Procurement changes won't solve EU's China problem

5 April 2019 11:47am

19 March 2019. By Poppy Carnell and Lewis Crofts.

Unfair competition from China has got the European Commission scrambling to come up with a solution that doesn’t involve loosening its merger laws.

While its arguments in defense of those laws make sense, its main alternative proposal — tighter public-procurement rules — looks likely to be ineffective even if it gains enough support to become law.

Officials are giving the plan a diplomatic push, but it’s been gathering dust in national governments’ offices since 2016 after negotiators failed to agree on its scope. The disagreements that put sand in the gears haven’t gone away.

Even if it does pass, its provisions are so weak — in one case, effectively calling on governments to pretend bids are higher than they are — that it’s unlikely to prevent unfair competition or put enough of a brake on Chinese investment to make Beijing think about liberalizing its own rules.

The EU has cranked up its rhetoric on Chinese competition in recent weeks, partly in response to calls from Berlin and Paris to loosen its merger rules to allow deals such as the Siemens-Alstom rail tie-up — blocked by the commission last month — to go through in the future, allowing the creation of “European champions” to take on Chinese behemoths.

The commission has resisted calls to change competition law, no mention of which was made in a recent strategy paper on China. But it is making alternative suggestions, including the resurrection of the public-procurement bill — in addition to trade-defense and investment-screening rules that have already been agreed and await transposition.

The debate is expected to come to a head when EU national leaders meet this week, and again on April 9 at the next EU-China summit.

The commission argues that, while the EU’s own procurement markets are quite open, EU companies face high barriers when trying to invest in these markets abroad. EU companies win just 10 billion euros ($11.3 billion) a year in business from all external public markets, from a market of 8 trillion euros — half of which is in countries that have closed off bids from Europe entirely.

The EU should therefore erect barriers of its own to countries that hinder European investment, the proposal says. This would make EU companies more likely to win bids at home by throwing up obstacles to bids from China and elsewhere, and might even nudge Beijing and others to liberalize their own markets.

But the draft has languished due to an impasse between two broad camps: countries such as the UK and Sweden, which say the proposal is too protectionist, versus those such as France that say it doesn’t crack down hard enough on perpetrating nations. Similar divisions sunk the commission’s first attempt at similar legislation stemming from 2012.

Imaginary money

Even if EU states do finally agree on the rules, they’re a far cry from the tough-guy talk of recent weeks.

Essentially, the proposal says that should a country fail to grant access to EU companies, then the bloc would be fully within its rights to open a dialogue with that country. And if that should fail, then the EU might decide to trigger a mechanism to supposedly make it harder for companies from that country to bid for public contracts.

This is where the proposal really loses any air of menace. In the worst-case scenario, a foreign company would be forced to inflate its bid for a project by up to 20 percent. This is intended to bring foreign bids more in line with those of European companies, rather than undercutting them, as is often the case.

But to be clear, the extra money added to the bid wouldn’t actually be billed. Should the public authority choose the foreign bid, the artificial topper of up to 20 percent falls away and the authority pays the cheaper rate.

Given that any such mechanism would have to be publicly announced, public authorities would already know that certain foreign bids would contain this fake buffer and could make decisions based on that knowledge.

On top of this, for the EU to be able to oblige any foreign bidders to follow these rules, it would first have to get the approval of the majority of EU member states in each case. Should a qualified majority of EU states vote against the move, the commission is blocked from implementing it.

And therein lies the continued problem with the tool: Since EU states are stuck in agreeing to the draft rules, the same could be imagined for putting them into practice.

And while this proposal is shown to have no real teeth, that’s only because the commission knows that, as things currently stand, the liberal EU states will dismiss anything more robust.

Tightening public-procurement rules might allow the EU to talk tough at summits. But China will surely know that the chance of a law with any real bite being adopted by the EU’s divided member states is very slim.

ABA 2019