European Union seeks to curb state-backed foreign rivals

Brussels is seeking new powers to review and potentially block takeovers of European companies by rivals deemed to have received unfair support from a foreign government.

The proposals, which have not yet been finalised, will intensify efforts by the EU to rein in perceived unfair competition from China and elsewhere.

The European Commission is working on a White Paper due for release this month that will propose new tools to scrutinise the activities of state-owned and supported enterprises operating in Europe or seeking to enter the single market.

The plans are likely to stoke tensions at an increasingly sensitive time in the EU's relations with China, as Beijing cracks down in Hong Kong and Brussels pushes to seal an investment treaty the two powers agreed to finalise this year.

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European Council president Charles Michel and Ursula von der Leyen, his European Commission counterpart, are tentatively due to hold a summit with Li Keqiang, China's prime minister, this month – about the time Brussels is due to publish the state-aid plan.

Under these proposals, the commission would be able to examine the impact of subsidies handed out by non-EU governments which have implications for competition in Europe. According to a summary seen by the Financial Times, the White Paper will lay out a twin-track approach: one handles general distortions to the single market, while the other specifically addresses potential takeovers of EU assets.

“There is an increasing number of incidences in which foreign subsidies appear to have facilitated the acquisition of EU undertakings or have distorted the pricing policy of their beneficiaries,” the summary notes.

“EU policy tools, however, do not address all possible distortive effects of foreign subsidies . . . this White Paper therefore calls for new tools to address those challenges and to ensure a level playing field in the internal market.”

European governments fear their companies have been left vulnerable to takeover by state-supported firms outside the bloc given the economic slowdown caused by the coronavirus pandemic.

However, Brussels’ concerns predate the current recession: last year the commission produced a paper on China calling for gaps in its state-aid regime to be plugged. The EU already has some tools to address foreign subsidies, including trade defence instruments and foreign investment screening to address potential security threats.

But its state-aid rules only directly target cash handed out by European states. This has left a “regulatory gap” when it comes to subsidies from non-EU states that facilitate acquisitions in Europe or which directly support the activities of subsidiaries operating in the bloc.

The commission proposals will set out two “modules” for examining foreign subsidies. The first of these would allow the EU or authorities in member states to address “distortive foreign subsidies in general market situations” – assessing whether the subsidy causes a distortion in the internal market, and then imposing measures to rectify the problem.

The second “module” is intended to tackle directly subsidies that help foreign companies acquire EU enterprises. Under it, the competent authority – which Brussels recommends should be the commission itself – would review proposed acquisitions, involving possible subsidies via a compulsory notification system.

If the investigation found that a takeover was facilitated by foreign subsidies that distort the internal market, the acquiring company may have to make commitments to remedy the problem or, “as a last resort”, the purchase could be prohibited.

The proposals are not yet finalised, but the commission is due to publish its white paper on June 17th. The ideas will be submitted for public consultation before being considered by the EU Parliament and council of member state governments.

Margrethe Vestager, the commission executive vice-president who oversees competition, recently called on member states to buy stakes in companies under threat of foreign takeovers, including those from China and the US.

Influential EU member states such as Germany have complained about the alleged lack of reciprocity that makes it much easier for Chinese companies to do business in Europe than vice versa.

Brussels originally promised to publish the state-aid crackdown last year, as part of a tougher new China strategy. That strategy, which for the first time branded Beijing a “systemic rival” as well as a competitor and partner in some areas, proposed further possible measures such as blocking the ability of Chinese companies to buy European technology businesses.

Zhang Ming, China's ambassador to the EU, has since warned the bloc against pursuing policies to curb Chinese companies' access to Europe, saying it would damage its own interests and deter investment.

A commission spokeswoman declined to comment on the specifics of the White Paper, but added: “The commission will adopt a white paper by mid-2020, in which it will present possible ways to address distortive effects caused by foreign subsidies in the single market and tackle foreign access to EU public procurement and EU funding.” – Copyright The Financial Times Limited 2020