EU gets tough as state support for Pirelli takeover spawns new policy

Mechanisms are being drawn up coordinating policies across the EU to combat perceived unfair takeover practices by foreign companies partly in response to anti-dumping findings

Though much of the focus ahead of this week's G20 Summit in Buenos Aires is on a likely clash on trade issues between Chinese President Xi Jinping and his US counterpart Donald Trump, there are also signs of a tougher stance from the European Union on what they view as unfair trade practices.

The EU recently stepped up the pressure on China with a detailed anti-dumping report to justify duties imposed on imports of Chinese truck and bus tyres, and is also moving forward with a new screening mechanism for foreign direct investment.

On 20 November the European Parliament's trade specialists reached agreement with the Commission and Council (the latter representing each of the 28 member states) on putting in place a formal screening mechanism for foreign direct investment, to ensure security and public order. At present there is a patchwork of national policies.

The goal of the proposed European investment-screening framework is to limit foreign threats to critical infrastructure, including in the energy, transport, communications, data, space and financial industries, and to critical technologies such as semiconductors, robotics and artificial intelligence.

EU governments would be allowed to request information, and offer comments on a foreign investment in a particular member country. In addition, the Commission could ask for information and issue an opinion.

The nation in which the investment was planned would have to give "due consideration" to any comments or opinions, as well as take "utmost account" of any commission view regarding a foreign investment deemed to affect a European project or programme.

The EU promises to use this tool in a transparent, predictable and non-discriminatory manner, but Beijing will clearly see itself as the main target.

In spite of their differences, China seeks to maintain friendly trade relations with the EU, as a counterbalance to its ongoing disputes with the Trump Administration, so the recent anti-dumping regulation, which sets out in a detailed way what the EU views as unfair support for Chinese exporters, will undoubtedly be viewed with dismay.

Ever since the acquisition of Pirelli in 2015, European tyre manufacturers have been complaining about what they view as unfair competition from China in the new and retread bus and truck tyre market.

Temporary duties on a number of Chinese tyre exporters were put in place for six months back in May. Definitive duties (in some cases lower than those proposed in May) were announced in October, and will run for five years.

On 11 November the EU Commission published a 273-page report on the matter, which includes setting out in detail the various layers of state support for the Pirelli acquisition.

In March 2015, China National Chemical Corporation, a state-owned enterprise subject to the control of the state-owned Assets Supervision and Administration Commission of the State Council (SASAC), and its wholly owned subsidiary, China National Tire & Rubber Corporation (CNRC), entered into a co-investment agreement for the acquisition by CNRC (through indirectly controlled companies) of Pirelli.

In its report, the Commission states that the Government of China (GOC) intervened in several ways to facilitate the acquisition of the 65 % stake in the Pirelli Group by CNRC.

First, CNRC received a grant of 500 million yuan (66 million euro) from SASAC, to promote global production capacity cooperation under the Belt and Road, in line with the Notice of the Ministry of Finance on Release of Central State-Owned Capital Operating Budget in 2016.

Second, CNRC received an 800 million euro preferential loan from a bank consortium including China Development Bank (CDB), EXIM and China Construction Bank (CCB). The loan agreement mentions as purpose of the loan the acquisition of Pirelli.

Third, CNRC received a 17 million yuan refund of the interest paid on this loan. This refund was granted by the Ministry of Finance for the acquisition of Pirelli's stock rights as part of the "key projects of 2015 special funds for the development of foreign trade", in line with the Notice on Appropriating Subsidized Funds of Key Projects of 2015 Special Funds for the Development of Foreign Trade and Economy.

Fourth, the GOC participated in the acquisition of the stake in the Pirelli Group by providing an equity participation worth 533 million euro via the Silk Road Fund (SRF), the government investment fund which is part of the Belt and Road initiative.

According to the EU Commission, the investment agreement deals with the practical details of the transaction, but is silent about the underlying conditions. The Commission says that it was not provided with any other documents between the SRF and the CNRC relating to this specific operation.

Finally, the GOC participated in the restructuring exercise within the China National Tire Group after the acquisition by providing an equity participation worth 266 million euro via the China Cinda Asset Management Company Ltd (Cinda) in the company holding the Pirelli Group's industrial tire business.

The EU Commission's conclusion is that all five interventions had the common objective to help CNRC acquire Pirelli.

For its research on the tyre market in the EU, the Commission looked closely at three other tyre companies in addition to China National Tire Group. These were Giti Group, Hankook Group, and Xingyuan Group.

The report determined that price undercutting from China is putting EU manufacturers under intense pressure, and concluded that duty will be imposed on tyre imports taking into account the calculations of unfair subsidies. A definitive countervailing duty has been imposed on imports of certain pneumatic tyres, new or retreaded, of rubber, of a kind used for buses or lorries.

The regulation is binding, and was directly applicable to all EU member states from 9 November.

Coming just before the G20 Summit, and a sensitive meeting with US President Trump, Beijing will not be happy with the details set out in the report of the wide variety of what the EU views as unfair subsidies, including access to cheap electricity for some tyre factories.

However, China may choose to be patient. The current five-year term of the EU Commission and Parliament is coming to an end, with elections for the parliament in late May. Over the summer of 2019, the soon-to-be 27 member states (the UK will probably have officially departed by then) will be jostling for position over the various Commission portfolios, as well as the important top job as President of the Commission, at present held by Jean Claude Juncker of Luxembourg.

That process will probably run through into September 2019, so China may be incentivized to make a limited response to some of the allegations, as the world's second largest economy bids to build up its relationship with the next Parliament and Commission.