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5 industries that need to watch foreign subsidies rules

Chinese state-owned firms aren’t the only companies that need to watch out for new European Union rules on foreign subsidies.

The EU’s newest trade defense tool wants companies operating on EU territory to follow rules similar to the EU’s state aid regime. They can expect a grilling about foreign state shareholders or subsidies when they do deals, apply for public tenders or attract suspicion that they are competing unfairly.

The European Parliament’s Trade Committee voted unanimously on Thursday on the new Foreign Subsidy Regulation after striking an agreement with governments last month. All Parliament lawmakers are set to vote on it in a November plenary session. EU countries approved the agreement in a Wednesday vote.

The new rules would apply to some Middle Eastern airlines, U.S. defense firms that get state help and a certain Russian state-owned gas provider.

EU Competition Commissioner Margrethe Vestager expects the new rules to start applying in mid-2023.

Under the regulation, companies engaging in large public tenders or mergers and acquisitions in the EU, will need to report the financial contributions they received from foreign governments. The European Commission can also start its own-initiative investigation into potentially anti-competitive behavior.

The punishment can be brutal: from prohibiting an acquisition or blocking the bidder from a large tender to repaying the subsidy. 

“This is really quite a discretionary tool,” Bernd Meyring, a competition lawyer at Linklaters said. “It’s important in these situations that the Commission gives people a good sense of what it’s likely to do and what not.”

So far the EU has been vague in saying which companies or sectors it will target. That is why POLITICO gets you up to speed on which sectors will likely be in the spotlight.

1. Basic industries

The steel and aluminum industries have been struggling to survive and critical raw materials have risen to the top of the EU’s political agenda because of their importance for strategically crucial supply chains such as semiconductors, batteries and renewable energy. That makes the foreign subsidy instrument a particularly welcome addition to the EU’s toolbox.

Metal companies in Europe have complained for years that state-backed Chinese companies dump their excess production on European markets at prices it is impossible to compete with. They were quick to welcome the Commission’s proposed foreign subsidy tool.

“China has invested heavily in its strategic metals industry through a program of industrial support & state subsidization. It is now the dominant producer of almost all metals,” metal lobby Eurométaux told the Commission as it was drafting the rules. “We support the [Commission’s] priority to strengthen its toolbox and create new legal instruments.”

“The Commission will want to avoid massive distortions of the internal market. This typically occurs when companies that are heavily subsidized abroad create overcapacity,” said Sophie Bertin, a former Commission official who is now a senior advisor at the law firm Covington & Burling.

2. Infrastructure

In December, the EU announced its Global Gateway plan to counter China’s infrastructure initiative Belt and Road in the rest of the world. Now, it can also look into Chinese bids to build European infrastructure: (rail)roads, bridges, buildings or ports. Chinese firms have in the past decade acquired stakes in at least eight European ports.

Infrastructure is expected to be front and center when the Commission assesses bids for tenders. All three procurement case studies in an annex to the Commission’s proposal concern transport infrastructure.

“In 2019, a regional council awarded a contract for works/supplies on a transportation network to a state-owned non-EU company for a value of several tens of millions of euro[s]. The winning bid was 40 percent lower than the next-lowest offer from competitors,” the Commission said in its third example.

A much-cited example is the Pelješac Bridge linking the Croatian city of Dubrovnik to the mainland — expected to be opened at the end of July —  which was constructed by the state-owned China Road and Bridge Corporation (CRBC) and received 85 percent of its financing from EU funds.

3. Transport

Global transport has been in the eye of the storm during the pandemic as air traffic came close to a halt and container shipping prices skyrocketed amid supply chain disruptions.

The developments have escalated long-standing complaints against government-backed shipbuilders in China and South Korea or state-owned airlines from the Middle East.

While rules exist to deal with competition-distorting practices by foreign carriers, lobbyists have welcomed the possibility to tackle foreign support to European carriers, for instance, Qatar Airways’ stake in Air Italy or Etihad’s in Air Berlin.

“China is massively subsidizing its state-owned airplane maker COMAC and this will likely lead to reduced global market share of Airbus (and Boeing),” wrote the Information Technology and Innovation Foundation, a Washington-based think tank (supported by Boeing).

Insolvent shipbuilders in China and South Korea were granted loans, according to European shipbuilding association SEA. An EU official said that “unlimited guarantees or subsidies to an ailing company without a restructuring plan” were among the types of foreign subsidies “most likely to create distortions.”

In the Dutch province of Overijssel, Chinese bus manufacturer Build Your Dreams (BYD) — which receives hundreds of millions of euros in state aid per year — supplied 259 buses for the winning bid in a public transport tender. 

4. Technology

One of the EU’s long-standing frustrations is its lack of tech giants. Of the world’s 20 most valuable companies, 10 are tech firms: seven from the U.S. and three from Asia. 

Ursula von der Leyen’s Commission has made digital transformation one of its top two priorities. After the chip shortage severely impacted European car makers, von der Leyen proposed a Chips Act to strengthen the European ecosystem for semiconductors. 

If it is up to European chip companies, the new foreign subsidy rules will play an important role too. “The EU should ensure that foreign subsidies provided by third countries do not distort the EU’s single market,” semiconductor industry association SEMI Europe said in response to the EU consultation on the rules. The lobby group insisted that the EU also takes into account “covert” subsidies relating to “tax systems and recapitalization of economic operators.”

A recurring issue in the feedback from the European tech industry was subsidized acquisitions of promising European startups.

“It has become a common practice for companies that are partly or heavily financed by foreign state actors to acquire promising EU companies,” the European Games Developer Federation said. For the European video game makers, the threat doesn’t stem only from China, but also from the Middle East (Israel, Emirates) and North America (Canada and the U.S.).

Chinese telecoms equipment provider Huawei is likely to be scrutinized under the EU’s new powers. The Commission in its preparatory documents zoomed in on an EU telecom operator which chose “Company A” to provide network equipment because it underbid a competitor by 60 percent in a private tender.

“Current research indicates that subsidies, alongside other measures from which Company A benefitted in the past, have … had a negative impact on innovation in the … telecom sector as a whole,” the Commission said.

5. Energy

Last but not least, energy has become the absolute top priority of EU policymakers following the war in Ukraine and the EU’s plan to rapidly reduce the bloc’s dependence on Russian fossil fuels. Boosting the competitiveness of the EU’s own energy industry by limiting the distortive effect of foreign subsidies could prove crucial in reaching that goal. European industry is still traumatized by how China’s subsidized producers of solar panels undercut with cheaper imports.

The Commission said it could, on its own initiative, investigate a case against a “state-owned vertically integrated energy group,” which has contracts with “several power plants” in various EU countries. The subsidiary of the anonymous company in the case study is remarkably similar to Russia’s nuclear energy firm Rosatom, which is currently building the Paks II nuclear power plant in Hungary.

The fertilizer industry is interested in the new tool to tackle “gas dual pricing,” a practice by which countries such as Russia sell their gas at a lower price domestically, giving their own fertilizer companies — for whom gas is the number one input — an edge over foreign players.

“Given that the EU anti-dumping and anti-subsidy instruments cannot address every particular market distortion situation arising, this new instrument might have potential corrective powers,” Fertilizers Europe Director General Jacob Hansen said.

Barbara Moens and Sarah Anne Aarup contributed reporting.

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