ministry of Commerce said Friday.

With cognac considered a premium product in China that sells at prices far higher than local alcohols, the dumping charge is “quite stretched,” said Gilles Guibout, a portfolio manager at Axa Investment Managers in Paris. “This is purely retaliation for EV.” 

The EU’s recent trade actions toward China have extended beyond electric vehicles. Last month, the EU also opened anti-dumping probes into Chinese biodiesel and melamine exports. In November, the bloc imposed provisional anti-dumping duties on imports of some plastics products from China.

Zhao Yongsheng, a professor at the University of International Business and Economics in Beijing, said he doesn’t think the new brandy investigation is a sign of a trade war starting between China and EU.

“It’s a retaliation but a reasonable one,” he said. “China has chosen a product with little impact on EU, but the message is that it can target much more important European goods in the future” such as wine, luxury products and cars.

--With assistance from Jinshan Hong, Julien Ponthus, Dong Lyu, Kevin Whitelaw, Fran Wang and Yujing Liu.

(Updates with EU reaction the in fourth paragraph)

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