MOFCOM Issues Final Determination on Trade and Investment Barrier Investigation into the EU’s Foreign Subsidies Regulation

On January 9, 2025, the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) released its decision in a trade and investment barrier investigation into the European Union’s Foreign Subsidies Regulation (“FSR”).

MOFCOM concluded the EU’s practices under the FSR targeting Chinese enterprises constitute trade and investment barriers under Article 3 of the Rules on Trade and Investment Barrier Investigations of the People’s Republic of China.[1] This alert provides a summary of MOFCOM’s findings and possible next steps.

I. The EU FSR and Background of MOFCOM Investigation

The EU FSR regime targets distortive subsidies from non-EU countries to companies active in the EU single market (see our general briefing here). Since the regime took full effect in October 2023, the European Commission (“EC”) has reviewed over 100 mergers and 1,000 public tender filings, and launched five in-depth and ex officio investigations. All but one of these investigations targeted Chinese enterprises, leading to the abandonment of various tenders and projects (see our alert on FSR developments in 2024 here).

Launch and Conduct of the Investigation. On June 17, 2024, the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (“CCCME”) applied for an investigation into the EU’s FSR practices, citing discrimination against Chinese enterprises and restrictions on market access. After reviewing the application, MOFCOM launched the investigation on July 10, 2024.[2]

MOFCOM received a total of 13 questionnaire responses and 44 public submissions. MOFCOM also conducted site visits to Chinese enterprises in industries targeted by the EC’s in-depth investigations, such as rail transport, photovoltaics, wind energy, and security equipment.

Engagements with the EU. MOFCOM requested information from the EC regarding its investigations under the FSR. However, MOFCOM’s decision states the EC did not provide substantive responses to these inquiries or clarify its decision-making processes. MOFCOM’s requests included a comprehensive list of cases, the criteria used for initiating investigations, and the scope of the inquiries. They also sought specific justifications for targeting Chinese enterprises, clarification on how foreign subsidies are defined, the rationale behind extensive information requests in FSR proceedings, and raised issues with procedural transparency, enforcement practices such as dawn raids, and the EC’s criteria for assessing market distortion. .

II. MOFCOM’s Findings

MOFCOM found that the FSR created or could potentially create obstacles for Chinese products, services and investments entering the EU market and that they harmed or could harm their competitiveness. The decision highlighted various aspects of FSR enforcement leading to this conclusion.

1. FSR Practices Identified In The Decision

Selective Enforcement. According to MOFCOM, the EC’s FSR investigations demonstrated “de facto discrimination” against Chinese enterprises. More specifically MOFCOM argues that EC investigations in public procurement exclusively targeted Chinese enterprises for in-depth investigation while similar enterprises from other countries were not investigated. The EC also failed to investigate non-Chinese bidders for the same projects without justification. Chinese companies were also the sole targets of intrusive EC enforcement powers, notably dawn raids.

Ambiguity in Defining Foreign Subsidies. According to MOFCOM, the FSR concept of “subsidy” is overly broad and ill-defined, in both the regulation and its application. MOFCOM claims that the EC relied on vague “indications” to infer potential subsidies and market distortion, and classified common practices like VAT refunds, market-rate loans, and even participation in domestic public tenders in China, as subsidies. The EC provided no clear criteria or explanation for these determinations, which hampered the response of Chinese enterprises and undermined procedural fairness.

Excessive Administrative Burden. According to MOFCOM, enterprises under investigation faced extensive demands for information, including data on affiliates, subsidiaries, and unrelated transactions. The EC insisted on information concerning parent companies and other group companies, despite the parties providing evidence that EU affiliates were legally-independent entities that fully satisfied the eligibility requirements for bidding. Other examples of “unnecessary” data requests covered procurement projects outside the EU and the personal data of executives. The EC also investigated enterprises with no EU operations, or sought data that did not exist. These demands often came with unreasonably short deadlines, ranging from two to seven days. The EC also disregarded Chinese laws restricting data transfers abroad and threatened severe penalties for non-compliance.

Lack of Transparency. According to MOFCOM, EC investigations were opaque and lacked a clear definition of the investigation scope or standards for assessing subsidies and market distortion. The EC failed to provide detailed explanations for subsidy calculations and its findings of market distortion. On procedure, investigation timelines were unclear while ex officio investigations were only announced through brief press releases. Companies were denied public hearings to defend their interests, and the EC failed to ensure adequate protection of business confidentiality.

Excessive Enforcement Measures. According to MOFCOM, the EC employed “disproportionate” measures including unannounced inspections (dawn raids) that disrupted business operations and compromised confidentiality. The procedures used during these raids were inconsistent, with varying protocols on entry, equipment use, and documentation. These measures created uncertainty, operational disruption, and safety risks for company personnel.

