• China’s vast yet protected home market has allowed some of its firms to acquire a scale that provides them with significant advantages when they compete in other markets. 
• These firms are able to undercut European companies both in the EU and around the world, including in sectors key to Europe’s future economy and security, from energy to telecommunications. 
• The EU urgently needs to incorporate the concept and reality of this ‘protected home market advantage’ into its thinking on China. 
• Europe can defend its own industries by adopting an integrated policy approach, working with like-minded partners around the world, and even prising open closed parts of China’s domestic market. 
• The EU should also look to enhance its single market – both as a defensive measure and a way to improve its strategic sovereignty. 

In a new report “Home advantage: How China’s protected market threatens Europe’s economic power” Agatha Kratz (Associate Director at Rhodium Group) and Janka Oertel (Director of ECFR’s Asia programme)

• provide a short overview of the key features of China’s protected home market advantage,
• point out how this advantage plays out in three industries in China and
• lay out ways that the EU might respond to this challenge.

China’s protected home market advantage in a series of sectors could put a competitive strain on EU competitors and diminish their revenue prospects and global market shares. Three sectors serve to illustrate the potentially acute implications of China’s protected home market for European competitors and Chinese firms:

• Solar: China officially encourages foreign participation in the solar photovoltaic sector. However, foreign activity is constrained by a strong informal preference for local players in public procurement, which has resulted in a nearly 100 per cent market share for domestic firms. Larger Chinese firms have been able to produce at extremely low cost and take over global market shares quickly, and with drastic effects on European firms in the sector.
• Telecommunication equipment: China’s telecommunication equipment market is the largest globally. However, China allows only limited participation from foreign players: the government issued informal guidance to China’s state-owned telecom operators to allocate no less than 70 per cent of 4G orders to Huawei and ZTE. This creates advantages for China’s telecommunication equipment leaders not only in emerging economies but also in Europe’s own market.
• Rail rolling stock: China’s rail market remains largely closed to foreign participation. Foreign players are officially authorised to operate in China. However, China’s main rolling stock manufacturer, CRRC, commands 86 per cent of China’s total rolling stock market volume and close to 100 per cent of its high-speed rail rolling stock market. The reason for this is a strong informal preference for local players by China’s main rail operator and main equipment purchaser, China Railway. Though not yet as drastic as in the solar and telecommunications sectors, the protected home market effect on European players could be significant in the longer run, especially in third markets.

China’s protected home market advantage has the potential to artificially shift revenues and profits from Europe to China, with significant risks for European firms. The report offers pathways towards tackling the problem at hand:

• Press for more and fuller market openness from China: In its negotiations for the investment agreement (CAI), the EU Commission secured openings in a series of sectors, including some industries in which a ‘protected home market advantage’ is likely to emerge, such as new energy vehicles. If the CAI endures despite current tensions in the bilateral relations, the Commission will need to monitor the implementation of China’s pledges closely to ensure European firms reap the benefits.
• Protect and advance Europe’s competitiveness and market power: The EU has over the past five years invested in developing its toolbox to deal with China-related distortions spilling over to the European market. None of these tools are tailored specifically to China’s ‘protected home market advantage’. However, it could easily mobilise some of them to address its effects on the European market and European firms.
• Play offence: In the sectors that have the most strategic importance for Europe’s economic resilience (and only in those), policymakers might also decide to temporarily offset the cost of China’s protected home advantage for European firms. Such a project should be pursued in close coordination with allies and partners across the Atlantic and in the Indo-Pacific region.
• Perfect the single market: Many intra-European market barriers – such as regulations, standards, market fragmentation, and language – make it hard or impossible for European firms to build the scale their competitors in China have. Addressing these barriers is crucial to keeping European firms competitive. Enhancing Europe’s single market would thus be a major contribution to tackling the issue. It would be a proactive step towards enhancing European leverage and strategic autonomy.

“Better understanding the impact on European industry of Chinese barriers to foreign competition is key to effective policymaking, and to preserving European competitiveness in sectors of the future”, says Agatha Kratz.

“Over the years, Europe has been highly focused on securing market access in China, but it does not seem like market conditions for European companies are improving there. It is now no longer just about a level-playing field bilaterally, but about sustaining the capacity to compete with Chinese players on a global scale – understanding the protected home market advantage is one crucial part of finding the appropriate response”, says Janka Oertel.

NOTE TO THE EDITORS

Interviews & more research:

• Janka Oertel and Agatha Kratz are available for comment and interview. Please contact Ana Ramic, ECFR’s head of communications, email: ana.ramic@ecfr.eu or ECFR’s communications team (communications@ecfr.eu) to arrange.