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Within hours of each other, the European Union and the Biden administration acted in April to take dramatic and unprecedented actions against Chinese economic interests. Though the actions appear to have been uncoordinated, they had a common purpose in opposing Chinese economic practices deemed a threat to national and economic security. Another less noticed commonality was that their actions are potentially reshaping their long-accepted norms in dealing with international trade and investment.
The opening shot in the latest round of Western tensions over China played out on April 23, when EU officials conducted dawn raids in Rotterdam and Warsaw on the offices of a partially state-owned Chinese company, Nuctech, accused of using Chinese government subsidies to gain market share in the European Union at the expense of European competitors. A continent away, on April 24, the US Congress enacted a ban (or alternatively forced divestiture) against a different Chinese company—a ban inserted into the foreign assistance security package that President Joseph R. Biden, Jr. immediately signed into law.
What the two actions also have in common, beyond their timing, is that within their legal systems they are each the first of their kind, and, by coincidence or by design, in the age of big data, both are concerned with fear over the misuse of business data and personal information.
This is the first case under a new EU regulation addressing foreign subsidies distorting the internal market that was adopted in 2022 as part of its arsenal of defensive measures. The tool was added as a complement to a trade remedy and in fact may have the same result. It is designed to offset foreign government subsidies that affect the sale of goods within the European Union. It is pathbreaking because it deals with foreign government subsidies of investment, not trade, and because the subsidy could be paid by a private entity and still be actionable if it could “be attributed to the third country.” The April raid on Nuctech in this instance is infused with national security concerns over the use of one of the company's products—scanning devices at airports gaining information on shipments and persons potentially being misused by foreign government agencies—but that is not a question of commercial competition. In fact, had the stated motive been to protect national security, the legal authority of the European Commission might have been unclear. The matter might have been within the exclusive jurisdiction of individual member states.
Subsidies are a central concern of the European Commission. It has long had a heightened sensitivity to member states using subsidies, as that might disassemble the single market, with one region being favored over another. This new regulation's concern with subsidies is very different. It is the use of subsidies to give a commercial advantage to a foreign entity over a domestic competitor. The matter is of potential importance in economic relations with China in that this case is unlikely to be a one-off. For the regulation, this may prove to be a target-rich environment. Subsidies are a potent and longstanding industrial policy tool used in China. (Caveat: Were US and EU interests to diverge, the new regulation could be used against firms benefitting from US industrial policy initiatives.)
Separately, the US Congress acted on April 24 to ban TikTok or force divestiture by its Chinese owner ByteDance. There had been several prior attempts to reach this result using other authorities. Foreign investment is screened in the United States by the Committee on Foreign Investment in the United States (CFIUS). CFIUS can block a foreign investment or force changes to be made in ownership. There is an ongoing negotiation between CFIUS and ByteDance, in a review started in the Trump administration and continued in the Biden administration, over the conditions under which this foreign investment may operate. Separately, President Trump had, for a time, sought to ban the downloading of the app under delegated authority, as being a threat to national security, invoking the International Emergency Economic Powers Act (IEEPA). The courts blocked his attempt as being impermissible, arbitrary, and capricious. The legal authority for the ban will again be settled by the courts.
It was not, in the end, the use of emergency economic authority nor CFIUS, the standard authority to review foreign investments, that resulted in the ban or divestiture decision this last week. It was enactment of a statute that is part of the foreign military assistance legislation (see Division H—Protecting Americans From Foreign Adversary Controlled Applications Act) signed into law on April 24. There is general authority to block “foreign controlled applications” in the new statute, similar in concept to the authority already granted to the president to block foreign acquisitions of a telecommunications network.
This act differs, however, in one remarkable aspect. Trade historian Douglas Irwin (and colleague at the Peterson Institute) states that he knows of no example in US economic history of a congressional ban on use of a service provided by a single named company, and in my half century in this field, as a government lawyer and official, and as a practitioner dealing with international competition, I have not come across anything like it. In time of war, there are numerous examples of seizing “alien property.” For this purpose, there is broad and extensive authority delegated by the Congress to the president. There appears to be no prior example of an act of Congress aimed at a single company, and a legal challenge is likely.
In the economic competition with China, blocking use of an app is unlikely to stand out. Interestingly, TikTok is not available in China. Moreover, American data platforms and social media sites are already restricted or banned in China. Google, Facebook, YouTube, and primary traditional Western news sources such as the New York Times, the Washington Post, the Wall Street Journal, Bloomberg, the Guardian, and many others are blocked in China. None of China’s restrictions are likely to be lifted any time soon. Most predate any concerns over data collection and presumably relate to content, restricting access within China to alternative sources of information including unfettered foreign press.
What is most interesting about the use of the new European anti-subsidy measure and the enactment and mandated use of the new US statute, two otherwise disparate actions recently taken, is that in the West’s contest with China, the United States and the European Union are reshaping their own legal systems in unprecedented ways than would otherwise occur. Foreign subsidies to investment in the European Union were not a prior concern, nor would dawn raids be deployed to deal with normal trade concerns. In the United States, enacting a statute aimed at forced divestiture applicable to a single company would not have been contemplated earlier. As long as there is no convergence of China’s economic system with the economies of countries subscribing to the liberal international economic order, additional ways to manage the interface between China and the West are likely to continue to be devised.
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