Flawed and Subjective Market Distortion Assessments. According to MOFCOM, the EC’s findings of market distortion relied on flawed and over-simplified calculation methods and comparators. In some cases, the EC had concluded that the Chinese enterprises’ bids were significantly lower than procurement budgets, despite evidence showing that they were reasonable or even above industry benchmarks. The EC opined there was a lack of evidence on whether affiliate funds had flowed to the bidding entity (and drew adverse conclusions on this basis), despite “full disclosure” of financial transactions. The EC also relied on isolated overseas losses to characterize enterprises as financially unviable, which then became evidence of distortive foreign subsidies.

Reversal of Burden of Proof. According to MOFCOM, the EC reversed the burden of proof by launching investigations based on vague claims and requiring the investigated enterprises to identify and disclose the details of potential subsidies.

2. Impact of FSR Practices on Trade and Market Access

MOFCOM concluded that the FSR practices discussed met the criteria for trade and investment barriers under Article 3, paragraph 2 of the Rules on Trade and Investment Barrier Investigations.

Impact on Market Access. MOFCOM’s investigation concluded that FSR investigations created barriers for Chinese enterprises, products, and investments in the EU single market. MOFCOM estimated economic losses of over RMB 156 billion (c. EUR 20.88 billion[3]), including RMB 76 billion (c. EUR 10.18 billion) from abandoned bids and compliance and compensation costs. According to MOFCOM, Chinese enterprises have been excluded from public procurement opportunities on the basis of “national security threats” or required to agree to contract termination clauses for FSR risks. Project delays caused by FSR investigations also jeopardized timelines and resulted in significant losses. Over 50% of the enterprises surveyed were planning to reassess their EU investment strategies to avoid FSR investigations.

Impact on Competitiveness. The investigation also concluded that the EC’s FSR practices significantly harmed the competitiveness of Chinese enterprises and products in the EU. MOFCOM believed that FSR compliance imposed substantial additional costs, including legal fees, data collection efforts, and other resource-intensive activities, with some companies incurring millions of RMB in expenses. Stakeholders also reported significant uncertainty in daily business operations, supply chains, and project timelines, as well as reputational damage and diminished client confidence. Over 70% of stakeholders reported losing investment opportunities, customers, and partners, with others becoming more cautious and imposing requirements to mitigate perceived risks.

Broader Impact. MOFCOM also identified several adverse effects of the FSR beyond market access and competitiveness for Chinese enterprises: the FSR hindered EU green energy development by discouraging investment, increased procurement costs for EU Member States, disrupted supply chains and delayed key projects; it damaged China-EU trade relations by introducing legal uncertainties that undermined bilateral cooperation, and eroded China’s confidence in the EU’s business environment as a fair and open market.

III. Future Implications

MOFCOM has concluded that certain EU FSR practices constitute trade and investment barriers under the Rules on Trade and Investment Barriers Investigations. This conclusion does not have any immediate effects. There is limited precedent on likely next steps as all previous MOFCOM trade barrier investigations have been carried out with respect to Taiwan and have not led to concrete countermeasures. However, the Rules on Investment and Trade Barriers Investigations empower MOFCOM to adopt retaliatory measures, including engaging in bilateral consultations, initiating multilateral dispute settlement mechanisms, or other appropriate measures. The findings and evidence collected in this investigation could serve as a basis for further action such as bilateral negotiations with the EU or dispute resolutions through multilateral frameworks such as the WTO.

From the EC’s perspective, MOFCOM’s decision encapsulates the various procedural and substantive concerns that could be raised by parties seeking to challenge FSR enforcement. The decision however seems exclusively focused on investigations and does not quote specific FSR decisions, since no definitive substantive decision has been adopted so far under the FSR against a Chinese company. On its own, it is therefore unlikely to deter the EC from investigating Chinese subsidies but may put additional pressure on the EC to ensure its investigative practices and decisions are well-founded and proportionate. The EU’s rich jurisprudence on procedural rights and non-discrimination, developed in antitrust proceedings, will likely serve as precedent for such challenges. The General Court has started to develop the law in this area, having considered and dismissed a request for interim measures to suspend an ongoing FSR investigation, and upheld the EC’s power to seize China-based mailboxes.[4]

[1] Article 3 of the Rules on Trade and Investment Barrier Investigations stipulates that measures or practices adopted or supported by foreign (regional) governments shall be deemed trade barriers if they meet any of the following conditions:

(1) They violate economic or trade treaties or agreements jointly concluded or participated in by the foreign (regional) government and China, or fail to fulfill obligations stipulated in such treaties or agreements.

(2) They cause or may cause any of the following negative trade impacts:

- Obstruct or restrict the entry of Chinese products or services into the foreign (regional) market or a third-party market;

- Harm or may harm the competitiveness of Chinese products or services in the foreign (regional) market or a third-party market;

- Obstruct or restrict the export of products or services from the foreign (regional) market or a third-party market to China.

[2] MOFCOM’s Announcement No. 28 of 2024 (link).

[3] Exchange rate based on the China Foreign Exchange Trade System (CFETS) central parity rate as of Jan. 9, 2025: 1 EUR = 7.4694 RMB

[4] Case T-284/24 R Nuctech Warsaw Company Limited and InsTech Netherlands v Commission.