EU seeks to counter Chinese trade threat with M&A curbs

The European Union suggested a raft of measures to protect its industries from the potential threat of takeovers by companies bankrolled by China and other foreign powers.

In a bid to rein in Beijing’s trade ambitions on the continent, EU Competition Commissioner Margrethe Vestager unveiled plans on Wednesday to bolster local industries in fighting back against M&A and unfair competition from rivals subsidized by foreign states.

The suggested curbs, which could be formalized in draft legislation next year, could eventually lead to a ban on some firms from making acquisitions, or force them to divest assets, and allow the European Commission to impose fines. They effectively extend Europe’s strict system of state-aid limits to businesses worldwide.

“We want to be in control within our own territory,” Vestager told reporters at a press conference.“When it comes to foreign subsidies we have absolutely no control and no transparency.”

Europe, caught between China and an America in retreat from the world stage, is seeking to carve out its place in the global order. Its latest move comes just after it deployed tariffs to curb China’s “Belt and Road” infrastructure plan and just before new legislation on screening foreign-direct investment on national security grounds comes into effect.

In response to Wednesday’s proposals, China urged the EU to stick with World Trade Organization rules and “keep clear of protectionist moves, refrain from creating new trade barriers under the pretext of subsidies.” Subsidies are a commonly used policy instrument, China’s Mission to the EU said in an email to Bloomberg, adding that “developed countries such as those in Europe and the United States are the primary users of subsidy policies.”

Vestager insisted that the EU remains open for business and said, diplomatically, that “there is no specific country that we are thinking about” in the demand for “reciprocity” and a level playing field.

The 27-nation EU has been under pressure to better protect its local industries and repatriate supply chains after the global pandemic caused the steepest recession in almost a century and spurred a rout in equity prices.

A post-pandemic rescue plan presented by German Chancellor Angela Merkel and French President Emmanuel Macron last month aims to fortify Europe internally, but also contains measures to equip it to better face outside threats.

The 750 billion-euro ($845 billion) coronavirus recovery package would seek to help those countries most affected by the pandemic and includes a proposal that would allow the EU to take equity stakes in companies.

Governments are particularly alarmed at the prospect of European companies being bought by firms with unlimited credit lines or being forced out of business because rivals can afford to sell below cost.

Manfred Weber, a German lawmaker who heads the biggest European Parliament group, said in a statement his center-right Christian Democrats are “extremely concerned that China will benefit from the economic recession in Europe.” He urged the EU to move faster.

“China will not be impressed by a discussion paper. What we urgently need is legislative proposals to prevent outsiders from buying our strategic companies and know-how at a bargain price,” Weber said.

Moving Slowly

The EU is, as ever, moving slowly, with Vestager asking for “careful discussion” on the ideas by Sept. 23 before drawing up legislation next year that will need approval from EU governments and lawmakers before it enters into force. Many measures outlined are deliberately vague, such as which authorities will investigate companies that appear to be subsidizing below-cost pricing with foreign aid and how that should be punished.

The EU paper, which doesn’t mention China at all, foresees “an increasing number of incidences in which foreign subsidies appear to have facilitated the acquisition of EU undertakings.” Regulators are weighing extra scrutiny for dealmaking involving companies with more than 100 million euros in revenue or for all assets likely to generate significant revenue in future.

The EU’s executive arm suggests action against firms already active in Europe that use subsidies to compete unfairly with local rivals. Authorities could start investigations into cases that involved foreign state funding of more than 200,000 euros over three years. Companies could be forced to make “redressive payments” to European states, repay the subsidy to their home state or sell off units or assets to resolve the concerns.

Carles Esteva Mosso, the EU’s top state aid official, said regulators might also see a subsidy as more problematic when it helps a company in a market with few rivals or one that is growing fast. Measures could include demanding that a business grants access to others or that it offers a non-discriminatory license, he said.