Economic loss sustained by the EU industry is a precondition for the 27-nation bloc to take either anti-dumping or anti-subsidy measures.

Lee-Makiyama said the case was hinged on defining loans from Chinese commercial banks as state aid on the grounds that some of the banks are state-owned, which was also unfair.

"The banking sector in China is indeed highly protected and underdeveloped, but few would dispute that these state-owned enterprises compete amongst each other on market terms, often vying hard with each other for lucrative market segments," he said in a recent paper focused on the case.

Lee-Makiyama warned that extending the definition of public bodies to commercial banks could have repercussions.

"Almost every firm in China with a line of credit from a local commercial domestic bank could then be subject to a subsidy accusation on what is actual 'market-lending rates' through creative exercises by trade defense authorities," he said.

Stuart Newman, legal advisor for the Foreign Trade Association representing EU importers, said it was particularly problematic for the EU to impose both anti-dumping and anti-subsidy duties on Chinese paper.

"I think there is a problem of double counting here. I am not convinced that the commission was legally able to do that," he said.

In the anti-dumping part, the EU chose the Untied States as an analogue country to define normal market price and calculate dumping margin because it has so far refused to recognize China as a market economy and believe the price on the Chinese market was artificially lower than normal due to subsidies and public support to companies, which are taken as common in a non-market economy.

In other words, Chinese producers which were already penalized by the anti-dumping duties for the alleged subsides were forced to pay twice.

Targeting at the paper industy, the EU is testing water. The precedent-setting case may indicate a sharp change in the EU's trade defense policy.

"It is a very strange case because the market share of the Chinese products in the EU is very very small," Newman said. "I do know they have been considering opening more anti-subsidy cases."

A European Commission trade official, speaking on condition of anonymity, declined to say whether there are other anti-subsidy cases against Chinese products waiting in line, insisting that the EU's dual measures were in line with WTO rules.

Lee-Makiyama warned the EU is running the risk of a tit-for-tat trade war with Chinese over subsidies.

"The risk of retaliation is particularly palpable for the EU where subsidies in various forms are used intensively and still represent an important (and politically necessary) complement to some economic sectors," he said. "China will not have difficulty in finding examples where they can impose anti-subsidy duties against Europe on equally weak grounds."

Lee-Makiyama said the anti-subsidy measures against Chinese products can only buy time for European sunset industries, but possible retaliation would hurt EU exporters which are now competitive on the Chinese market.

"Due to the risk of retaliation, they are costly means to buy time for sunset industries," he said. "Cases are filed by uncompetitive firms who have nothing to lose from retaliation. Competitive exporters are unlikely to file a complaint as they could lose their market access in the targeted countries."