File photo of the flags of the European Union and China. /CFP
Editor's note: Alexandr Svetlicinii, a special commentator on current affairs for CGTN, is an associate professor of Global Legal Studies at the University of Macau, where he also serves as program coordinator for the Master of Law in International Business Law. The article reflects the author's opinions, and not necessarily the views of CGTN.
China's Ministry of Commerce (MOFCOM) recently announced the results of its investigation into the European Commission's enforcement of the EU foreign subsidies regulation (FSR). MOFCOM concluded that current enforcement trends regarding EU rules on foreign subsidies constitute trade and investment barriers for Chinese enterprises doing business in Europe.
The FSR, which came into effect on July 12, 2023, requires companies doing business in Europe to notify the European Commission of subsidies received from foreign governments. This obligation applies to investments through mergers and acquisitions as well as public procurement.
The first in-depth investigation involving public procurement targeted the Chinese company CRRC Qingdao Sifang Locomotive Co. Ltd., which participated in the public procurement procedure in Bulgaria for the purchase of several electric trains. CRRC subsequently withdrew from the tender, which had an estimated value of 610 million euros (over $625 million). The European Commission's investigation of a public tender for the construction of a photovoltaic park in Romania led to the withdrawal of another Chinese company, Shanghai Electric.
The first litigation under the FSR involved a Chinese company, Nuctech, which specializes in security inspection equipment. The European Commission conducted an unannounced inspection at Nuctech's premises and requested the company to provide information stored on computer servers outside the EU. The EU General Court later dismissed Nuctech's request to suspend the European Commission's demand for information.
As Chinese companies are being increasingly targeted by the European Commission's investigations under the FSR, the China Chamber of Commerce for Import and Export of Machinery and Electronic Products submitted a formal complaint to MOFCOM, requesting an investigation into FSR enforcement practices under China's trade barriers legislation. MOFCOM determined that vague definitions regarding what constitutes a "foreign subsidy" under the FSR create substantial difficulties for companies, which must notify such foreign subsidies or risk substantial penalties for failing to provide the requested information.
The European Commission building in Brussels, Belgium, October 4, 2024. /Xinhua
According to MOFCOM's findings, which legal practitioners advising companies in the EU have also confirmed, compliance with FSR, requires providing a large amount of information related to investments and operations of the parent companies and subsidiaries. Frequently, the European Commission requested this information to be provided in a short period of time, which further complicates compliance and creates risks for companies to be penalized for insufficient cooperation with the European Commission.
In addition, MOFCOM pointed out that the European Commission's investigations and unannounced inspections damage the business reputation of Chinese enterprises in the EU by raising doubts about their compliance with EU laws and regulations. This may cause further loss of customers or disruption of supply chains of the Chinese companies in the EU.
MOFCOM estimated that losses to Chinese enterprises, including the value of bid projects abandoned following FSR investigations, amount to 7.6 billion Chinese yuan (more than $1 billion), with the value of other affected projects exceeding 8 billion yuan. Furthermore, increased compliance costs further undermine the competitiveness of Chinese companies doing business in the EU.
MOFCOM's concerns about emerging enforcement practices under the FSR have been echoed by legal practitioners and academics. Lawyers advising companies doing business in the EU frequently acknowledge that the FSR poses significant compliance challenges, as the required information is often not accounted for by standard accounting and reporting systems. Companies must make additional efforts to identify potential foreign subsidies they may have received. Academics have also noted that important FSR concepts such as "market distortions" and "balancing test" remain unclear.
Naturally, all these uncertainties will present a specific burden for companies coming from jurisdictions with a substantial presence of state-owned enterprises, such as the Gulf countries or China.
It is worth noting that two major objectives of MOFCOM's investigation are to promptly address trade barriers affecting trade and investment of Chinese enterprises abroad and attempt to find solutions for the observed grievances.
MOFCOM's findings thus send an important message to the EU authorities highlighting how the FSR enforcement practices affect the trade and investment activities of Chinese companies in Europe. Following its investigation, MOFCOM can engage in bilateral consultations, resort to multilateral dispute settlement mechanisms such as the World Trade Organization, or resort to other remedies.
As the newly constituted European Commission has announced its intention to vigorously enforce FSR, a constructive dialogue between the EU authorities and Chinese companies is especially vital to preserving a "level playing field" and a business-friendly environment in the EU's internal market.
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