EU goes softer on China’s subsidies than on Britain’s
Brussels is not using its investment deal with Beijing as a way to get tough on state support.
Despite repeated pledges to create a more balanced economic playing field with China, the EU has ultimately taken a softer approach to Beijing’s subsidies in a trade deal secured at the end of last year than it did toward Britain in the post-Brexit accord.
One of the more concrete aspects of the EU-China Comprehensive Agreement on Investment is that Beijing has secured a greater threshold within which it can give cash to its companies under the terms of the pact than Britain did in its deal, without having to be transparent about it.
A draft of the EU-China investment deal seen by reporters stipulates that public support below 450,000 Special Drawing Rights (€533,000) over three years will not be regarded as subsidies. By comparison, the EU-U.K. deal says that subsidies only pass under the radar if they are under 325,000 SDR over the same timeframe. SDR is an accounting unit used by the International Monetary Fund.
Also, in direct contrast to the U.K.-EU agreement, fights over what the parties see as the harm done by subsidies are explicitly excluded from the dispute resolution mechanism envisaged in the Beijing-Brussels deal. While the Commission insisted that the dispute resolution mechanism can be used to query whether the other party is being transparent in declaring certain subsidies, it conceded that the mechanism will not tackle the tougher issue of how to confront actual subsidy payments.
The EU-China deal was agreed at a political level in late December but still needs approval by the European Parliament, which could block it over concerns about China’s human rights abuses.
The Commission’s rationale for the 450,000 SDR figure is that it is a standard in trade deals, such as the ones with Japan and Mexico. The Commission also often insists that it plans to tackle Chinese subsidies through measures beyond the investment deal. Instead, Brussels wants the investment deal to pursue a far looser goal of improved transparency, rather than turning the screws on Chinese subsidies through a hard-hitting dispute settlement mechanism.
“The reasons for such exclusion [from dispute settlement] are self-evident and do not diminish the robustness and enforceability of the detailed transparency rules,” a person at the European Commission said.
Both parties will have to make public the subsidies they’ve granted to specific service sectors, according to the EU-China deal text. On a yearly basis, China and the EU will have to disclose cash boosts for sectors ranging from financial services and maritime transport through to telecoms, construction work and retail.
The deal also includes a consultation process for parties to investigate subsidies they deem to threaten the free market. “The requesting party may seek additional information about the subsidy,” the text reads.
But this consultation method is more akin to mediation based on goodwill than to a form of dispute settlement.
“The requested party shall use its best endeavours to find a solution with the requesting party. Any solution must be considered feasible and acceptable by both parties,” the treaty says.
“This is an investment agreement, and investment is not a natural placeholder for disciplines like this, because … you must be able to enforce it,” said Hosuk Lee-Makiyama, director of the ECIPE think tank. “We can’t expropriate a Chinese business because … they subsidize their economy. There just isn’t a credible threat.” Instead, the bloc always has the option to impose unilateral countervailing duties against any market-distorting subsidies.
The subsidy provisions in this deal don’t cover the same ground as the bloc’s foreign subsidy white paper, which suggested capping foreign cash at €200,000 per company established in the EU.
“These commitments do not affect the adoption of autonomous measures by the EU to address distortions in the European internal market created by foreign subsidies,” the Commission said in its questions-and-answers sheet on the Sino-European investment pact.
Federico Ortino, a trade law professor at King’s College London, argued that the Beijing-Brussels investment deal was intended to push for greater transparency about China’s payments within China, while the EU’s separate approach as outlined in the white paper would seek to limit Chinese payments affecting the EU market.