Brussels toughens efforts to level the playing field with China

Brussels is seeking to prevent foreign state-subsidised companies from undercutting EU rivals when bidding in the highly lucrative public procurement market, as it expands its economic armoury to target alleged unfair dealing by Beijing and other capitals.

The European Commission crackdown on companies deemed to be benefiting from excessive public support from non-EU governments is in part a response to years of frustration over China’s perceived refusal to honour vows to open its markets to European businesses.

While falling far short of a US-style effort to “decouple” from China, the new proposals unveiled on Wednesday by commissioners Margrethe Vestager, Thierry Breton and Phil Hogan are the latest sign of a tougher EU approach to what it now dubs a “systemic rival”, diplomats said. Officials believe the economic slump triggered by the pandemic has only added to the urgency of the situation.

“It is obvious that some non-European companies bidding for procurement contracts have been benefiting from government subsidies — and we cannot permit this distortion of the internal market to continue,” Mr Breton told the FT. “This is a market that amounts to €2tn a year, and it will be particularly sensitive in the post-crisis era . . . When it comes to ensuring reciprocity in access to public procurement markets China still has some progress to make.” 

The mooted regime is not targeted at specific countries. But it comes just days ahead of summit talks between EU institutional leaders and China’s premier Li Keqiang on Monday. It comes amid broader EU concerns that the benefits of inward investment from China have often fallen short of expectations.

“Reciprocity is not there,” said Manfred Weber, the German leader of the centre-right European People’s party in the EU parliament. China was a potential threat to Europe’s economic interests and its western “way of life”. “In some fields China is a partner. But in the economic field it is a clear competitor.” 

Sceptics say, however, that EU policy towards Beijing is still compromised by the frequently competing imperatives of commerce and human rights, while tensions with the US risk forcing Europe into a choice between two superpowers it doesn’t want to have to make.

The commission proposals, which are being put out for consultation, are an attempt to address gaps in EU law when it comes to tackling perceived unfair subsidies to companies supported by governments outside the bloc. They attempt to address distortions in the single market generally, as well as during acquisitions of EU companies and public procurement processes. 

While the EU and China have been attempting to re-energise talks towards an investment treaty, diplomats warned expectations remain muted. The fate of a proposed summit of EU national leaders with President Xi Jinping in Leipzig that has been postponed from its original September date is uncertain. “They are not implementing what they agreed in the past, so that doesn’t create trust for the future,” said one envoy. “The time is not right for anything very ambitious.”

Analysts say the package from Brussels shows the EU has moved towards a better-defined economic posture towards China more quickly than it has developed a wider geopolitical strategy, including in supposed priority areas such as human rights.

EU countries have been generally been cautious in their responses to Beijing’s security crackdown in Hong Kong and its internment of an estimated 1m Uighur Muslims in the western region of Xinjiang.

“It’s like a two-track approach,” said Janka Oertel, Asia programme director at the European Council on Foreign Relations think-tank. “On the trade and broader economic competition part the direction of travel is a lot clearer. What’s missing is the wider policy bit: where do we position ourselves on human rights and the US-China confrontation?”

A further complication is the fraying of the EU’s relationship with the US, which has made it harder to partner with Washington against Beijing in areas of shared concern including such as World Trade Organization reform or security threats from Chinese technology.

Josep Borrell, the bloc’s foreign policy chief, has acknowledged the complications caused by the growing transatlantic friction and the impetus that has given for the EU to act independently.

“Amid US-China tensions as the main axis of global politics, the pressures to ‘choose sides’ are increasing,” he blogged last week. “In rougher seas, the EU’s own interests and values should be our compass.”

Divisions among EU member states have narrowed since the days when disagreements among them meant the bloc did not even mention China in a 2016 statement on an international court ruling that dismissed Beijing’s territorial claim to most of the South China Sea.

This convergence has been driven in part by disappointment about the benefits from Chinese projects in countries such as Greece and Poland. “The beneficiaries of Chinese investment have had an opportunity to see how it works over the long term, and it is not always in the best interests of the recipient countries,” said one diplomat.

It has been intensified recently by Beijing’s lack of openness during the early stages of a pandemic that then raged through many European countries.

“Overall scepticism has been on the rise and China’s behaviour in the coronavirus crisis has been very important in that,” Ms Oertel said. “There is a clearer understanding of China’s intentions and ambitions and that does change policies in the long term.”

With additional reporting by Mehreen Khan in Brussels