The EU is seriously upping the ante in its drive to tackle unfair competition from China, the U.S. and other foreign players in the single market.
Brussels is set to unveil on Wednesday a proposal for sweeping new powers to crack down on foreign subsidies, in its most aggressive push yet to curb the influence on the European market of companies backed by China and other governments.
While welcomed by many seeking to protect the bloc’s interests against non-EU competitors, the new tools risk undermining the single market if not carefully designed, diplomats and experts warn.
The package would complement the Commission’s competition and trade arsenal, according to a draft of the proposal obtained by POLITICO. These measures could apply to countries such as China, the U.S. and Russia when they subsidize their champions operating in the EU.
They would give the EU new powers to impose fines, block acquisitions, or ban companies from participating to public tenders, if it finds the companies gaining an unfair advantage from subsidies provided by non-EU governments.
The Commission says the tools would level the playing field in the single market, as European companies are already subject to similar rules.
“In recent years, foreign subsidies appear to have had an increasingly distortive impact on EU’s internal market,” according to the EU’s draft proposal, which cites an “increasing number of incidences in which foreign subsidies appear to have facilitated the acquisition of EU undertakings, influenced other investment decisions or have distorted the market behavior of their beneficiaries.”
But the proposed new tools could have a damping effect on investment decisions.
Stéphanie Yon-Courtin, a leading member of the European Parliament on competition matters from the centrist Renew Europe group, sees a “potential risk of reduced investment in Europe if the framework is too restrictive.” The French lawmaker also warns of “repercussions on our European companies operating abroad,” as other jurisdictions could impose similar regimes.
“You don’t want to discourage foreign investment in Europe,” warned Guntram Wolff, head of think tank Bruegel in Brussels. “If you go too far, you can annoy your trade partners, and if you do too little you risk losing market segments in your economy.”
EU competition czar Margrethe Vestager says the proposed new powers are necessary to protect fair competition in the EU.
“Trade and investment are good for Europe — but they need to be fair,” Vestager said in a speech in March. “And that’s not happening, if foreign businesses can freely buy European companies, but the countries they come from don’t let our businesses do the same. Or if foreign companies use subsidies to set up business in Europe, or to buy European companies, or to bid for public tenders at artificially low prices.”
A spokesperson for the Chinese mission to the EU told POLITICO that China “hope” that the EU measures will be “objective and fair to all,” adding that “Europe and the United States have been the main users of subsidy policies,” and that Beijing’s subsidy measures comply with international rules.
Two EU diplomats said there was a risk the proposal could trigger retaliation from countries in the Commission’s crosshairs. Some EU governments also are concerned that the Commission’s new tools might interfere with their existing ability to screen investments.
The U.S. mission to the EU declined to comment.
Extending the EU toolbox
The Commission is looking to clamp down on foreign subsidies of more than €200,000 to companies that operate in Europe’s single market, according to the draft proposal. It also aims to review deals when a foreign company acquires control over an EU target, or at least 35 percent of the voting rights, according to the draft.
It is also seeking to beef up control over public procurement and access to EU funds to ensure a level playing field between EU businesses and foreign competitors that receive public support.
In the end, this could mean foreign companies could get fined, be banned from acquiring EU companies or from participating to public tenders in the bloc.
The new measures would form part of a new legal instrument that would become operational after the EU’s heads of state agree by a qualified majority vote, and following a vote from EU lawmakers, according to the draft.
Vestager told French lawmakers on Tuesday that she expected the tools to be operational in “a few months.”
But the support from some EU countries might prove to be difficult.
Two diplomats feared that some foreign investments considered as essential by national authorities might be vetoed by Brussels, possibly under the pressure of another EU country. “What happens if I want a foreign investment, regardless of the fact that it is subsidized, and the Commission or another country say no?” an EU diplomat asked.
This could for instance be the case for the Ilva steel plant in southern Italy, which is currently under government control and has been struggling in past years following an environmental scandal. Investments by multinational ArcelorMittal might be the only solution to keep the plant alive, but the Commission might potentially use the new tool to block the deal on the basis of alleged Indian subsidies to the steel maker.
The elephant in the room
The Commission’s draft does not target China specifically. But there is no doubt the proposals aim at protecting EU businesses against Chinese companies enjoying access to state-backed loans and subsidies.
The proposals have been in the making for some time, with French President Emmanuel Macron and German Chancellor Angela Merkel in the background. Both leaders have pushed hard for more measures at the EU level to deal with China as their nations’ businesses have felt the heat from Asia.
Over the last decade, Germany’s solar cells and panel industries have been decimated by Chinese competition. Its e-bikes sector is only surviving with the help of anti-dumping tariffs. German robot-maker Kuka was bought by Chinese appliance maker Midea in 2016.
Concerns about Chinese competitors also were instrumental in the narrative around the proposed mega-merger between France’s Alstom and Germany’s Siemens. Vestager blocked that deal in February 2019 on competition concerns, a decision that provoked the ire of the French and the Germans, who since then have vowed to reform EU competition rules to make sure Europe would have industrial champions in a position to compete against Chinese companies.
These frustrations were evident in the European Commission’s Communication on China in March 2019, which first mentioned the need for measures aimed at cracking down on foreign subsidies.
Since then, the Commission has pushed back against changing competition rules, especially as regards mergers, but it is upping its game in trade.
Brussels on Monday imposed anti-subsidy tariffs on glass fiber from Chinese factories in Egypt. The investigation is novel — for the first time, Brussels explicitly claims to address China’s “Belt and Road” program in third countries — and re-interprets EU law to tackle subsidies outside the territory of the country granting them.
And on Tuesday, the EU launched a review of the bloc’s trade policy. A public consultation will address, among other things, the reshoring of Europe’s industry, echoing calls by France and Germany for strategic autonomy.
China, the WTO and subsidies
There is also the question of whether the Commission’s proposals will comply with the principles set out by the World Trade Organization.
Bernd Meyring, a partner at law firm Linklaters, said he thought “the Commission uses a bit of a trick” to justify how its new rules would comply with the WTO.
With the proposals, “the Commission says there is no discrimination between an EU company and a Chinese company benefiting from subsidies,” Meyring said. “Technically this is right, but how many EU companies will get funding from a foreign state for acquisitions? This will affect foreign investors, and that will be a problem because of the [trade agreements],” he added.
For its part, China “will look into it carefully after its publication,” the Chinese diplomat said of Wednesday’s announcement. “China’s position and attitude on the subsidy policy is very clear, that is, to abide by the WTO rules and honor the commitments made on its accession to the WTO,” the diplomat said.
China will have the opportunity to give its impressions about the measures directly to European Commission President Ursula von der Leyen and European Council President Charles Michel at the EU-China summit scheduled for Monday.
Jakob Hanke, Paola Tamma, Lili Bayer contributed reporting.
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