The EU tackling distortive foreign subsidies

Four months after the European Union and China concluded negotiations on the Comprehensive Sino-European Agreement on Investments (CAI), progress on the far-reaching accord has come to a halt. The EU Commission has issued new regulations aimed at addressing distortions in the Single Market caused by external subsidies. The new measures follow the publication of a White Paper in June 2020 and may dampen enthusiasm among those already waiting for a follow-up on the CAI — the pact through which the two parties envisioned rebalancing trade and investment relations.

Progress on implementing the agreement was first hindered in March, due to EU sanctions against Chinese officials and subsequent Chinese counter-sanctions against EU officials. In this context, Brussels drafted a law that would enable the EU Commission to crack down on market-distorting state subsidies from third countries — with a tacit special concern towards Beijing. As Margrethe Vestager, the European Commissioner for Competition, stated:

"Openness of the single market is our biggest asset. But openness requires fairness. For more than 60 years, we've had a system of state aid control to prevent subsidy races between our member states. And today we are adopting a proposal to also tackle distorting subsidies granted by non-EU countries. It is all the more important to ensure a level playing field in these challenging times, to support the recovery of the EU economy."

Digging into the EU's New Rules on Market Access

By adopting a harder stance towards external investments, the EU Commission's main aim is to investigate financial backing in acquisitions or investments by foreign governmental institutions where these are perceived as detrimental to EU companies' global competitiveness. In a globally integrated market, this kind of shield could enhance the bloc's "Strategic Autonomy" and contribute to its twin transition to a green and digital economy, as referenced in the EU 2020 Industrial Strategy.

The European Commission unveiled three main instruments to tackle this anti-competitive behaviour. Two are notification-based tools aimed at investigating the largest and most distorting company takeovers and procurement bids, for which the EU Commission must be notified in advance. These will target acquisitions of EU companies generating at least €500 million in European revenue, or procurement contracts worth at least €250 million. A third tool will enable the Commission to scrutinise — on its own initiative — all market situations, smaller concentrations, and public procurement procedures, with the special power to request ad-hoc, on-site investigations.

The legislative tool gives competent authorities the power to seek remedies when anti-competitive behaviour is detected. Perceived anti-competitive behaviour may result in structural payments or even a decision to halt a transaction in order to restore fair competition and protect strategic industries. While these instruments are expected to improve the level playing field in trade, many argue that indiscriminate and regular application of investment screening procedures could also have counterproductive results.

Learning from Past Experiences

This legislation should be contextualised within the recent tense state of EU-China diplomatic relations — and could cast shadows on the progress made in preliminary bilateral investment discussions. But viewed through a historical lens, the EU Commission's more assertive position towards China and market access can be traced back to 2012, when the Sino-European Solar Panel Dispute first arose.

The solar panel dispute — which ran from 2012 to 2014 — began when several European solar companies filed a complaint with the EU Commission, accusing Chinese companies of alleged unfair trade practices, namely dumping and illegal subsidies. At the time, many European countries were still primarily focused on attracting external investments and helping their companies obtain commercial contracts in China, rather than pushing for a united EU trade policy to protect the European solar panel industry. The trade dynamics shaped by that dispute could repeat themselves — and understanding them is essential for making accurate forecasts about the future of Sino-European bilateral relations.