EU's Foreign Subsidies Regulation Challenges Chinese Enterprises
Enforcement of EU rules poses concerns for Chinese businesses over compliance and trade barriers.
China's Ministry of Commerce (MOFCOM) has released its assessment of the European Commission's recent enforcement of the European Union’s Foreign Subsidies Regulation (FSR), highlighting significant trade and investment barriers for Chinese companies operating within Europe.
The FSR, implemented on July 12, 2023, mandates companies to disclose any subsidies received from foreign governments when engaging in business activities, such as mergers, acquisitions, or public procurement, within the EU.
The regulatory scrutiny has already impacted prominent Chinese entities.
CRRC Qingdao Sifang Locomotive Co. Ltd., for instance, withdrew from a €610 million tender to supply electric trains in Bulgaria following an in-depth public procurement investigation by the European Commission.
Similarly, Shanghai Electric exited a tender for a photovoltaic park project in Romania due to regulatory investigations.
Moreover, Nuctech, a Chinese leader in security inspection technology, found itself embroiled in the first litigation case under the FSR after resisting an unannounced inspection by the European Commission, which demanded data stored outside the EU. The EU’s General Court upheld the Commission's request, dismissing Nuctech’s appeal.
These developments prompted the China Chamber of Commerce for Import and Export of Machinery and Electronic Products to file a formal grievance with MOFCOM, prompting an investigation into FSR enforcement under China’s trade laws.
MOFCOM identified ambiguities in the FSR’s definitions, especially concerning what construes a 'foreign subsidy,' challenging for companies to adhere to notification standards without risking penalties.
The compliance complexities don't end there.
Companies must navigate extensive requests for detailed information about subsidiaries and parent companies, often under tight deadlines, exacerbating the risk of penalization for non-cooperation.
MOFCOM contends that such practices not only harm the business reputation of Chinese enterprises in Europe but also disrupt their supply chains and customer relationships.
Financially, MOFCOM estimates FSR-related investigations have cost Chinese businesses over 7.6 billion Chinese yuan (more than $1 billion) in project abandonments, with other affected ventures exceeding 8 billion yuan.
These increased compliance costs undermine the competitive edge of Chinese firms in the EU.
Legal experts also point out the regulatory hurdles posed by the FSR, as most accounting systems are not tailored to track foreign subsidies specifically.
Scholars highlight that essential FSR concepts like 'market distortions' and the 'balancing test' remain unclear, further complicating compliance, especially for companies from nations with significant state-owned enterprises, such as China or Gulf countries.
MOFCOM aims to advocate for the removal of trade barriers and to explore resolutions for these challenges, perhaps through bilateral dialogues or multilateral platforms like the World Trade Organization.
As the European Commission reaffirms its commitment to rigorously enforce the FSR, it is imperative to foster constructive discourse with Chinese entities to ensure a balanced market environment in the EU.
The FSR, implemented on July 12, 2023, mandates companies to disclose any subsidies received from foreign governments when engaging in business activities, such as mergers, acquisitions, or public procurement, within the EU.
The regulatory scrutiny has already impacted prominent Chinese entities.
CRRC Qingdao Sifang Locomotive Co. Ltd., for instance, withdrew from a €610 million tender to supply electric trains in Bulgaria following an in-depth public procurement investigation by the European Commission.
Similarly, Shanghai Electric exited a tender for a photovoltaic park project in Romania due to regulatory investigations.
Moreover, Nuctech, a Chinese leader in security inspection technology, found itself embroiled in the first litigation case under the FSR after resisting an unannounced inspection by the European Commission, which demanded data stored outside the EU. The EU’s General Court upheld the Commission's request, dismissing Nuctech’s appeal.
These developments prompted the China Chamber of Commerce for Import and Export of Machinery and Electronic Products to file a formal grievance with MOFCOM, prompting an investigation into FSR enforcement under China’s trade laws.
MOFCOM identified ambiguities in the FSR’s definitions, especially concerning what construes a 'foreign subsidy,' challenging for companies to adhere to notification standards without risking penalties.
The compliance complexities don't end there.
Companies must navigate extensive requests for detailed information about subsidiaries and parent companies, often under tight deadlines, exacerbating the risk of penalization for non-cooperation.
MOFCOM contends that such practices not only harm the business reputation of Chinese enterprises in Europe but also disrupt their supply chains and customer relationships.
Financially, MOFCOM estimates FSR-related investigations have cost Chinese businesses over 7.6 billion Chinese yuan (more than $1 billion) in project abandonments, with other affected ventures exceeding 8 billion yuan.
These increased compliance costs undermine the competitive edge of Chinese firms in the EU.
Legal experts also point out the regulatory hurdles posed by the FSR, as most accounting systems are not tailored to track foreign subsidies specifically.
Scholars highlight that essential FSR concepts like 'market distortions' and the 'balancing test' remain unclear, further complicating compliance, especially for companies from nations with significant state-owned enterprises, such as China or Gulf countries.
MOFCOM aims to advocate for the removal of trade barriers and to explore resolutions for these challenges, perhaps through bilateral dialogues or multilateral platforms like the World Trade Organization.
As the European Commission reaffirms its commitment to rigorously enforce the FSR, it is imperative to foster constructive discourse with Chinese entities to ensure a balanced market environment in the EU.
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