The coronavirus crisis is bound to lead to a fire sale of weakened companies in which foreign state-owned or subsidised enterprises may be the most hungry buyers. No wonder governments are rethinking their takeover regimes. Britain is preparing stricter vetting procedures. The EU recently adopted a framework for screening foreign acquisitions on security grounds. This month it will propose a clampdown on the activities of businesses subsidised by foreign states which threaten to distort the EU’s internal market.
The policy from the European Commission is unlikely to mention China by name, but there is no doubt that China is the inspiration. Last year the EU adopted a tougher stance against Beijing, describing it as a “systemic rival” intent on using its model of state capitalism to achieve industrial and technological supremacy, all the while taking advantage of Europe’s open market economy. As part of this new China strategy, Brussels was instructed to devise new tools to curb the distortive effects of foreign state ownership and state financing. It is a sign of how opinion has hardened against unfair Chinese competition and a lack of reciprocal market opening that the loudest proponent of the subsidy clampdown are the Dutch, not so long ago the arch enemies of anything that looked like protectionism.
The EU has restricted state aid since its inception, albeit with several exemptions and the occasional suspension, as during this pandemic. But the rules only apply to support granted by EU member states. The EU can restrict subsidised imports through anti-dumping measures, but it has no tools for dealing with foreign subsidised entities or their subsidiaries providing goods and services inside the single market. The internationalisation of Chinese and other emerging market economies makes this a gaping hole that has to be filled.
The commission is proposing to do this in two ways. First, the EU and national authorities would have the power to investigate alleged foreign subsidies to groups operating inside the EU and impose corrective measures if an in-depth probe found they distorted the market. Second, the EU would be given the power to screen, amend or even ban bigger takeovers involving possible foreign subsidies under a notification regime akin to its regular merger control. National authorities would look at smaller acquisitions.
The proposed changes are a logical, non-discriminatory tidying up of existing state aid rules. But they are also fraught with political and practical difficulty. Some governments in southern and eastern Europe like the promise, if not always the reality, of Chinese investment and will be unwilling to defy Beijing by agreeing to these new rules or by implementing them.
Determining what constitutes a subsidy is also hard. The Dutch government, for example, says it should include an unregulated dominant position in a domestic market. Data can also be hard to verify in opaque systems like those in China unless the burden of proof is placed on the acquiring company.
The EU may have to go further and demand full reciprocity to prise open Chinese markets for European businesses and investors. Action on state aid is a sensible first step. It will also help to maintain the legitimacy of the union’s competition regime, which is indispensable for spurring efficiency and innovation in the bloc. Unless foreign subsidies are controlled, demands in Paris and Berlin for dominant European industrial champions and, worse, political interference in antitrust decisions will become harder to resist.
