Protection of the European Single Market: European Commission Wants to Control Third-Country Subsidies

A new proposal from the European Commission aims to combat competition-distorting subsidies from third countries. The proposal was prompted by the increasing global imbalance between EU companies and companies from third countries. China in particular poses a problem in such cases. These measures are intended to counter China's influence on the European domestic market.

While companies from third countries are in part massively subsidized, or even owned by a third country, and benefit from less regulatory pressure, subsidies from EU member states are subject to the strictest state aid regime in the world.

The objective of the proposal for a regulation on third-country subsidies distorting the internal market is to ensure a level playing field in the internal market by preventing subsidies from third countries that distort competition.

About the Proposal

The European Commission is focusing on two areas in particular.

The first requirement is to require ex-ante notification of investments connected to concentrations (acquisition of shares, investments) if certain thresholds are met (EC proposal: a EUR 500 million turnover in the EU and a subsidy from a third country that exceeds EUR 50 million in the last three calendar years).

Secondly, ex-ante reporting obligations are to be introduced in public procurements valued at EUR 250 million or more (EC proposal), if third-country subsidies are involved. In addition, the proposal provides for ex-post controls below these thresholds if such subsidies appear to be relevant to the internal market. The EU Commission will consider the financial contributions from a third country to companies operating in the EU as part of the review.

Companies can reduce capacity or market presence, forgo investments, or grant access to infrastructure acquired with subsidies in order to prevent distorting effects on the internal market. In addition, the European Commission can impose a repayment obligation or, for example, prohibit subsidized acquisitions within notified projects or prohibit the award of public contracts to subsidized bidders.

On May 4, 2022, the Council was given the negotiating mandate to initiate trilogues in the Permanent Representatives Committee. The European Parliament voted on its position in a plenary also on May 4, 2022. Trilogue negotiations of the legislative EU institutions will therefore start immediately. In terms of content, it is to be expected that the threshold values in particular will be discussed intensively. These negotiations are expected to be concluded soon.

Austria welcomes this decision by the EU, Economy and Digitization Minister Margarete Schramböck said, "The new regulations are intended to close a loophole and eliminate unfair competition by companies sponsored by third countries, or even by state-owned companies from third countries. This regulation is urgently needed for the sake of European businesses and our jobs."

China's subsidies in the European Single Market

These measures are intended to prevent pampered Chinese state-owned companies from winning tenders or buying up technology firms in the EU. The European Parliament wants to tighten the rules even further. This is because Chinese corporations offer themselves at far lower prices in Europe than would be possible without subsidies from China itself.

Until now, the Commission's competition watchdogs have only been able to intervene when EU governments pay subsidies to their companies and thus distort the single market. In addition, the authority can impose punitive tariffs if manufacturers on other continents collect subsidies and therefore export their goods to the EU at junk prices.

So far, however, there is no way to prevent companies from being subsidized in their home country, for example, China, and then participating in tenders in the EU or bidding for company takeovers. Thanks to the friendly support from Beijing, these corporations can submit very favorable bids or pay lunar prices for takeovers.

Subsidized corporations from Asia buy European technology companies at unbeatably high prices in order to acquire knowledge in this way. This buyout at a low price is a Chinese geopolitical strategy.

The People's Republic of China is now the world's largest economy in terms of purchasing power adjusted gross domestic product. For Germany, it is the largest trading partner and for the EU, after the USA, the second largest. Conversely, the EU is China's largest trading partner. Chinese companies are increasingly relevant competitors for European companies.

Outlook for Competition in Europe

In the future, the European Commission will examine financial contributions in the broader sense from third countries to companies operating in the EU to determine whether they distort the internal market. In this context, ex-ante reporting obligations are envisaged in merger and award procedures above certain thresholds, as well as ex-post controls by the European Commission. However, investments or participation in award procedures in the EU are not prevented per se: Within the framework of a balancing test, there is the possibility of a positive assessment of a project despite the existence of third-country subsidies.

Suspiciously low offers are not only written by Chinese companies but sometimes also by Indian or Russian companies. This poses a danger to the interests of the European Union.

This regulation is not the only law with which the EU wants to arm itself against China's dubious practices.

As recently as March, Parliament and the Council of Ministers agreed on a regulation that allows the Commission to bar corporations from state tenders if their home country does not grant EU companies similarly good access. European companies have long complained about being left out of the loop in China - now the EU can threaten Beijing to pay Chinese suppliers back in kind if the country does not open up.

In addition, the Commission presented draft legislation in December that allows Brussels to quickly introduce counter-sanctions if an economic power imposes unjustified penalties on an EU state. One example is again China, which imposed a trade boycott on Lithuania. Later in the year, the authority still wants to present law against forced labor: No goods may then be sold in the EU whose production involves forced laborers. There is no doubt that this will also affect China.

Through these unfair practices, China can appropriate technologies from the West and strengthen its influence. This would strengthen its influence more and more. Technology exporters such as the U.S.A and Germany would be particularly affected. And with the "New Silk Road" initiative, China wants to secure developing countries as export markets and is thus likely to become a stronger competitor for the EU.

These new measures by the European Union are important steps on the way to containing China's influence and important to protecting the European Single Market from Beijing's intentions.