China’s Belt and Road Initiative under scrutiny in the EU

EU anti-subsidy: are we bracing for a new trend?

In the current environment of trade protectionism, European Union (EU) trade defense measures play an increasingly important role to protect the domestic industry from unfair imports. In the last two years, various anti-subsidy investigations have been initiated directly against the People's Republic of China (PRC) or, indirectly, against other foreign states hosting Chinese foreign direct investment schemes. The EU is extending the boundaries of its trade defense measures in a recent decision.

“Fitting” foreign direct investment into the subsidy box

A product is considered to be subsidized if it benefits from a countervailable subsidy granted by the government or any public body within the territory of the country of origin or export. The primary idea of a subsidy is that the state in question grants or maintains a subsidy within its territory. The EU choses now to adopt a wide interpretation of this territorial aspect in order to address foreign direct investment by Chinese companies abroad.

In certain woven and/or stitched glass fiber fabrics (GFF) (OJ L 189/1), the EU imposed anti-subsidy measures on exports of two Egyptian companies established in an economic cooperation zone between Egypt and the PRC.  The two companies produce GFF in Egypt, which is exported to the EU from the economic cooperation zone. The ultimate parent company of these two companies is owned by a Chinese State-owned entity. The two companies are financed with funds coming from the PRC, they are using input materials and equipment imported from there, they are directed by Chinese managers and they are using Chinese know-how.

The EU concluded that Egypt supports Chinese economic activity on its territory. The measures by the PRC could therefore be attributed to Egypt. Consequently, the EU considered that the preferential financing granted by the PRC to the GFF’s exporting producers in the zone amounts to financial contributions by Egypt.

Some key takeaways

EU trade defense rules continuously adapt to a changing global landscape. While anti-dumping investigations still remain the most prominent, anti-subsidies investigations might increase further in importance and prove a useful instrument to compete against new rivals.  It seems that the Commission has clearly chosen the path to impose countervailing duties on non-Chinese imports for the reason that they have benefitted from Chinese subsidies. All investments in the framework of the Chinese One Belt – One Road initiative could therefore become under scrutiny. This could also be a precedent for other countries to scrutinize Chinese and/or other third country investments linked with imports into their territory.

Exporters and importers should keep this in mind and direct their operational activities accordingly. Practices such as a diversified supply chain and price monitoring program will equip better economic players against the uncertainties in the global trade landscape.