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Competition vs. industrial policy: where do we draw the line?

Something old, something new

Debates about the interplay between industrial and competition policy – and whether competition law can and should prevent the creation of national champions – are nothing new. But this issue has gained considerable momentum around the world as both the technological revolution and the political shift towards national protectionism continue at pace.

Political backlash against EU competition policy in the wake of Siemens/Alstom

The EC’s decision in February to prohibit the Siemens/Alstom railway merger sparked intense criticism – particularly from France and Germany – on the basis that the merged entity would have been able to compete more effectively with Chinese and U.S. industry players. However, according to the EC, the parties could have – but failed to – adequately address its legitimate competition concerns by offering suitable remedies.

Indeed, notwithstanding often extensive lobbying, the EC is legally required to apply a competition-based test in merger control cases and has no powers to consider industrial policy concerns. By contrast, there is no constraint under EU law on a government of a Member State taking into account industrial policy concerns to approve an anti-competitive merger over which its national competition authority has jurisdiction, and many Member States have such mechanisms in place – albeit they are used rarely in practice.

A joint manifesto published in July by France, Germany and Poland rows back from the previous joint manifesto published by France and Germany in February, which advocated the softening of the EU competition rules, including by enabling ministers to intervene “in well-defined cases” on industrial policy grounds. The new proposal suggests that the EU’s Competitiveness Council (made up of Member State ministers) should have input on merger policy, while an Advisory Committee in merger control should feed input from Member States into EC decision-making based on the competitiveness of EU industry.

However, the prospect of increased state intervention has been met with concern in many quarters, most recently in a position paper by the Dutch government, on the basis that competition enforcement should remain independent from politics and that bigger is “not always better”.

It is clear that there is no uniform view on this topic among the Member States and it remains to be seen whether these initiatives will lead to actual change, or whether they are just the most recent example of a recurring theme over past decades.

“Faced with the challenges of a rapidly evolving digital economy and the populist trend towards protectionism, there is a now a clear division between what some stakeholders want from competition policy and what the current framework is able to deliver.”

- Thomas Elkins

Light at the end of the (railway) tunnel – other ways to ensure a coherent industrial policy

Notwithstanding the EC’s resolve (so far) to apply only competition-based principles when reviewing mergers, Competition Commissioner Vestager has acknowledged that there is still room for a European industrial policy. Indeed, it has been suggested that she may take on this portfolio herself. While EC President-elect von der Leyen’s policy programme is largely silent on reforming the EU Competition rules, she has indicated that she will “update” the EU’s industrial policy.

In the meantime, the EC has pointed to other ways to apply industrial policy objectives and to level the playing field with non-EU countries:

More flexible application of State aid rules. EU State aid rules only cover aid granted by Member States and do not cover potential distortive effects of unfair subsidies or support by third countries. The EC plans to identify before the end of 2019 how to address this. In the meantime, the EC has already relaxed the rules for Important Projects of Common European Interest, in relation to which Member States can pool their resources to support a project of common European interest in all sectors and can grant support to cover up to 100% of the funding gap. For example, the EC recently approved an alliance among France, Germany, Italy and the UK to finance €1.75 billion worth of research into micro-electronics.

Reciprocity in relation to public procurement rules. The EC has urged Member States to accelerate stalled talks over the International Procurement Instrument, which could be implemented as soon as this year to provide the EU with additional leverage to request reciprocity in rivals’ markets. This approach has been echoed in a recent statement by Aegis Europe, a cross-industry alliance, which has called for greater assertiveness by the EU in the context of trade with China.

Introduction of new foreign investment screening powers. Responding to the growing concerns around large foreign investment streams coming into Western countries (in particular from China), the EU has adopted new rules to strengthen the screening of foreign investment. A number of other jurisdictions have introduced or strengthened existing foreign investment regimes to more closely scrutinise inward investment.

“The EU State aid rules only cover aid granted by Member States and do not cover potential distortive effects of unfair subsidies or support by third countries. These rules could be more flexibly used to strengthen European industries in strategic sectors, especially by facilitating cross-border collaboration.”

- Fredrik Lowhagen

U.S. calls to include broader policy factors in competition reviews

The substantive test applied by U.S. agencies is generally limited to competition considerations. Non-competition issues, such as effects on labour rates and industrial policy, can only be considered under the expanding scope of the U.S. foreign investment review process. Nevertheless, several high-ranking politicians have called for new rules to expand the agencies’ powers to include broader policy factors.

Separately, it has been suggested recently that industrial policy considerations around the need for U.S. leadership in 5G technology have crept into the DOJ’s antitrust enforcement policy. For example, the DOJ (together with the Department of Defense) has unprecedentedly sought to intervene in the FTC’s successful enforcement action against Qualcomm seeking a stay of the remedies pending appeal, arguing the order would “potentially undermin[e] U.S. leadership in 5G technology and standard-setting, which is vital to military readiness and other critical national interests.” In addition, the terms of the DOJ’s settlement with Sprint/T-Mobile are rumoured to consider in part the parties arguments on the need for a combined entity to effectively compete in the roll out of 5G technology. This is set against the backdrop of active CFIUS enforcement and the recent sanctions against Huawei.

Trade tensions between the U.S. and China

While considerations of a transaction’s impact on the Chinese economy may be considered explicitly or implicitly during the merger review, SAMR and its predecessor have never explicitly challenged a transaction on this basis. In theory, such considerations could support domestic consolidation or create additional challenges in securing expeditious merger clearance for cross-border transactions and inbound investments.

The trade tension between the U.S. and China over the last 12 months has raised fears that the authorities would use their merger review powers to political ends, especially after Qualcomm was forced to drop its attempted acquisition of NXP because of an unfinished lengthy review by SAMR. For example, there was much speculation that United Technologies/Rockwell Collins or Disney/21st Century Fox would fall victim to the U.S./China trade war. But during one week in November 2018, SAMR cleared both deals.