By Matthew Dalton in Paris and Matthias Verbergt in Stockholm 

A European Union plan to help shield the bloc's telecommunications-equipment companies from a rush of Chinese rivals is floundering, according to EU and industry officials, compounding the European industry's troubles amid weak demand for its mainstay wireless products.

Beijing, the officials say, isn't abiding by the terms of a 2014 pact with the EU, in which Brussels dropped the threat of import tariffs on gear made by China's Huawei Technologies Co. and ZTE Corp. In exchange, Beijing agreed to a number of measures aimed at helping European champions Ericsson AB and Nokia Corp. secure more Chinese business while containing the relentless market-share gains of their Chinese rivals.

A key plank of the agreement called for empowering an independent commission to monitor telecommunications-equipment markets. The panel was supposed to identify practices like dumping and ensure European access to the Chinese market. But nearly two years after the pact was signed, the body has yet to be set up. China hasn't provided funds for it and has rejected a demand by Brussels that panel members have no ties to the government, one EU official said.

China's Ministry of Commerce didn't respond to a request for comment.

The fraying of the 2014 pact with China shows the limits of the EU's capacity to confront Beijing over its export-oriented economic policies, European and industry officials say.

Western officials have long said Beijing provides hefty subsidies to favored Chinese companies. The result is overcapacity in sectors ranging from steel to solar panels to aluminum, they say, pushing down prices and wreaking havoc in many markets. For telecommunications equipment, Western officials have previously pointed to large credit lines provided by Chinese state banks to finance exports by Huawei and ZTE as evidence of the companies' state support.

But enticed by the prospect of doing business with China, many EU nations were reluctant to back tariffs on Huawei and ZTE for fear of alienating Beijing. Ericsson and Nokia themselves, eager to win contracts in China, also refused to support tariffs.

China has denied that the companies are "dumping" their products on world markets. Huawei says the quality of its equipment now rivals or even exceeds that of European. "We're not winning business on price anymore," said Kenneth Fredriksen, chief executive of Huawei's Swedish subsidiary. ZTE didn't respond to a request for comment.

The fast-eroding dominance of European companies in wireless-network equipment has been on vivid display in recent days. On Thursday, Nokia reported a net loss for the second quarter in a row, blaming tough competition.

The Finnish company, which recently completed the acquisition of French rival Alcatel-Lucent SA, pledged to intensify cost-cutting efforts after posting an 11% drop in second-quarter revenue. Last week, Ericsson of Sweden ousted its chief executive, Hans Vestberg, amid recriminations by core shareholders that he has failed to come up with a strategy to counter Huawei and ZTE's ascent. Mr. Vestberg said it was time for new leadership.

The sector has been hit by falling prices and lower demand from telecom carriers, as many of them have completed the rollout of modern wireless networks, known as 4G. This hasn't stopped Chinese firms from continuing to make inroads in Ericsson and Nokia's European backyard.

Meantime, Ericsson's market share for wireless-networking equipment in China fell to 6.9% last year from 26.5% in 2011, according to industry tracker IHS.

For now, the European Commission, the EU's executive arm, has little stomach for reviving the tariff threat. It is already occupied with another major trade dispute with China: whether to label the country a "market economy," a move that would limit the EU's power to impose tariffs on China. Beijing says its agreement to join the World Trade Organization requires such a move by the end of the year.

On Thursday, the EU imposed anti-dumping tariffs on some Chinese and Russian steel imports, but those measures are less than a 10th the tariff levels set by the U.S. for the same product earlier this year. Complicating matters in Brussels, the commission's upper echelons will also soon be occupied with the U.K.'s looming divorce from the EU.

In July, the EU complained about the telecom-equipment deal at a high-level meeting with Chinese counterparts in Beijing, according to people familiar with the situation. But one EU official said the impasse with China is unlikely to be resolved soon.

In contrast with Europe, the U.S. government has effectively blocked Huawei from the U.S. network infrastructure market because of concerns that its gear could be used by Beijing to spy on Americans. Huawei has denied the allegations.

The EU previously attempted to play tough with Beijing. In May 2013, under then-EU trade chief Karel De Gucht, the European Commission threatened to open an investigation into alleged unfair competition over Chinese telecom equipment, a move that could have resulted in tariffs on Huawei and ZTE.

In October 2014, however, Mr. De Gucht shelved the probe amid weak political support in Europe for the move. Instead, he signed what the commission called an "amicable settlement" with China, which mandated the independent commission.

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Matthias Verbergt at Matthias.Verbergt@wsj.com

 

(END) Dow Jones Newswires

August 05, 2016 05:27 ET (09:27 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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