Brussels takes drastic action over huge Chinese investment in Hungary

As we have reported on several occasions, since last year the European Commission has been able to use a special instrument to protect the single market against companies from third countries setting up in the Single Market. The Foreign Subsidies Regulation essentially complements existing subsidy instruments to prevent non-EU companies from circumventing customs rules by relocating production to the EU while receiving substantial amounts of state aid in their home country.

The European Commission is now opening proceedings in the case of the BYD factory being built near Szeged.

The investigation will pay particular attention to whether the investment received Chinese state aid that could distort competition in the European market, the Financial Times reported.

The EU's aim is to ensure a level playing field and prevent foreign companies from gaining an unfair advantage through state aid.

The EU investigation is part of a wider strategy to address Chinese state aid and its impact on the European market. The European Union has previously expressed concerns about Chinese state aid that may distort competition and threaten the competitiveness of European industry.

As part of this, a subsidy investigation was carried out last year which found that Chinese electric car manufacturers received significant government contribution that distorted competition and violated World Trade Organisation rules. The European Commission's report at the time said that all players in the value chain had received such incentives from the Chinese government, which was why it imposed punitive tariffs on BYD, for example.

The report's findings at the time may also confirm that Beijing could have supported Chinese investment in Hungary with resources such as managed public procurement and the channelling of development aid to companies.

The outcome of the investigation could have a significant impact on future Chinese investment in Hungary and the EU. A positive outcome could allow BYD to continue its activities, while a negative outcome could lead to sanctions or restrictions.

Brussels has a range of sanctions and remedies at its disposal to tackle foreign aid that distorts competition. The most severe sanctions include fines of up to 10% of a company's global annual turnover for failing to declare foreign aid or for carrying out a transaction in breach of the rules. The EU executive can also block acquisitions or public procurement if it considers that the aid distorts competition in the market.

It can also order companies to repay the aid received and impose structural or behavioural corrective measures.

These may include selling certain assets, reducing capacity or restructuring the company's market activities.

If a company voluntarily undertakes certain commitments to avoid distortions of competition, the Commission may accept them or make them binding. These instruments ensure that foreign state aid does not give an unfair advantage in the EU market.

If the Commission finds during the FSR procedure that the Chinese company has benefited from unfair state aid, it could force it to sell some assets, reduce capacity, pay back the subsidy and potentially pay a fine for non-compliance. They may also look into Hungarian subsidies and could potentially ban them or impose a fine citing competition rules.

In the case of BYD, it is not direct incentives but indirect contributions that could trigger action, as the government is providing more than HUF 46 billion for the development of the industrial park and the upgrading of related roads, rail and energy networks, among other things.

The British newspaper notes that Hungary has attracted significant Chinese investment in recent years, particularly in the production of electric vehicles and batteries, and that the government of Prime Minister Viktor Orbán is actively encouraging such investment to boost economic growth and create jobs.

But these Chinese investments are raising concerns in the EU about fair competition and control over strategic industries.

Cover photo (for illustration purposes only): Getty Images