China Has an Unfair Advantage in the EU Market. What Can Be Done to Level the Playing Field?

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

The dominance of Chinese state-owned enterprises in China’s domestic market is giving them unfair advantages in the European Union single market as well. The EU Commission recently released a series of recommendations for leveling the playing field regarding foreign subsidies. Unfortunately, while useful, these ideas are unlikely to be enough to deal with the issue.

Given the urgency of the matter, any solutions need to go beyond trade instruments toward competition ones, which have not been considered by the EU until now. But even so, the wealth of instruments offered to address the issue may prove insufficient for the challenge at stake.

The Sheer Size of Chinese Companies Has a Distorting Effect

The first reason relates to the good functioning of the EU’s single market, which requires a high degree of competition. Having companies that operate as monopolies — or make up part of an oligopoly — in other markets, especially ones as large as China’s, introduces distortions in the EU single market, whether the preferential treatment comes from subsidies or not.

This means that chasing subsidies granted, even if limited to China’s state-owned companies (SOEs), might not really tackle the issue. This is because the source of Chinese companies’ upper hand comes from their dominance and related extraction of rents in their own huge market — which is beyond the reach of EU commissioners. Their dominant positions are due to the lack of foreign companies’ access to the Chinese market and the generally unequal treatment of private companies versus state-owned companies.

Their Domestic Position of Dominance

Secondly, a position of dominance favored by subsidies or other means, such as lower interest payments per unit of debt and a lower tax burden, effectively allows for the extraction of rents. This can help finance the acquisition of companies abroad — more than half of which happen to be in Europe, according to China’s outbound M&A data.

Beyond financing acquisitions, Chinese companies can compete in Europe through…