Europe’s new anti-subsidy weapon is powerful but hard to control

For years, some of the most skilled craftspeople in the European Commission have toiled away in the workshop of the regulatory armoury. Their task: designing policy weapons to aim at countries that unfairly subsidise their companies and block EU businesses from their markets.

Over the past few weeks, the commission has apparently burst out of the arsenal, guns blazing. The new foreign subsidies regulation (FSR), originally launched last year, has now resulted in several high-profile investigations, including dawn raids in Poland and the Netherlands on the premises of Nuctech, a Chinese company that makes cargo, baggage and body scanners for airports and border crossings. The commission also launched a broader investigation into subsidies to Chinese windpower equipment manufacturers.

It’s tempting to think of this activity as a co-ordinated EU get-tough-on-China drive, following the investigation launched last year into supposedly subsidised electric vehicle imports. In reality, it’s a bit more disjointed than that.

In launching the FSR, the EU has set itself on a course towards confrontation with China it can’t entirely direct. Control is heavily concentrated in the hands of the commission, specifically the directorates for competition and the internal market. Before long it might well provoke a conflict with EU member states. Swift, powerful and necessary the FSR may be: a cohesive plan to deliver the EU’s prized “strategic autonomy” it is not.

The principle behind the FSR is entirely logical. It plugs a hole in the EU’s anti-subsidy rules by essentially extending the state aid regime to subsidised foreign companies operating in the EU market. Companies must notify public procurement and merger and acquisition activity above a certain value, which can then trigger an investigation about competitive distortions.

Most dramatically, (at least for those who find drama in state aid policy), the commission can start “own initiative” investigations into foreign-owned companies trading in the single market, demanding detailed information from businesses and potentially ordering divestment. It’s this tool that has attracted the most attention, particularly since it can be used to hit a variety of goals.

Because of its access to customs information, the state-owned Nuctech — formerly headed by the son of former Chinese president Hu Jintao — has long been accused of secretly collecting sensitive data, a suggestion it denies. Given that national security policy is traditionally set at member state level, using an EU-wide antisubsidy tool to pursue it is quite bold, a bit like nailing Al Capone on tax-evasion charges rather than racketeering.

These fast and splashy investigations, already press released with glee by the interventionist internal markets commissioner, Thierry Breton, contrast markedly with the slow and deliberative “trade defence instruments”, notably anti-dumping and anti-subsidy duties, used against cross-border commerce. 

Indeed, it’s striking how the FSR is addressing companies and sectors that trade defence is not. Nuctech set up operations in the EU to escape anti-dumping duties restricting imports of its machines from China in 2009. Companies investing in their foreign markets to get behind a protective trade wall, a move known as “tariff jumping”, is a familiar tactic: being pursued by anti-subsidy investigations once there is a novelty. The trade directorate has also considered but so far declined to start formal anti-dumping investigations on imports of Chinese solar and windpower equipment.

Before long, the FSR might well put the commission into conflict with member states. Governments wanting the cheapest kit available might not appreciate a low-cost supplier being removed by a subsidy tool over which they have little control. This applies especially to technology that will help advance the green transition the commission is forever exhorting member states to achieve.

In an early FSR procurement case concerning a tender for electric trains in Bulgaria, the Chinese manufacturer CRRC, which had bid €610mn, pulled out as soon as an investigation was announced, leaving its Spanish competitor, Talgo, in the bidding at twice the price. Regulatory uncertainty could deter legitimate foreign investment and raise the cost of green tech.

The defining case on the horizon is EVs. The Chinese car company BYD is already investing in Hungary, and the manufacturer Chery is planning to build EVs in Spain. The commission ordering BYD or Chery to divest or repay any subsidies from the Chinese state, with a potentially serious impact on production, EV prices and jobs in Europe, would be a seriously inflammatory move.

As regulatory weapons go, the FSR is a blunderbuss rather than a precision-guided missile. Although it’s possible to target certain strategic technologies, such as windpower, it’s still a company-by-company tool rather than a sector-wide one, and can be used without much consideration for broader EU-China relations and the potential for retaliation by Beijing.

The trade directorate’s anti-subsidy investigation into imports of Chinese EVs, by contrast, involves painstaking management of member states’ views, trading off the interests of French versus German manufacturers and estimations of consumer welfare from cheaper cars.

No one, including those in charge of it, thinks the FSR is a sufficient strategic tool in itself. In recent speeches Margrethe Vestager, the EU’s competition chief, admitted there had been more cases than expected and referred to the regulation as “playing whack-a-mole”. But while waiting for the slow process of co-ordinating international action on subsidies, the speed, power and automaticity of the FSR make it a powerful piece of ordnance that will require careful handling.

alan.beattie@ft.com