Shearman And Sterling

Antitrust, European Parliament, Brussels

Jun 18, 2020

European Commission Expands Arsenal to Curtail Foreign Subsidies

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EUROPEAN COMMISSION EXPANDS ARSENAL TO CURTAIL FOREIGN SUBSIDIES

On June 17, 2020, the European Commission published its highly anticipated White Paper detailing its “anti-subsidy tool,” aimed at rectifying supposed distortions in the EU caused by foreign subsidies. Stakeholders have until September 23, 2020 to submit their views—a pre-COVID type timescale representing the significance of this shift.

The current Commission has ambitions to be a “geopolitical European Commission” as proclaimed by Commission President von der Leyen—boosting “European sovereignty” and fostering national champions into formidable competitors capable of competing on the global stage.

The White Paper supports these goals and aims to patch over gaps in the Commission’s trade and competition toolkits. However, the gaps are not as obvious as that. There are no specific examples referred to by the Commission in justifying the proposal and the three “Modules” it proposes raise a number of issues, including extra-territorial enforcement challenges, expansion of Commission executive power and conflicting regimes. Ultimately, there are questions as to whether EU citizens will actually benefit—or if this is to protect European firms.

  • Module 1: All Types of Foreign Subsidies. This catch-all instrument would allow Member States or the Commission to deal with distortive foreign subsidies in “all market situations”—i.e. for goods, services, and investments. The Commission already has sweeping powers to manage subsidies handed out by European governments to companies active in the EU; and these powers would extend the Commission’s reach to companies active in the EU but receiving money from foreign governments.

    The Commission proposes that subsidies in excess of € 200,000 granted over three years could be subject to review. In line with the Commission’s existing EU state aid rules, these subsidies could comprise: export financing (leaving aside the Member States’ own significant export credit operations), subsidies to ailing undertakings (such as debt forgiveness), open-ended debt guarantees, tax reliefs and subsidies facilitating an acquisition.
  • Module 2: Foreign Subsidies Facilitating the Acquisition of EU Companies. This Module is aimed at ensuring that foreign subsidies do not confer an unfair benefit in the market for corporate control. In a process similar to the merger control notification process, the Commission proposes that companies benefitting from foreign subsidies would need to notify and receive approval for acquisitions of “European” companies above given thresholds (qualitative and quantitative—e.g. turnover above € 100 million), to a competent supervisory authority—which is proposed to be the Commission itself.
  • Module 3: Foreign Subsidies in EU Public Procurement. To address a supposed unfair advantage of bidders who have access to foreign subsidies, facilitating undervalued bids, Module 3 proposes a notification mechanism, which would require bidders to notify authorities (the Commission in coordination with national authorities) of foreign subsidies.

    This module seems confused. If a company receives a foreign subsidy and uses it to provide public services to EU citizens—effectively a foreign government is reducing the cost of public services for EU citizens. It’s far from clear that such a situation either arises in a material way or that, if it does, it’s wise to try and stop it.

Enforcement Challenges. The Commission’s goals face clear enforcement challenges, particularly concerning access to evidence. Foreign governments may (in fact are quite likely to) respond by prohibiting their companies from sharing any information regarding subsidies they receive. This already happens where U.S. export control or sanctions policy conflicts with other governments, for example.

The Commission hopes to overcome this issue with “adequate investigative tools,” for example, by seeking information from other market players or imposing fines for failure to share information. The Commission also expects to use its experience in trade defence to assess whether foreign subsidies exist. To that end, it may well rely on its country reports in the context of anti-dumping (notably for China) to ground the existence of distortions.

Retaliation is also a real risk—especially as EU State aid information is already public and can readily be used by trading partners to impose retaliatory measures.

Expansion of Executive Power. The Commission unsurprisingly foresees a central role for itself as a supervisory authority under Modules 1 and 3 (in a shared system with national authorities) and further—also unsurprisingly—proposes itself as the sole supervisory authority under Module 2. This marks a notable expansion of its executive power, in contrast with the recently adopted EU foreign investment regime, where the Commission’s role is largely to coordinate and to provide non-binding opinions on transactions.

Moreover, the proposed assessments fold in an “EU interest test” whereby subsidies that contribute to the EU’s policy objectives (e.g. job creation, digital transformation) may be allowed. This risks being a highly politicized and discretionary exercise, further expanding the Commission’s decision-making powers. The Commission is accustomed to applying such criteria in State aid—in a manner that is effectively outside judicial supervision.

Conflicting or Duplicative Processes. The proposals insufficiently dispense with real issues of conflicting and overlapping remits already in existence under the EU merger control regime, EU trade defense instruments, EU bilateral free trade agreements and the WTO system. For instance: the new instrument would be “without prejudice to the current rules on antitrust and mergers;” any overlaps with FTA dispute settlement could be addressed “during an [actual] action;” and, even where parallel procedures are notified under both the FDI regime and the new foreign subsidies regime, they are still complementary as they “aim at different objectives.”

Broader Implications: Brexit. If the Commission receives the extensive set of powers anticipated in its proposal, it will remove the rationale for the kind of subsidy control the EU has sought to impose on the U.K. via the current trade negotiations. Provided the U.K. adopts similar tools, this should make an EU/U.K. FTA easier.

Fundamentally, the announcement as part of the Commission’s industrial strategy demonstrates a dramatic shift away from the principles of global free trade, which the European Union has extolled for generations. During the announcement, Commissioner Vestager framed this legislative agenda in the context of the most difficult geo-political environment in recent history and the challenges to the rules based multilateral order. Beyond the technical difficulties which the Commission will inevitably face in designing such a grand new package of measures, this represents a radical shift and yet another step towards a more protectionist and fragmented world. The proposal is likely to meet with resistance from numerous countries, not least China, which has already sounded its alarm regarding “new trade barriers” planned by the EU.

If you would like further information on the above or responding to these consultations, please do not hesitate to contact the authors.

Authors and Contributors

Matthew Readings

Partner

Antitrust

+44 20 7655 5937

+44 20 7655 5937

+32 2 500 9866

+32 2 500 9866

London

Elvira Aliende Rodriguez

Partner

Antitrust

+32 2 500 9837

+32 2 500 9837

Brussels

James Webber

Partner

Antitrust

+44 20 7655 5691

+44 20 7655 5691

+32 2 500 9800

+32 2 500 9800

London

Sara Ashall

Counsel

Antitrust

+32 2 500 9818

+32 2 500 9818

Brussels

Sujin Chan-Allen

Associate

Antitrust

+32 2 500 9836

+32 2 500 9836

Brussels

Practices

Regional Experience