Merkel speaks at the annual congress of the Federation of German Industry, September 25, 2018 | Sean Gallup/Getty Images German industry seeks to push harder EU line on China Europe’s industrial heartland signals it wants tougher policies from the next Commission.

German industry today launched a major offensive to ensure the next European Commission will take a harder line on China.

Ahead of this year's European election, Germany's most influential industry federation is calling on Brussels to ramp up EU defenses against what it sees as unfair competition from Beijing.

Crucially, its 54-point plan, obtained by POLITICO, seeks a bigger role for the European Commission's powerful competition unit as the EU tries to combat China's subsidized exports, industrial overcapacity and corporate buyouts.

The proposals from the Federation of German Industries (BDI) offer a sign that Berlin and the EU are likely to gravitate toward a tougher position against Beijing after the departure of the more China-friendly U.K. from the 28-member bloc.

"The People's Republic is establishing its own political, economic and social model," said BDI President Dieter Kempf. Politicians could no longer afford to "simply ignore the challenges China poses to the EU and Germany," he added.

A tougher line on China from Germany would align Berlin more closely with Paris.

"A battle of economic models is emerging," the BDI said in Thursday's paper.

A tougher line on China from Germany would align Berlin more closely with Paris. It would, however, also revive charges of hypocrisy from countries such as Portugal and Greece, which argue that Germany pushed them to sell off prized assets to the Chinese during the financial crisis. Germany's critics say Berlin has only recently woken up to the risks posed by strategic Chinese buyouts in sectors with core know-how such as robotics.

Battle of the systems

The BDI plan represents a major shift in the way German businesses think and talk about China, which American and French officials often criticized as naïve.

For many years, the Chinese economy was seen as largely complementary to Germany's: China produced cheap consumer goods and components, while Germany produced larger machines and hi-tech products.

When the European solar cell industry was wiped out by subsidized Chinese competitors, the German economy ministry saw it as the price to be paid to maintain good relations with Beijing, which was more than offset by Germany's sales of luxury cars to the Middle Kingdom.

But as China moves up the value chain, Chinese subsidies pose an increasing threat to the German model. Chinese producers have now entered into direct competition with many traditional German champions.

As one of its lines of defense, the BDI on Thursday came out staunchly in favor of mergers that allow companies to bulk up into European champions. This is a subject of hot debate as Franco-German plans to merge Alstom and Siemens into a rail champion are meeting fierce headwinds over fears the two will form an uncompetitive behemoth in the EU. The Germans argue that EU regulators should take a more global perspective when calculating the effects of merger concentrations, and not just look at the harm to consumers in Europe.

France leads the charge for reciprocity but Britain and Sweden argue such measures would be counterproductive.

To fight Chinese subsidies, the BDI wants hard-hitting options on the table. EU state-aid rules only apply to European companies receiving subsidies, but the BDI wants these extended to cover "subsidies outside the EU." The bloc should also consider creating a new mechanism for “subsidy control” to assess whether takeovers are financed with subsidies, the BDI argued.

But the group also suggests fighting fire with fire. This could mean taking account of “reciprocity” in tenders for big public procurement contracts like roads and railways. To date, France has led the charge for reciprocity, which means closing EU tenders to bids from companies based in (particularly Asian) countries that restrict European access to tenders on their soil. Free-trading countries such as Britain and Sweden have long argued that such measures would be counterproductive and would close European markets to the best-value bids.

Changing the focus on Chinese takeovers

The BDI also called on the EU to change its approach to the Chinese state's influence in mergers and acquisitions.

The European Commission's directorate general for competition has long been under pressure to take a more holistic view of how it values the market power of Chinese enterprises owned or steered by the state. The EU often treats each state-owned company as a separate entity. This limits the perception by regulators that a company could be distorting competition by coordinating with other limbs of the Chinese state. The BDI is calling for updated rules that would allow the Commission to consider those companies as part of a bigger market player: China Inc. This would expand Brussels’ powers to crack down on buyouts.

European Commission Vice President Jyrki Katainen said on Wednesday that he is "open ... to look at the competition policy due to the changing market."

Many EU countries have pledged to push for "evolutions of the European rules applicable to competition and state aid."

In a little-noticed statement just before Christmas, 18 EU countries also called on the next Commission to rethink its industrial policy, specifically calling for changes to competition rules.

France, Austria, Croatia, Czech Republic, Estonia, Finland, Germany, Greece, Hungary, Italy, Latvia, Luxembourg, Malta, the Netherlands, Poland, Romania, Slovakia and Spain said they would push for "possible evolutions of the European rules applicable to competition and state aid" particularly to "review the state aid framework to ... promote the competitiveness of European industry at international level."

The countries also called for updating antitrust rules to "better take into account international markets and competition in merger analysis."

The BDI also stressed the value of so-called matching clauses, which have been overlooked as a potential weapon in EU state-aid policy. These clauses allow EU countries to offer state aid to investors to keep business in Europe, by matching the subsidies the companies are being offered by a rival such as China or Mexico.

German industry says it wants the scope of these matching clauses to be ramped up. The BDI sees such subsidies as an interim measure until the EU works out how to export its anti-subsidy standards internationally.

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