Europe's top trade official for the first time late on Friday officially cited Chinese mobile telecommunications equipment makers Huawei and ZTE Corp for violating anti-dumping and anti-subsidy guidelines.
European Union Trade Commissioner Karel De Gucht said he was prepared to launch a formal investigation into anti-competitive behavior by these Chinese companies in order to protect a "strategic" sector of Europe's economy.
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"Huawei and ZTE are dumping their products on the European market," De Gucht told Reuters in an exclusive interview before engaging with U.S. businesses as part of his preparations for negotiating a Transatlantic free trade pact with the United States. Those talks are expected to begin in July.
An investigation now into sales practices of Chinese telecoms equipment companies would open up a new front in a multibillion-euro trade offensive against a critical partner.
The EU is China's most important trading partner, while for the EU, China is second only to the United States. Chinese exports of goods to the 27-member bloc totaled 290 billion euros ($372 billion) last year, with 144 billion euros going the other way.
Cheap capital for these Chinese companies "creates a distorted playing field and that is what this is about," De Gucht said, referring to Huawei and ZTE, respectively the world's No. 2 and No. 5 telecom equipment makers.
In the past both Huawei and ZTE deny benefiting from illegal state support.
A STRATEGIC PAUSE
De Gucht's office on Wednesday said an investigation was prepared but put on hold. At the time no companies were officially named. The pause is to allow further negotiations with China in hopes for a resolution.
"We have already had three rounds of negotiations on that, but without any satisfactory outcome," he said.
"I think it is better for the whole world economy and trade that these two big trading partners come to an amicable solution on what is in fact a very strategic and crucial sector. But you need two to tango and we have the necessary resolve to go for it if necessary," he said.
China responded on Thursday, threatened the EU with retaliation.
European telecom equipment makers have not made any complaints for fear of Chinese reprisals. Therefore if the EU makes the case, it does so for the first time on its own initiative, known as ex-officio. European manufacturer Ericsson is the global leader with a 35 percent market share. It said it opposed the Commission's move.
"I don't want to elaborate on what could be the sanctions... Everybody knows. The Chinese know our procedures as well as we do. They are very well aware of what is in our toolbox," De Gucht said.
China exports network equipment, base stations and connections used by telecom providers to transmit voice and data messages worth more than 1 billion euros a year to the EU, giving it almost a quarter of the market.
Meanwhile, De Gucht would not comment on whether he will go ahead with imposing punitive import duties on 21 billion euros worth of imported Chinese solar panels. The European Commission agreed to his proposal for a 47 percent tariff, which he can formally declare on June 6 if it is published in the EU's Official Journal.
AT THE MOVIES
While Europe battles with China over trade, given 18 out of 31 ongoing trade investigations are with Beijing, De Gucht said he is eager for talks to start with Washington on a trade pact focused on making each other's regulations more compatible.
"The most important part of that agreement, because it would be a real game-changer, is the regulatory (component)," he said.
The EU and the United States account for nearly half of the world's economic output and 30 percent of trade, with goods and services worth $2.7 billion traded bilaterally every day. Those figures were released in February when the two sides announced they would launch bilateral trade talks.
However U.S. President Barack Obama's pick for the U.S. Trade Representative cabinet post, Mike Froman, has yet to be confirmed. Froman is the White House chief international economic affairs advisor, a job he has held since Obama took office in 2009.
Ahead of the talks France has already pushed to exclude from negotiation the movie and television industries.
France has long defended a "cultural exception" in trade affairs in what it sees is a need to protect European arts from Hollywood-driven market forces.
According to the latest data from the Motion Picture Association of America, U.S. film and television services exports in 2010 were $13.5 billion, down 2 percent from 2009 but up 6 percent over 2006.
De Gucht said the EU would not put on the table "a cut to the subsidies for European film producers." Instead, for the first time, he is arguing the audiovisual sector should be included so European businesses could benefit from developments in the digital media sphere.
"What we would prefer not to have is a carve out of the whole sector and I hope that we can manage to do so."
(1 euro = $1.28)
(Reporting by Daniel Bases; Editing by Lisa Shumaker)