Brussels is on the verge of gaining new legislative powers that would allow it to tackle market-distorting subsidies from foreign governments as the EU tries to defend itself against perceived unfair competition from capitals like Beijing.
The proposed rules, the summary of which was consulted by the Financial Times, significantly tighten the bloc’s approach to government-sponsored overseas competition.
The draft law, due to be published next week, is interpreted as a particular challenge for China at a tense moment for the EU’s relations with Beijing. It did so after the EU and China signed a tentative deal on a landmark investment treaty late last year – though it will take some time to ratify the deal.
The EU already has some tools in place to combat foreign subsidies, including trade defense tools and foreign investment screening to address potential security threats.
However, the state aid rules only directly target cash issued by European countries. Officials fear this has left a loophole when it comes to subsidies from non-EU countries, facilitating acquisitions in Europe, or supporting the activities of companies in the bloc.
According to the proposed regulation, which follows a Brussels White paper The European Commission published last year would be empowered to intervene in takeovers of EU companies or offers for public contracts if these are fueled by government subsidies from outside the bloc.
Under the new system, the largest and potentially most distorting takeovers or procurement offers would have to be notified to the Commission in advance. These are planned takeovers of companies worth at least EUR 500 million or procurement contracts worth at least EUR 250 million, according to two people familiar with the discussions.
The Commission could decide to open investigations into other cases that have the power to request information and conduct on-the-spot investigations. Foreign subsidies of less than EUR 5 million are unlikely to distort the EU internal market. Companies could be fined for failing to comply with requests for information or instructions on how to submit a takeover plan.
Due to the lack of transparency of foreign government subsidies, the Commission will use a number of “indicators” to assess the degree of possible distortion of the internal market, including the amount of any subsidy in relation to the size of a given market or the value of an acquisition. Certain types of subsidy, such as unlimited guarantees, are seen as particularly distorting.
Remedial measures include behavioral or structural corrective measures such as banning a business or selling assets, and repaying the subsidies received along with interest.
The proposal for a regulation falls within the remit of Margrethe Vestager, Executive Vice-President of the Commission who oversees competition.
“In recent years, foreign subsidies have in some cases distorted the EU’s internal market and created an unequal playing field,” the Financial Times summary said.
In some cases, these facilitated the acquisition of EU companies or the distorted trade in services to the detriment of competition. The government handouts include interest-free loans, unlimited government guarantees, or tax subsidies.
The draft law will shortly be available for examination by the Member States and the European Parliament. However, it could take a few years for the regulation to come into force and warn stakeholders that the proposals could still change.
EU officials said the proposals would also affect European companies if found to be receiving subsidies from outside the EU. “The origin of the money matters, even if it is a European company,” said an official with direct knowledge of the proposals.
The commission said it had “no specific comment” on the proposals.