The Case of Nuctech: An Unending Saga of Market Distortion by the Chinese

The growing tensions between the West and China have taken a new turn this week, with Brussels officials being compelled to raid the offices of Nuctech, a Chinese security equipment maker company located in Europe. The reasons for the “unannounced investigation” are the prolonged concerns over China excessively and unduly subsidizing its firms to distort competition in the international market, dumping activities, and predating over the internal markets of Europe. Back in 2020, Nuctech was listed by the US amongst those needing stricter license requirements “for its involvement in activities that are contrary to the national security interests of the United States.”

The raid comes under the EU’s Foreign Subsidies Regulation, which came into effect in July last year. FSR is the set of rules enabling the Commission to address distortions caused by foreign subsidies. This, in turn, allows the EU to ensure a level playing field for all companies operating in the single market while keeping itself open to trade and investment.

Though the EU’s action may appear as protectionist, it is essentially an act to prevent the subsidies that distort the EU’s internal market. It is a measure to prevent their recipients from having an unfair advantage to acquire companies or obtain public procurement contracts in the EU which undermines fair competition. Under FSR, subsidies granted by non-EU governments will come under check, which were unchecked before the regulatory framework.

As observed by economists, the entire international trade fiasco is rather a result of a very simple demand-supply mismatch problem stemming from China. China is over-producing; its domestic market is not able to absorb its excess supply due to deflationary situations in the economy, and hence, Beijing is trying to capture foreign markets using unfair means to cater to its “structural overproduction.” Moreover, China is trying to fuel its economy with exports which is not sustainable and makes China sensitive to international shocks.

The US Secretary Antony Blinken, in his recent visit to China, also expressed his concern over PRC’s unfair trade practices and potential consequences of industrial overcapacity to global and U.S. markets in key industries of the 21st-century economy like solar panels, electric vehicles, and batteries. Calling China’s trade policies as “non-market economic practices, he said, “China alone is producing more than 100 percent of global demand for these products, flooding markets, undermining competition, putting at risk livelihoods and businesses around the world”.  

The current situation is the result of years of the EU resorting to dialogues with China on issues of massive state subsidies and overcapacity steel, aluminum, and green tech sectors. EU is now showing strict political and economic commitment to protect its core technologies. It has previously launched a probe into Beijing’s excessive support of electric vehicles, wind turbines, and hospital equipment.

Now, using stricter measures, including FSR and International Procurement Instrument, which are no more empty threats, but rather means of direct confrontation. The International Procurement Instrument (IPI) is an “instrument to restrict access to the EU internal market, including the area of public contracts, for third countries that have placed constraints on access to their markets for EU operators.”

With the use of these tools, Brussels has decided to show a real and effective threat and signal its intolerance towards China’s malpractices, which hamper the stability of EU economies. As put by Gunnar Wiegand, the ex-top diplomat on Asia at the European External Action Service,  “Nobody should be surprised that the instruments which have been created in quite a long process over the last few years are now finally, actually being used.[1]

The current conditions are a hint to the new future of international trade practices, which will be intolerant towards any unfair trade practices, and threats to their economy in the pretext of seemingly free trade. It is important to note that the plight and the resulting anguish being shown by the advanced economies is also shared by other emerging market economies, including India, Brazil[2] and South Africa[3], against the notoriety of China. In March 2024, Brazil launched investigations against China against the dumping of cheap industrial products.

To protect its industries, Brazil launched an investigation earlier this year against the imports of certain carbon steel sheets, which rose by a mammoth 85 percent. Brazilian steelmakers have requested the government to impose tariffs between 9.6 and 25 percent on imported steel. It is striking that in one year’s span, the import of steel and iron from China rose by almost 1 billion to Brazil[4].

In a nutshell, though the West is more proactively raising its voice against the excesses of China, it is a concern of both advanced and emerging economies alike. Chinese actions are detrimental to free trade and welfare in its exporting nations. As the EU and the US have done, there is a need for emerging economies also to join hands for collective action at the global level to call out China. Necessary dialogues at the international platforms, clear accusations backed by evidence, and corrective actions need to be a part of the package to prevent international trade from becoming disarray.





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