The European Commission’s ban of the planned merger of the Siemens and Alstom train divisions in May 2019 put the issue on the front page: Is the European internal market well equipped to adequately deal with the challenges posed by the China’s economy and Chinese companies, such as the railway giant China Railway?

ZEW President Professor Achim Wambach on the challenge of the European Single Market.
ZEW President Professor Achim Wambach on the differences between the European and Chinese economic models.

The ban caused a massive stir back then; the German and French ministers for economic affairs accused the EU Commission of defining the market too narrowly in its decision, thereby not sufficiently taking into account long-term developments. The industrial strategy of the Federal Minister for Economic Affairs and Energy, Peter Altmaier, could also largely be understood as a necessary protective measure against Chinese companies in response to the Commission’s decision.

China’s economy plays by its own rules. The Chinese economic model of the “socialist market economy with Chinese characteristics” is characterised by the state intervening in economic activity in a plethora of ways to achieve and maintain its industrial policy goals.

In order to avoid competitive disadvantages for European companies as a result of such policies, there has been discussion for some time about possible reforms. In cross-border trade, European companies are protected by anti-dumping and anti-subsidy instruments, but the European market economy is nonetheless far from being perfectly protected in certain situations. An example of this is when third countries subsidise other companies which then, in order to avoid anti-dumping or countervailing duties, relocate their production to the EU and sell their products here. Competitive disadvantages also exist when subsidised companies are in a position to submit better bids in company acquisitions or public procurement procedures.

In the EU Single Market, State aid control exists in order to avoid distortions caused by state subsidies. However, subsidies granted by non-EU governments that have an impact on the Single Market fall outside EU State aid control. To fill this regulatory gap, the European Commission presented a White Paper, featuring three instruments. One of these instruments is designed to generally capture the distortive effects of these subsidies, while the other two specifically address distortions in company acquisitions and public procurement procedures.

The German Monopolies Commission has dealt extensively with the challenges posed by China’s state capitalism in its latest biennial report published at the end of July. In the report, the Commission advocates the introduction of an instrument that largely ensures equal treatment of third country subsidies and State aid granted by Member States. While the instruments proposed in the White Paper refer to subsidies as defined in the anti-subsidy rules, the third country aid instrument would be aligned with the State aid rules.

A viable alternative to protecting the European Single Market would be to defend companies directly; other instruments under discussion therefore try to strengthen European companies. However, these instruments would also exacerbate competition problems. In this way, “defensive mergers” would pose similar problems as defensive (export) cartels or defensive aid. The restriction of competition resulting from such measures would be primarily at the expense of consumers, not to mention the risk of getting into a subsidy race.

These rules apply to the European Single Market. As for the Chinese market, fair conditions should be sought through international agreements. In this respect, the planned EU–China investment agreement is paramount, although it should also be extended to include agreements on granting subsidies. The conclusion of the negotiations on this agreement, which has lasted more than six years now, was actually expected for this year.

This article was previously published on 21 August 2020 in the “Neue Zürcher Zeitung”.

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