EU looks at new trade tactic against Chinese firms

Wed May 30, 2012 6:01pm EDT

* Ministers to discuss Commission trade investigation

* EU companies currently vulnerable to retaliation

* Brussels meeting coincides with China trade minister visit

By Sebastian Moffett and Robin Emmott

BRUSSELS, May 31 (Reuters) - EU trade ministers meet on Thursday to discuss possible action against Chinese companies accused of trading unfairly, including asking the European Commission to start an investigation into China's subsidies.

Many European companies would like protection from Chinese imports sold onto the EU market at what they consider artificially low prices. But they fear that, if they start their own industry complaints, they will be vulnerable to retaliation from the Chinese government, which could hamper their business in an increasingly important market.

With domestic demand stagnating, many European countries are increasingly dependent on exports for growth. Highlighting the sensitive nature of trade relations with Beijing, EU Trade Commissioner Karel De Gucht will receive China's Minister of Commerce Chen Deming in Brussels just hours after the meeting of EU trade ministers.

Diplomats said the idea of giving a strong political mandate to the Commission for an investigation appeared to be gaining pace.

"This is something that a lot of member states support," said an EU diplomat with close knowledge of the issue. "But it hasn't been discussed widely so the meeting will give a real sense of the appetite for this."

The European Commission, which handles trade issues for the 27-nation European Union, would like to take action against China's top telecoms gear makers Huawei and ZTE Corp , according to several EU diplomats. The EU executive thinks they receive illegal state subsidies to undercut rivals in Europe - an accusation the two companies deny.

Though the Commission has the authority to launch its own investigation, diplomats and officials say political support from member states would give the move more legitimacy at a time of delicate relations with China.

"A political mandate would mean a great deal," said one EU official who declined to be named.

De Gucht said in May that the Commission might in the future launch cases on its own initiative, so that no foreign government could blame a European company for launching a case. He said the aim was to get round companies' fear of retaliation in countries, such as China, that practice "state capitalism" - close government control of privately-owned business.

EU trade with China is booming and bilateral commerce is expected to reach a record high of 500 billion euros ($620 billion) this year. China is the EU's second biggest trading partner after the United States. The bloc is China's biggest.

NOT FOOLPROOF

In the past year or two, the EU has been more active in fighting what it sees as unfair trade practices, challenging Chinese subsidies to makers of glossy paper and looking into complaints over cheap credit to Chinese firms.

The case against Huawei and ZTE was raised at a meeting in May of the EU trade policy committee, according to one EU diplomat. The accusation is that their low prices hurt European equipment suppliers such as Alcatel-Lucent and Nokia-Siemens Networks.

Still, some trade analysts question the effectiveness of a new role for the Commission. One problem is that in sectors with just a few dominant players, it would be easy to guess what companies might benefit from the Commission's action.

Moreover, a confrontational relationship with China might hurt the long-term prospects of European companies in a promising future market, while defence against Chinese companies in Europe might not boost European businesses much.

"The problems that European companies are facing are not problems of the European market," said Fredrik Erixon, director of the European Centre for International Political Economy, a Brussels-based think-tank. "The problems facing European firms are predominantly inside China."

That is why an investigation is a tactic to be used sparingly. Germany, which accounts for nearly half of EU exports to China, has been reluctant to give the Commission a free hand in using the tactic.

Analysts say that, with Huawei and ZTE, Germany has an interest because a part-German firm, Nokia-Siemens, is affected.

"If the Commission does launch a case it would be expected to provide evidence," said one EU diplomat. "People would want to see that the political and strategic implications of this are fully bottomed out."