29 June 2020

Erika Szyszczak is Professor Emerita and a Fellow of the UKTPO, University of Sussex.

In response to the global economic effects of the COVID-19 pandemic the European Commission has launched a major review of EU trade policy. The first act was to launch an inclusive online public consultation on a number of themes:

• Building a resilient and sustainable EU economy after the coronavirus
• Reforming the WTO
• Creating global trade opportunities for businesses and in particular SMEs
• Maximising the contribution of trade policy to addressing key global challenges: climate change, sustainable development, the digital transition
• Strengthening of trade and investment relationships with key trading partners
• Improving the level playing field and protecting EU business and citizens

A flavour of how the EU may modernise its trade policy was revealed the next day, on 17 June 2020, when a White Paper was published launching a second consultation on a new trade remedy and legal process addressing the competitive impact of subsidies granted by non-EU states to subsidiaries operating in the EU.

The EU is an economy open to foreign investment. Thus, a balance has to be made between attracting foreign capital and ensuring that there is openness and transparency when foreign-financed companies are active in the Internal Market. Recently the EU has been concerned by the role of Chinese state-owned enterprises (SOE) operating in the EU, especially where these companies are able to takeover EU companies or bid for tenders at artificially low prices.

But investment from the US and Canada is also causing concern for the EU, alongside the uncertainty of how the UK will use and regulate State aid to facilitate trade in the future.

Existing EU law on competition and procurement is unable to regulate foreign subsidies, even where the effects are felt in the EU. A lack of transparency and poor compliance with the obligation to notify subsidies under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) exacerbates the EU’s frustration at not understanding the extent of the anti-competitive effects of foreign subsidies.

A Regulation establishing a framework for the screening of foreign direct investments into the EU was adopted, addressing risks to security or public order brought by foreign investments that target EU or Member States’ critical assets. However, it is only the effects on critical infrastructure, critical technologies and critical inputs, that are tackled, not the anti-competitive effects of distortions to trade caused by foreign subsidies.

In its Communication A New Industrial Strategy for Europe  the European Commission announced that  it would adopt a White Paper to start a consultation on how  to fill the regulatory gap created by the limited application of the  EU State aid and procurement rules and the lack of a satisfactory international process to remedy the distortions created by foreign subsidies.

The ensuing White Paper puts forward three Modules to address the distortive effects caused by foreign subsidies.

Module 1: A General instrument to capture distortive effects of foreign subsidies

This proposal would create a general market scrutiny instrument to capture all possible market situations in which foreign subsidies may cause distortions in the Internal Market.

The supervisory authority, which would be a national authority or the European Commission, could act upon any indication or information that a company in the EU benefits from a foreign subsidy. If the existence of a foreign subsidy is established, the authority would then impose measures to remedy the likely distortive impact, for example, such as payments to redress harm, structural or behavioural remedies. It could also consider that the subsidised activity or investment has a positive impact, which outweighs the distortion and not pursue the investigation further (EU Interest Test).

Module 2: Foreign subsidies facilitating the acquisition of EU companies

The first Module could be complemented by Module 2, which is intended to specifically address distortions caused by foreign subsidies facilitating the acquisition of EU companies. This Module aims at ensuring that foreign subsidies do not confer an unfair advantage on their recipients when the latter acquire EU companies, either directly by linking a subsidy to a given acquisition or indirectly by de facto increasing the financial strength of the acquirer.

Under Module 2, companies benefitting from a subsidy from a non-EU government would have to notify their acquisitions of EU companies, above a given threshold, to the competent supervisory authority. The White Paper proposes that the European Commission is the competent supervisory authority. Transactions could not be closed until the European Commission has completed its review. If the supervisory authority finds that the acquisition is facilitated by the foreign subsidy and distorts the Internal Market, it could either accept commitments by the notifying party that effectively remedy the distortion or, as a last resort, it could prohibit the acquisition. Under this Module, the European Commission could also apply the EU Interest Test.

Module 3: Foreign subsidies in EU public procurement procedures

The White Paper proposes a mechanism where bidders would have to notify the contracting authority of financial contributions received from non-EU countries. The competent contracting and supervisory authorities would then assess whether there is a foreign subsidy and whether it made the procurement procedure unfair. In this case, the bidder would be excluded from the procurement procedure.

Foreign subsidies in the context of EU funding

The White Paper also sets out ways to address the issue of foreign subsidies in applications for EU financial support. It proposes options to prevent an unfair advantage, for example, in case of funding distributed through public tenders or grants; a similar procedure would apply as the one used for EU public procurement procedures. The White Paper emphasises that international financial institutions that implement projects supported by the EU budget (such as the EIB or EBRD) should mirror this approach to foreign subsidies.

Consequences for Future UK Trade

The Global Trade Review indicates that the EU is focused upon how to modernise the framework of international trade and to take the lead in developing new procedures and trade remedies. At a time when the United States is losing its influence, the EU is stepping up its commitment to build an international framework of legal rules. These will underpin future trade negotiations to address the problems emerging, making an imprint on the way a new global order of trade relations should emerge and be managed.  The EU claims that its measures are not discriminatory and fall within the current WTO non-discrimination principle. The proposed thresholds for intervention fall broadly within the de minimis thresholds used internally for State aid and procurement regulation. This implies that the EU is only concerned with larger scale subsidies and  is attempting to avoid criticisms of discrimination between EU Member States and non-EU Member States.

These new measures will undoubtedly impact upon the way in which the UK has to deal with the EU in the future. Not only in direct EU-UK trade deals but given that the EU is a regulatory magnet, the UK may also find that other countries feel constrained to comply with the EU trade rules.

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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