EU Outlines New Powers to Protect Firms From Chinese Takeovers

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(Bloomberg) -- Companies from outside the European Union that benefit from state support face financial penalties for undercutting homegrown rivals and could potentially be banned from making acquisitions in the bloc under a set of suggestions due to be unveiled by the EU executive next week.

The European Commission will lay out a menu of options to counteract forms of state subsidy including tax breaks, capital injections by governments, debt relief and preferential financing terms. The penalties, according to a draft of the document seen by Bloomberg, may include restricting access to the EU market or forcing companies to divest parts of their business. The aim is to ensure a level-playing field between European firms and foreign competitors.

“State-owned enterprises may pursue business strategies which are driven not only by commercial considerations but also by broader political objectives and which are supported by public funding not available to privately-owned companies,” the commission’s document says. “It therefore appears particularly important to ensure a level-playing field for transactions with companies from such third countries.”

The move adds to signs of increasing protectionism in Europe, amid the steepest recession in almost a century. EU governments have been debating the “repatriation” of supply chains after the pandemic exposed the region’s vulnerability to disruptions while France and Germany say the bloc should reclaim its “strategic autonomy” by allowing the creation of companies big enough to compete with the U.S and China.

The commission cites “an increasing number of incidences in which foreign subsidies appear to have facilitated the acquisition of EU undertakings,” pointing to aluminum, steel, semiconductors, shipbuilding and the car sector, as “prone to foreign subsidies which provide their beneficiaries with a competitive advantage.” Such subsidies can be zero-interest loans, unlimited state guarantees, zero-tax agreements or dedicated state funding which might be “problematic” under EU state-aid rules.

The EU 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 more than 200,000 euros in foreign state funding 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.

The EU’s antitrust chief Margrethe Vestager has come under intense pressure from French and German politicians and businesses to take action on the challenge posed by China. Governments are 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.

The EU document raises several questions, asking for feedback on whether the new powers are “an appropriate response to the challenges outlined in the EU-China” paper last year. That document had painted Beijing as a systemic rival to Europe. Following a consultation period that runs until September, the policy options could be turned into legislation that would apply throughout Europe’s vast single market.

The commission declined to comment on the draft obtained by Bloomberg.

©2020 Bloomberg L.P.

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