Insight
Should the EU develop ‘European champions’ to fend off Chinese competition? by John Springford 5 March 2020
China is distorting world trade through its aggressive industrial policy. But fostering ‘European champions’ in order to compete is premature – and risky. On February 4th the economy ministers of Germany, France, Italy and Poland sent a letter to competition commissioner Margrethe Vestager asking for a review of EU competition policy. They demanded that the European Commission “introduce more justified and reasonable flexibility” to its decisions about mergers between European companies, to “take better account of third countries’ state intervention”. In 2019, the Commission had blocked Siemens’ attempt to buy Alstom, a French train manufacturer, leading France and Germany to raise concerns that China’s state-subsidised manufacturers, including train manufacturer CRRC, have been distorting global competition. Although they have backed down from their original proposal that the European Council should be able to overrule the Commission’s merger decisions, France and Germany want the Commission to allow more tie-ups of manufacturers if they are facing unfairly subsidised competitors from China and elsewhere. But it is unlikely that this policy would work without cross-subsidising European ‘champions’ through higher prices for European customers. A growing consensus is emerging in the EU and the US that China is distorting competition globally in two ways. First, the Chinese government is engaging in ‘import substitution’ in its domestic market. China is accused of sheltering domestic companies from competition through ‘buy Chinese’ public procurement policies; enacting licensing requirements that discriminate against foreign companies; requiring foreign companies to transfer technology to Chinese companies in order to build factories there; and granting Chinese firms stronger intellectual property rights than foreign ones. Second, through the state-directed financial system, the government provides cheap capital to Chinese companies in strategic sectors. The Chinese government hopes that it can more rapidly attain technological parity with developed countries through these policies, moving up the manufacturing value chain and developing world-beating companies. And while these policies are a well-trodden path for developing countries, many Europeans believe China’s size and rapid growth makes the need for swift action all the more pressing, especially because the EU retains a large industrial base compared to the US. CER INSIGHT: Should the EU develop ‘European champions’ to fend off Chinese competition? 5 March 2020
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