Illustration: Chen Xia/GT

In recent years, the European Union (EU) has shown a strong tilt toward neo-protectionism in its trade and economic policies. It has frequently introduced new subsidy and countervailing tools and applied unconventional regulatory measures, many of which are discriminatory and distort normal trade flows. This is a typical demonstration of neo-protectionism.

The EU continues to strengthen and expand its subsidy regulation tools and instruments. In the area of subsidies and countervailing duties, the EU has expanded the scope of traditional countervailing measures to include cross-border subsidies and established a foreign subsidies review system to restrict cross-border investment. This has resulted in a regulatory system that combines both old and new tools, highlighting non-traditional features of economic and trade regulation.

First, the EU has increasingly stretched the boundaries of traditional countervailing rules in its trade investigations, applying non-traditional methods that expand the scope of countervailing measures which has introduced greater arbitrariness and discrimination. A key example is the EU's broad definition of subsidy providers, which now improperly includes Chinese private firms such as lithium battery suppliers and commercial banks. Routine market behavior, such as responding to industrial policies or participating in trade associations, is being mischaracterized as government-directed activity. Moreover, instead of using actual cost data, the EU often relies on external benchmarks and surrogate-country data, citing "market distortions" even in private-dominated industries, which leads to unreasonable increase in countervailing duty rates.

This approach politicizes commercial autonomy and ideologizes market competition, which is a departure from WTO rules. It replaces objective evidence with subjective assumptions, undermining the fairness and predictability that countervailing measures are supposed to obey.

Second, the EU has extended countervailing rules to cover "cross-border subsidies," effectively creating hidden barriers to international investment. In a case involving fiberglass fabrics from Egypt, the EU attributed financing support provided by the Chinese government within a joint economic zone in Egypt to the Egyptian government itself and treated the exports as subsidized. 

By attributing the actions of a third country or its market actors to the exporting country, the EU disregards the WTO's requirement that subsidies must originate from the government of the exporting country and be confined within its territory. This approach exposes companies to countervailing risks stemming from third-country policies, raising compliance costs and investment uncertainty and hindering normal cross-border industrial cooperation and supply chain integration.

Moreover, the EU has introduced a foreign subsidies review mechanism through its Foreign Subsidies Regulation (FSR), effectively creating a new form of subsidy barrier in cross-border investment and public procurement. The regulation brings financial contributions from non-EU governments to companies operating within the bloc under scrutiny, requiring firms to proactively disclose such subsidies during mergers or public tenders. Failure to do so could result in harsh consequences such as forced divestitures, transaction restrictions, or mandatory technology licensing. The rules also presume certain behaviors to be "market-distorting," shifting the burden of proof heavily onto investors. In practice, enforcement authorities enjoy broad discretion in deciding what constitutes distortion of the internal market, placing a significant compliance burden and uncertainty on global companies looking to expand in the EU.

At its core, the EU's subsidy regulation regime reflects a new wave of protectionism. By expanding discretionary powers for investigators, inverting the burden of proof through presumptions of illegality, and selectively targeting countries like China, these instruments have introduced greater arbitrariness and discrimination in enforcement — revealing the fundamentally protectionist nature of the EU's evolving trade policy toolkit.

The EU has expanded the definition of "public authority" well beyond WTO standards, making subsidy findings increasingly arbitrary. Under the FSR, vague criteria like "potential future harm" are used to justify distortion claims, giving investigators broad discretion.

In anti-subsidy probes, the EU often rejects Chinese firms' actual cost data, citing "market distortion," and instead uses external references — shifting a heavy burden of proof onto companies. The FSR goes further, requiring firms to prove that subsidies didn't distort the market or face adverse assumptions if full financial data is not provided promptly. This "presumption of guilt" approach runs counter to the principle under multilateral trade rules that require investigating authorities to show proof.

The EU's application of subsidy-related rules is also selective, making them effectively targeted at certain countries. In countervailing duty probes, Chinese industries — even those dominated by private firms — are often pre-labeled as operating under "market distortions," leading to their classification as "public bodies" and the use of external references. Although the FSR is framed as closing a regulatory gap between domestic and foreign subsidies, investigations into "foreign subsidies" are more arbitrary and lack the exemptions available under the EU's internal state aid rules.

The EU's protectionist subsidy rules are creating a ripple of negative effects. They undermine market confidence in policy stability, escalate trade frictions and investment barriers, and weaken rules-based global economic governance. This trend risks derailing the global economic recovery.

The EU's protectionist subsidy rules are driving up compliance costs and risks for businesses. Some multinationals have pulled out of the EU market to avoid retroactive scrutiny, while firms from China and elsewhere are growing increasingly cautious about investing in third countries, fearing future EU probes. This chilling effect is dampening global investment and innovation.

The EU's protectionist tilt is already sparking ripple effects globally. Several economies are following suit by adopting unilateral tools to police alleged subsidies, deepening the fragmentation of global subsidy governance. This trend — using rules as a shield for protectionism — is triggering a race to the bottom, with governments increasingly bolstering their own industries.

By elevating domestic law above international norms and circumventing WTO mechanisms to impose unilateral measures, the EU is undermining the credibility of the multilateral trading system. As protectionism gains ground, no country remains untouched. Preserving a rules-based global order and pushing back against the weaponization of regulation are essential to sustaining international cooperation.

The author is an associate professor at the School of International Law, China University of Political Science and Law. bizopinion@globaltimes.com.cn