The EU’s foreign subsidy rules are deterring Chinese firms. At what cost?

The EU’s foreign subsidy rules are deterring Chinese firms. At what cost?

POLITICO — 2026-07-30

News from Brussels

 Linlin Liang is the face of Chinese business in Europe. She is best known for a one-liner she often delivers at Brussels conference panels: the EU’s Foreign Subsidies Regulation is a “nuclear weapon.”

Like any weapon, the FSR has a specific target: foreign subsidies that distort competition. It is designed to detect whether a suspiciously cheap offer in a public transport tender is powered by unfair funding from, say, Beijing, or whether deep-pocketed Gulf states are behind a splash to buy an ailing European chemicals company.

Three years after it took effect, the FSR has had one clear impact: deterrence. Former industry chief Thierry Breton claimed an early victory for the tool in 2024 when Chinese train manufacturer CRRC dropped out of a Bulgarian rolling-stock tender. A handful of Chinese firms followed suit, with lawyers advising on those procedures saying they are just the tip of the iceberg.

“The clearest early success of the FSR is arguably its deterrent effect, particularly in public procurement,” Alexandra Rogers, a partner at law firm Norton Rose Fulbright, told POLITICO.

Brussels has also run the subsidy playbook against CRRC, imposing conditions in a Lisbon metro tender that resulted in the contract going to a Polish bidder earlier this year. It opened a full-scale investigation in February into wind-turbine maker Goldwind. In December, it raided Temu’s Irish premises as it opened in-depth probes into Nuctech, which makes airport security scanners, and e-commerce giant JD.com’s purchase of Mediamarkt owner Ceconomy.

China has repeatedly lashed out at the instrument, and not only through Liang, who represents the China Chamber of Commerce to the EU. Beijing’s Ministry of Commerce declared in January 2025 that EU practices under the FSR constitute trade and investment barriers, and more recently condemned the tool’s extraterritorial reach. 

The Commission acknowledged the deterrent effect in its self-assessment of the FSR this month, saying the tool remains “overall fit for purpose” while conceding that tweaks may be needed to reduce the compliance burden on companies.

Chilling effect

With the EU rushing to put together a strategy to respond to Beijing’s export dominance, putting the brake on Chinese investment may initially look like a success.

But some worry this may discourage the very investments Europe needs and could backfire on governments, leaving them with fewer, less competitive alternatives in public tenders. 

“The key policy question is whether deterrence should itself be regarded as a success,” said Eva Monard, a partner at Hogan Lovells Cadwalader. “In a number of industries that are central to Europe’s competitiveness ambitions, Chinese companies are among the global technology and manufacturing leaders.” 

“In some of these sectors, meaningful cooperation with Chinese industry may be one of the most (if not the only) realistic ways for Europe to accelerate its own industrial development and reduce technological gaps.”

“Europe can only seriously protect its internal market if the rules against foreign state aid are applied rigorously and swiftly,” Dirk Gotink said. 

A stark example is decarbonization, which would be all but impossible without some degree of reliance on China. Beijing has a stranglehold over the processing of many critical minerals, refining about 90 percent of the rare earths used in wind turbines and electric vehicles, as well as most lithium, cobalt and other metals used in batteries.

Merger scrutiny

There is also a risk that the chilling effect extends to investors from other regions, for example Gulf states, which have so far been the most affected by the merger control provisions of the FSR. 

Abu Dhabi National Oil Company’s $16 billion purchase of German chemicals firm Covestro exposed a rift between the FSR’s stated aims and the need to attract investment. 

The Commission opened an in-depth FSR probe into the deal over concerns that the new entity would unfairly undermine competitors in Europe because of its generous Gulf backing — while Germany lobbied hard for approval of the deal, which promised a shot in the arm to its ailing chemicals sector. 

A solution was ultimately found as ADNOC agreed to share Covestro’s green technology patents with certain market players and give up an unlimited state guarantee. “The first [merger] clearance decisions suggest that the Commission is seeking workable solutions rather than using the FSR as a tool to systematically block foreign investment, which is a positive signal,” Monard said.

But for Rafique Bachour of Skadden, Arps, Slate, Meagher & Flom, the Commission still needs to sharpen its assessments to target only problematic investment. 

“When we advise clients on investment opportunities, a central consideration is the regulatory burden associated with a given jurisdiction. Where that burden is high or uncertain, it inevitably impacts the region’s overall attractiveness for investment,” said Bachour, who advised ADNOC on the deal.

Industry hopes

Despite its limits, the FSR has reassured European businesses exposed to China’s aggressive trade stance. 

“Discussions with large European companies operating in procurement-intensive sectors frequently reveal a high degree of satisfaction with the FSR,” said Rogers at Norton Rose Fulbright. “Many believe it is helping to create a more level competitive playing field, especially through the ex-officio investigation mechanism.”

The wind turbine sector, for example, is closely watching the Commission’s investigation of Chinese manufacturer Goldwind, although no outcome is expected before August 2027. Goldwind is suspected of having received state support — including direct grants, tax breaks and preferential financing — that enabled it to undercut European rivals.

That timeline is too long to effectively protect the internal market, according to Dutch center-right MEP Dirk Gotink, a member of the European Parliament’s trade committee. 

“Europe can only seriously protect its internal market if the rules against foreign state aid are applied rigorously and swiftly,” Gotink said, criticizing the length of the Goldwind preliminary probe, which took almost two years before moving to an in-depth investigation. 

“It is proving more difficult than ever to guarantee a level playing field, and for that, a robust European law on foreign subsidies is absolutely essential,” he said.

No one’s doubting that the FSR is here to stay, albeit with tweaks. “The Commission’s review suggests that the debate has moved from whether the FSR is needed to how it can be made more proportionate, predictable and risk-based,” said Francesca Miotto, a partner at A&O Shearman.

The Commission said it was prepared to adjust thresholds and simplify notification forms to accommodate widespread criticism of the FSR’s administrative burden. 

The changes should be adopted through a Commission delegated act. But Bernd Lange, chair of Parliament’s trade committee, indicated that MEPs expected to be involved in the changes when the Commission presented its report this month. “We will discuss this continuously, I’m sure,” he said.