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), progresses on this major and far-reaching accord have come to a halt with the EU Commission issuing new regulations, which aim to address distortions in the Single Market caused by external subsidies. The new measures follow the publication of a White Paper in June 2020 and might dampen the enthusiasm of those who were already waiting for a follow-up on the CAI, the pact through which the two parties envisioned to rebalance trade and investment relations. Progress on implementing the agreement was first hindered in March, due to EU sanctions against Chinese officials and subsequent Chinese 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. The main purpose is to allow the Union to better regulate and control unfair competition from foreign capitals, with a tacit special concern towards Beijing. As Margrethe Vestager, the European Commissioner for Competition, said:

“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”.

In this ongoing spiral of tensions, what should we expect from the new defensive economic push against foreign subsidies?

Digging into the EU’s new economic rules on market access

By adopting a hard stance towards external investments, the main aim of the EU Commission is to investigate financial backing in acquisitions or investments by foreign governmental institutions, if they are perceived as detrimental to the EU companies’ global competitiveness. In a globally integrated market, this kind of shield could enhance the bloc’s “Strategic Autonomy” and add to its twin transition to a green and digital economy, as mentioned in the EU 2020 Industrial Strategy. To this end, the European Commission unveiled the main instruments through which it aims at tackling this anti-competitive behaviour and redress their deceiving effects. In short, there will be two notification-based tool and one general market investigation tool: The first two tools are aimed at investigating the largest and most distorting company takeovers and procurement bids, of which the EU Commission will have to be notified in advance. The takeovers to be scrutinised will target acquisitions of EU companies that generate a revenue of at least €500 million in Europe, or procurement contracts worth at least €250 million. A third tool will be set up to enable the Commission to scrutinise, on its own initiative, all the market situations, smaller concentrations and public procurement procedures with the special power to request ad-hoc, on-site investigations. The legislative tool gives the power to the competent authorities to seek remedies when anticompetitive behaviour is detected. Perceived anti-competitive behaviour may result in structural payments or even a decision to stop the transaction at issue in order to restore fair competition and protect strategic industries. Due to the magnitude of the new economic measures, we expect these instruments to ensure a better level-playing field in trade activities, but many still argue that an indiscriminate use and regular application of investment screenings procedures could also have counterproductive results.

Learning from past experiences

Undoubtedly, this legislation should be taken into account as a separate landmark tool to be contextualised within recent EU-China tense diplomatic relations and which could cast shadows on the progresses made on the preliminary agreement on bilateral investments. But, if history is the best teacher, it could also be interesting to analyse it in the light of not too recent experiences. Some may argue that attempts from the EU Commission to adopt a more assertive position towards China and market access can be tracked back to 2012, when the Sino-European Solar Panel Dispute first arose. Indeed, the the dispute on solar modules trade has had a deep effect on European legislation. The dispute shaped trade dynamics which could repeat themselves, and which we need to be aware of in order to be able to make accurate forecasts on the two parties’ future bilateral relations. To give our readers a little bit of background, the trade dispute on solar panels arose between 2012 and 2014, mainly because several European solar companies filed a complaint with the EU Commission, accusing Chinese companies operating in the solar energy sector of alleged unfair trade practices, namely dumping and illegal subsidies. At the time, mainly due to the 2008 financial crisis that took place six years prior, many European countries were still focused on attracting external investments and on helping their companies obtain commercial contracts in China, rather than pushing for a united EU trade policy that could protect the EU solar panel industry. More details on the solar panel dispute will be discussed in the next industry blog article. Be sure not to miss it!

So, lesson learnt?

Nowadays, in the dire economic situation caused by the Covid-19 pandemic, many countries might prioritise external and sometimes non-transparent investments over protectionist initiatives and investment screening mechanisms. The freshly released guidelines on market access and state aid can still be considered as a big shift in attitude for the EU, with a clear attempt to take a firm stance on the topic, enhance reciprocity in trade with foreign partners and thus increasing its visibility in the international arena. Being able to forecast, analyse and enhance European institutions’ understanding of the intricate ownership structures of Chinese companies, along with the peculiar tools available to access public fundings, is one of our main goals here at Datenna. With our ever-expanding database on Chinese companies, we seek to provide our clients with transparent analytical tools every day. In addition, we monitor the most recent relevant policies and couple them with our fast growing databases. Whatever the outcome of the EU’s renewed stance on foreign takeovers will be, we can’t wait to tell you about it in one of our next industry blogs!