China warns of a 'trade war' with the EU, leading to 'one-time burst of inflation'

China has warned that ongoing tension with the European Union could spark a trade war.

The trading bloc is planning to introduce extra tariffs on Chinese-made electric vehicles starting next week—dramatically increasing costs for end consumers.

Additional duties as high as 38.1% were proposed from July 4, which would be alongside an existing 10% tariff that's applied to car imports.

They've since been marginally revised downward to a maximum of 37.6%, but this may not be enough to placate Chinese officials.

Beijing wasted little time in retaliating when the tariffs were first announced, and launched a tit-for-tat investigation into pork products that are imported from the EU.

Spain, the Netherlands, Denmark and France are the biggest exporters of pork to China, with Danish lobbyists warning its agricultural sector would be "hit incredibly hard" if restrictions were imposed.

Meanwhile, Chinese carmakers are now lobbying the government to slap tariffs on European gas-powered cars.

A spokesperson for the Chinese commerce ministry told Reuters, "The European side continues to escalate trade frictions and could trigger a 'trade war.'

"The responsibility lies entirely with the European side," they added.

German Vice Chancellor Robert Habeck has since been on a three-day visit to China, with reports suggesting Beijing is attempting to encourage Berlin to oppose the planned EU tariffs on electric vehicles.

According to Bloomberg, current Chinese tariffs of 15% on German cars could be lowered if the European Union abandons the policy.

Beijing has previously hinted that, if the new tariffs do go ahead, it may impose a 25% fee on large European vehicles in return—a hammerblow to the likes of BMW and Mercedes-Benz.

'One-time burst of inflation'

The EU is far from alone in ramping up tariffs against China.

Donald Trump imposed restrictions on Chinese goods worth $300 billion, with his successor Joe Biden subsequently adding fresh tariffs on electric vehicles, semiconductors and aluminum.

The end result is higher prices for consumers, with academics from the Peterson Institute for International Economics likening them to a "one-time burst of inflation" in a recent report.

Analysis from the Center for American Progress says tariffs of even 10% are equivalent to an annual consumption tax increase of about $1,500 per household.

That's an unwelcome development, considering American and European consumers are already grappling with a cost-of-living crisis.

Although politicians often argue that tariffs protect domestic manufacturers by forcing consumers to opt for local goods, that's not always the case.

For one, tariffs can end up increasing the price of raw materials, ultimately making the goods produced within a country more expensive for consumers.

The Peterson Institute for International Economics report also pointed out that tariffs can prompt domestic producers to increase their prices so they are more in line with imported goods.

Either way, any trade war with China would ultimately be inflationary, making it much harder for central bankers to tame rising prices.