The European Union is preparing to investigate whether China is unfairly subsidising makers of wireless modems, the latest move by Europe to defend its high-tech industry in the face of China's growing market share.
The European Commission, the EU's executive, has told member states it wants to investigate the sector and has until mid-September to launch a full study, diplomats say. Such a move would add pressure to already tense EU-China trade relations.
According to Option's complaint, seen by Reuters, China's modem producers receive direct government grants, cheap loans and state-backed R&D as part of China's efforts to shift from a major low-tech exporter into a top player in global telecoms.
"China's government policies are aimed at raising up and supporting domestic companies in the telecommunication and information technology sectors with the express purpose of making them global champions," the complaint says.
China exported about 25 million wireless modems -- used to access the Internet on laptops and handhelds -- worth around 1.25 billion euros ($1.6 billion) in 2009. Its exports made up 90 percent of European modem imports, according to EU estimates.
The Commission has until mid-September to start a 13-month investigation, which could lead to steep import tariffs valid for five years. EU capitals must this week oppose or tacitly approve the Commission plan, according people close to the case.
Tariff hikes and a possible import limit on Chinese modems resulting from the investigation could hurt China's two leading producers, Huawei Technologies and ZTE.
EU member states have in the past given their backing to subsidy complaints, but one EU diplomat said the Chinese subsidies targeted in this complaint could be legal.
If opened, the investigation would represent the first time the EU has rolled out three trade defence instruments at once against one of its trading partners and highlights the EU's willingness to face down exporting powerhouse China, its biggest trade partner after the United States.
In June, the EU started a dual investigation into alleged market dumping by Chinese wireless modem exporters and into whether the EU should resort to emergency safeguards to protect Option from sudden surges in Chinese imports.
A Chinese official in Brussels said China will consult with the EU on the investigation. China's Ministry of Commerce lambasted the June investigations as trade protectionism.
People familiar with the case say Beijing will point to Option's production facilities in China and allege Commission bias to discredit the claim.