EU competition policy appears not sufficiently equipped to deal with the challenges recently raised by Chinese state capitalism. This column discusses some of the gaps in the EU’s economic toolbox, and identifies several strategic issues that will need to be addressed as the Commission looks to close these gaps with the introduction of a ‘level playing field instrument’.
In its 2019 EU-China strategic outlook (European Commission 2019), the European Commission has identified a long list of distortive strategies applied by China, including “selective market opening, licensing and other investment restrictions, subsidies to both state-owned and private sector companies, closure of its procurement market, localisation requirements, including for data, the favouring of domestic operators in the protection and enforcement of intellectual property rights and other domestic laws, limiting access to government-funded programmes for foreign companies, and onerous requirements to access the Chinese market”. To achieve market access and reciprocity for EU companies, the China Communication vows to reform the WTO – in particular on subsidies and forced technology transfers – conclude bilateral agreements on investment, and adopt the International Procurement Instrument.
The main action point, however, singles out foreign state ownership and state financing of foreign companies and promises to assess how the EU could appropriately deal with their distortive effects on the EU internal market. Within the Commission’s assessment, it would be worthwhile to obtain empirical evidence, or at least estimations, on the relative size of the distortions on competition and trade due to state-owned enterprises (SOEs) and subsidies as compared to the other mentioned strategies. However, qualitatively the ways through which such measures may distort competition in the internal market are well known – not only can they shield inefficiency, but they may also divert demand away or discourage entry from more efficient suppliers and allow the acquisition of assets and shares at inflated prices.
The EU’s current economic toolbox does not cover these distortive effects.
- First, EU competition rules apply without discrimination. In principle, they are not, and should not be, asymmetrical industrial or trade policy leveraging tools. In particular, EU merger control does not allow the Commission to intervene against the acquisition of a European firm solely on the grounds that the buyer benefitted from foreign subsidies. However, there are ways to interpret and enforce existing rules in a more robust way against distortions due to SOEs and subsidies. A German-French-Polish paper has called for taking into account the state control of undertakings when calculating turnover, as well as the financial power of state-controlled and subsidised undertakings when deciding in substance on mergers (BMWI 2019). Academics have gone further and suggested treating all Chinese acquirers as part of a single broad syndicate in merger review and assuming an underlying coordination scheme in antitrust investigations (Petit 2016). Past and current reviews of mergers with Chinese acquirers show that it is extremely hard to obtain reliable information on state ownership and corporate control structures. As long as sufficient transparency is lacking, an assumption on single control at least for the question of notification might be an option. However, even such an interpretation would leave a significant gap in the toolbox.
- Second, EU state aid instruments only cover aid granted by Member States. Extending EU state aid control in its current form beyond aid by Member States would, at least legally, be a challenge in terms of public international law. The WTO Agreement on subsidies and countervailing measures is limited in its scope and only applies to goods.
- Third, WTO rules also limit the scope of EU trade defence instruments (TDIs) (i.e. anti-dumping policy, anti-subsidy policy, and safeguards). These instruments do not cover all potential effects of unfair subsidies or support measures by non-EU countries. In particular anti-subsidy policy only captures public financial contributions, which are confined to a specific firm, industry, or group of firms or industries producing or exporting goods; it does not cover state ownership. Countermeasures by the Commission consist of duties on imports of the subsidised goods. Any assessment of existing tools will have to consider in particular the gaps left by the current anti-subsidy instrument.
With a view to closing the gaps in the regulatory toolbox, the Vice-President of the European Commission, Margrethe Vestager, has welcomed a Dutch proposal that would add a level playing field instrument as a new pillar of EU competition law (Financial Times 2019). Closing gaps in a smart way will require a sound assessment of the relevant costs and benefits from an economic, regulatory, and political economy perspective. Several strategic questions have to be answered.
Potential goals of a level playing field instrument
The first issue is to define the strategic goal of a new instrument. The obvious objective would be to ensure a level playing field and fair competition for all companies in the internal market. Setting incentives within the ‘systems competition’ in particular with China and gaining leverage in trade negotiations would be another.
This is closely interrelated with the second question. To what extent is the EU willing to go beyond the WTO Agreement on subsidies and countervailing measures? The EU has bound itself beyond WTO rules through its state aid rules and through the application of competition and state aid rules to public undertakings (Article 106(1) TFEU). Defending and leveraging its economic order means that the EU has to put in place instruments to achieve goals and to put in place rules beyond what has been agreed on an international level – potentially similar to a carbon border tax.
Potential scope and procedure
A third choice to be made is over what conduct and distortive effects shall be captured. Targeting distortive state ownership and subsidies at the source or border measures would be difficult to implement. Therefore, current ideas centre around prohibiting distortive conduct of the undertaking in the internal market. A recent – far-reaching – contribution to the debate by the Dutch government (Dutch Permanent Representation 2019) suggests as the baseline the ‘market economy operator’ principle (i.e. normal market conditions applicable to private undertakings). Conduct other than as a market economy operator could be prohibited in certain scenarios. Whether those scenarios, such as predatory pricing, can be transferred from abuse of dominance law (Article 102 TFEU) to a level playing field instrument should be subject to an empirical assessment of distortive strategies applied by SOEs and subsidised non-EU companies.
Specific scenarios could be acquisitions of EU companies with ‘abnormally high’ or tender offers with ‘abnormally low’ bids. While the US has limited Chinese investment on the basis of national security concerns, in 2018 Chinese investment into the EU27 (excluding the UK) saw the largest growth and reached 70% of China’s total foreign M&A in value (Garcia Herrero 2019). So particularly strategic and potentially inflated Chinese investment into EU companies could indeed be regarded as a challenge. At the same time, it may be too easy to focus on eye-catching mergers. An empirical assessment of different distortive strategies, in particular of the prices for acquisitions in the past, and of the effects of these strategies is warranted.
A fourth issue to be resolved would be to design an effective and efficient procedure. While for some potentially distortive strategies, such as ‘inflated’ bids, an ex ante control with a standstill obligation may be appropriate, for others an ex post control may be sufficient. It would be crucial to force adequate transparency on state ownership and subsidies.
A fifth issue would be to design appropriate inspection rights, remedies, and sanctions that can be implemented against the respective company in breach of the level playing fields’ substantive provisions. Both the Regulation on competition procedures (1/2003) and the Merger Regulation provide a menu of options such as prohibition and conditional clearance decisions, including structural and behavioural remedies as well as fines. Additional creativity may be needed with regards to corporate governance measures in order to offset the distortive effect of state ownership or a subsidy. If these issues can be resolved in a rule-based way within a level playing field regulation that is implemented by the Commission, the EU may well not solve all the challenges raised by Chinese state capitalism – but it could add one tool to its arsenal to better defend its economic order within the system’s competition.
Author’s note: The author writes in his personal capacity.
Bundesministerium für Wirtschaft und Energie (2019), “Modernising EU Competition Policy”, Report.
European Commission (2019), “EU-China – A strategic outlook”, Report, March.
Financial Times (2019), “Margrethe Vestager examines curbs on non-EU state-backed companies”, 16 December.
Garcia Herrero, A (2019), “Europe in the midst of China-US strategic competition: What are the European Union’s options?”, Bruegel Working Paper.
Dutch Permanent Representation (2019), “Strengthening the Level Playing Field on the Internal Market”, report, December.
Petit, N (2016), “Chinese State Capitalism and Western Antitrust Policy”, American Security Project Paper.