China-backed companies face new EU review power on subsidy distortions

02 June 2020 20:53 by Natalie McNelis, Lewis Crofts

Competition review

Companies backed by significant Chinese subsidies could be subject to a new kind of EU investigation that would correct distortions and restrict behavior inside Europe's internal market, MLex has learned.

The European Commission is exploring an "anti-subsidy tool" that would establish new enforcement powers, but it may clash with national capitals that remain sensitive to trade flows and political tensions.

The European Commission is expected to publish a policy document later this month on methods to tackle foreign companies that benefit from subsidies from their home governments.

The rationale is to eliminate the distortions that such companies cause on the EU market, but which currently go unpoliced because existing powers only tackle subsidies from European governments.

At the heart of the commission’s plans lies a new tool that would see officials look into the source and nature of a subsidy, weigh its impact, and potentially demand corrective measures.

But member states, which are taking note of the emerging plans, are likely to raise questions over where the powers divide between Brussels and national capitals, and how the tool sits alongside other powers to review investments and trade distortions.

The starting point for the new tool is said to be a checklist for detecting presumed distortions of the EU market, including criteria such as the type of subsidy, the level of concentration in the industry, the characteristics of supply and demand, and the presence of other state-owned or subsidized players. This review could be triggered by a complaint from a company within Europe.

Red flags would be production and sale below cost, the acquisition of companies or shares at a price higher than the market price, and abnormally low offers in the context of public tenders, it is said.

One idea circulating is for an "EU interest test" that would assess whether the distortive effects of the foreign subsidies are countered by positive aspects in sectors such as digital development, the protection of the environment and climate transition.

The regulator’s options, if it finds a distortion, could be to require the repayment of the subsidy or impose other restrictions common to antitrust and anti-dumping probes. At worst, the foreign company could be prevented from operating in the single market.

There are said to be many open questions before a draft law might emerge by next spring. These include the legal basis for any new regulation, the division of powers between Brussels and the member states, and the freedom for governments to control their own trade flows.

The White Paper has its roots in a proposal by the Dutch government from December 2019 that called for foreign companies receiving government support or benefiting from a protected home market to be singled out for “stricter supervision”.

The proposal is borne out of a frustration that the traditional tools available to the commission, particularly state aid investigations, antitrust procedures, and trade defense measures, don’t allow the EU to effectively combat the unfair behavior of foreign companies operating in the EU market.

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