EU Trade Strategy
Clear Rules for Fair Competition

China's trade practices and the new EU rules to control foreign subsidies
Margrethe Vestager
Die EU-Kommissarin für Wettbewerb, Margrethe Vestager © picture alliance / AA | Dursun Aydemir

The European Commission already announced that it would take stronger action against unfair trade practices and market distortions back in February in its new trade strategy. On Wednesday, it substantiated this claim with concrete proposals for the control of third-country subsidies. With the new regulation, the European Commission primarily targets companies that have gained unfair competitive advantages with the help of subsidies from third countries. This is intended to close a regulatory gap that, in contrast to subsidies granted by Member States, currently leaves subsidies from non-EU states largely unchecked. In the future, the Commission will be able to take stronger action. For example, in the case of takeovers of EU companies or participation in public procurement procedures, the Commission will examine whether market distortions could occur as a result of subsidies from third countries.  In the case of mergers and acquisitions, reporting is foreseen from a company turnover of 500 million euros and a third state subsidy of 50 million euros, and in the case of public procurement procedures, reporting is foreseen from a contract value of 250 million euros. For investments and awards below these thresholds, a so-called general market investigation tool is envisaged, which enables the Commission to start investigations on its own initiative and may request ad-hoc notifications. In the context of the proposed reviews, the Commission can impose measures to eliminate distortion, order the divestment of certain assets or the prohibition of a certain market behaviour. These changes to competition law are intended to enable the Commission to ensure fair competition conditions in the internal market vis-à-vis companies from third countries.

Spotlight on China's Trade Practices

The main target of the proposals is likely to be the People's Republic of China. Relations between Brussels and Beijing have deteriorated considerably in recent years. The ratification of the preliminary Comprehensive Agreement on Investment (CAI) between the EU and China also seems to be unlikely at the present time. Thus, the regulation now presented by the Commission also reflects a certain impatience with China's increasingly aggressive economic and trade policy. This conflict could not have been foreseen when China was admitted to the World Trade Organisation almost twenty years ago. But the hope associated with China's entry into the WTO that the state would be integrated into the existing world economic order has not been fulfilled. On the contrary, China has been criticised for undermining the rules-based global trade order through unfair trade practices, the sealing off of domestic markets and the deliberate creation of economic dependency. To this day, the world export champion claims a developing country status in the WTO and thus receives exemptions from the rules. Strategically, Chinese companies invest in other countries, targeting critical infrastructure in the EU or its immediate neighbourhood. These companies are either directly state-owned or benefit from subsidies from the Chinese state. Under the Silk Road Initiative (One Belt, One Road), the Chinese government actively supports domestic companies to engage in infrastructure construction in other countries and to outbid domestic companies in procurement procedures. These companies are similarly active in the acquisition of ports or airports. In doing so, Beijing not only pursues economic goals, but also uses the resulting economic dependency to prevent criticism of its policies, especially in the area of human rights.

In its latest five-year plan, the Chinese government emphasises the “dual circulation” strategy with the aim of reducing its own dependence on other markets, foreign companies and technologies and strengthening the domestic market. This dualism of exploiting open markets on the one hand and protecting oneself on the other poses considerable challenges for politicians and companies. However, the days of the European Union or the United States simply accepting this seem to be over.

No More Naivety

A special issue of the magazine of the German Council on Foreign Relations (DGAP) bears the title "End of Naivety" towards China. Either way, the EU no longer regards corporate takeovers and investments from the People's Republic as economic activities like any other. We can already see this in the debate about Huawei's operation of 5G networks. In view of the increasingly aggressive foreign policy approach of Chinese President Xi Jinping, this seems more than appropriate. The new rules will make it more difficult for third countries like China to use subsidies to overreach or take over European competitors in procurement procedures and to create unilateral dependencies in investment projects with state support. So far, the Commission has only been able to take action against exports at dumping prices or national governments rejecting a company takeover with reference to security interests. This could now change. The Commission's tougher stance should also be seen in the light of criticism from the European Parliament. Here, the investment agreement between the EU and China negotiated in December 2020 was met with particularly strong opposition. After Beijing imposed sanctions on the President of the Parliament, it was clear that the ratification of the investment agreement with China would not receive a majority in the European Parliament. Likewise, the US government had expressed its irritation at the timing of the announcement of the outcome of the negotiations. The new US President Joe Biden has signalled his interest in coordinating its China policy together with the EU. Insofar, the agreement on subsidies from third countries is also a signal to Washington that Brussels will take a more decisive stance towards the communist one-party state in future.

Open and Fair Competition

It is always important to maintain the fundamental openness of European markets. The liberal EU Competition Commissioner Margrethe Vestager emphasised that the openness of the Single Market is Europe’s biggest asset. But in order to guarantee this openness in the long term, clear rules are needed so that European companies are not put at a competitive disadvantage or fall into a one-sided economic dependence from the People's Republic or other autocracies. The EU faces the challenge of protecting itself from unfair trade practices while maintaining its openness and not undermining market economy standards through misguided industrial policy. After all, nothing would be more damaging to the single market than for the EU to respond to Beijing's strategic investment policy with protectionism, thus keeping other investors out of its market.

With the new instruments, the Commission has chosen a middle course that focuses on more transparency and clear measures to ward off distortive subsidies granted by non-EU countries. In the upcoming discussions on the proposals in the European Parliament and the Council, it will be important to ensure that there are clear rules that guarantee fair and open competition without making economic activity more difficult through overburdening bureaucracy. Especially against the background of increasing systemic competition, it is important that liberal and market-based democracies coordinate more closely. For they have a strategic interest in ensuring that the world economy is not dominated by state capitalist autocracies and their corporations. The upcoming G7 summit in June, for which the foreign ministers already agreed on a more coordinated approach towards China last week, offers an opportunity to address this issue.