The European Commission plans to send a formal warning to China that it is ready to levy sanctions against telecoms equipment makers Huawei and ZTE Corp over illegal subsidies, people close to the matter said.
EU trade chief Karel De Gucht is set to win support from the bloc's executive on Wednesday to send the warning letter and show China's new president, Xi Jinping, that Brussels is serious about countering what it says is state support.
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"We want to send a warning to the Chinese, a letter of intent that if they don't change their practices, there will be duties," said one person involved, adding that De Gucht had the full backing of European Commission President Jose Manuel Barroso.
The decision will mark an intensification of the European Union's efforts to guard against what Brussels says is dumping by China, the EU's second-largest trading partner. From June, the Commission will also levy duties on billions of dollars of solar panels from China, EU officials have told Reuters.
Huawei was a little known telecoms firm less than a decade ago but today, along with its smaller rival ZTE, it holds almost a quarter of the European market.
That poses a security risk, the Commission says, because European industries ranging from healthcare to water utilities are becoming reliant on cheaper Chinese wireless technology.
An internal EU report last year recommended that the 27-member bloc should take action against Chinese telecoms equipment makers as their increasing dominance of mobile networks made them a threat to security as well as to home-grown companies.
A Huawei spokeswoman in Brussels declined to comment on the move, but the company denies receiving unfair subsidies. It says its advantages are due to low-cost manufacturing and that its products are secure. There was no comment ZTE on Tuesday, but it also denies allegations of illegal subsidies.
De Gucht told Reuters in February there were serious concerns about China's growing presence in mobile telecoms networks, noting that the United States and Australia had effectively shut Huawei out of their markets.
Last year, Germany excluded Huawei from supplying the infrastructure for a national academic research network.
But European manufacturers Ericsson, Alcatel-Lucent and Nokia Siemens Networks fear retaliation in China if they push to launch an anti-subsidy case, so the Commission has been collecting evidence on Huawei and ZTE with a view to launching a case on its own initiative.
Division between EU countries over the telecoms issue meant De Gucht has trodden cautiously. Britain and the Netherlands have embraced Huawei as a major job provider, while France and Italy have been backing De Gucht on going ahead with sanctions.
Officials say they now have proof of Chinese subsidies.
"This is a political decision tomorrow," said another person briefed on the Commission's thinking. "It's basically saying, we have all the evidence we need, we don't need to launch an investigation," the person said.
The Huawei spokeswoman noted that the company had offered several times to meet the European Commission but was rebuffed.
"We are open to talking with stakeholders. Because there are allegations, there are misunderstandings and misperceptions, that's why we are always keen to discuss with all the stakeholders," Tina Tsai said.
(Additional reporting by Robin Emmott and Luke Baker; Editing by Alison Williams)