The European Commission is adopting today a proposal to investigate foreign subsidies that distort the internal market and to redress such distortions. This is an important step towards a true level playing field for companies in Europe, to ensure a healthy competitive environment benefitting consumers as well as European jobs. Today, an asymmetry exists as companies operating in the EU are subject to control when they benefit from subsidies from EU Member States, while control does not exist when such benefit comes from third countries. This new instrument is also innovative, as it combines well-established rules and practices from the World Trade Organisation (WTO) with principles stemming from EU State aid rules, public procurement regulation and merger control legislation.
The proposal is based on both Trade policy (Article 207) and Internal market policy (Article 114). It is comprehensive and covers three situations where foreign subsidies may distort the internal market: 1) subsidising the operations of a company operating in the EU, 2) subsidising the take-over of a EU company, and 3) subsidising a bidder in a public tender in the EU :
- Ex officio review of foreign subsidies. A foreign subsidy to the operations of a company operating in the EU may be considered to distort the internal market when it improves its competitive position. That said, it is presumed that foreign subsidies for a total amount below EUR 5 million received over a period of 3 years are unlikely to distort the internal market. The definition of the foreign subsidies concerned is broad and inspired by an interesting combination of the relevant WTO and EU State aid definitions. When a distortion is identified, the Commission may accept commitments or impose measures, such as reducing capacity or market presence, refraining from certain investments, divestment of certain assets, or repayment of the foreign subsidy to the third country.
- Concentrations. In the event of concentration, the requirement of a 'change of control' or a joint venture being established on a lasting basis applies, as considered under EU competition law. The notification thresholds consist in an EU turnover exceeding EUR 500 million over the past 3 years, and a foreign subsidy of more than EUR 50 million received over a 3-year period. The latter may be considered to distort the internal market when it improves the competitive position of the company concerned by the concentration. Where the relevant thresholds are met, the proposed regulation imposes an obligation to notify the merger ex ante. Following its investigation, the Commission can decide to either prohibit the concentration, accept commitments (as mentioned above), or state its absence of objections.
- Public procurement. For procedures of an estimated value in excess of EUR 250 million, foreign subsidies that enable the submission of a tender that is unduly advantageous are targeted. The proposal requires all foreign subsidies received during the 3 years to be notified to the contracting authority, which will then alert the Commission. The Commission can then initiate a 60-day review, after which it may launch an in-depth investigation that can last up to 6 months. The result of this investigation may be to conclude that there is no distortion, to accept commitments as above, or prohibit the award of the contract to the company concerned.
It is also important to note that a common feature of the three modules described above (i.e. operations in the EU, concentrations, and public procurement) is that failure to provide information or refusal to submit to inspections in the Union, in the context of the relevant investigations may result in fines: up to 1% of the annual turnover of the company concerned; 5% of daily turnover per day of non-cooperation; while failure to implement commitment or measures imposed by the Commission may result in fines of up to 10% of its annual turnover and 5% of daily turnover per day of non-enforcement.
The proposed Regulation is not only welcome, it is a much-needed EU tool to address distortive behaviours affecting fair competition in the internal market. The latter, largely open to international competition, is subject to numerous interferences from third countries in key strategic sectors, which the other available instruments, including the screening of foreign direct investments, cannot fully address. In the course of the negotiation and implementation of this proposal, the following key factors are likely to determine the success or failure of this new instrument:
- Scope & applicable threshold: the Commission significantly raised some of the thresholds it had considered in its June 2020 White Paper. Question marks will remain regarding the appropriate thresholds; the Commission provided however for the possibility to amend them via Delegated Acts.
- Causality: the proposal expects that a distortion on the internal market will be deemed to exist where a foreign subsidy is "liable to improve the competitive position of the undertaking concerned in the internal market and where, in doing so, it actually or potentially negatively affects competition on the internal market”. It may be difficult to establish that the said subsidy result in an improvement of the operation of a foreign company in Europe, when it is indirect or granted as a general support to all activities of the company, whether domestic or export.
- Market/non-market economies: in this respect, the proposal clearly targets the aggressive subsidisation by the third countries of key companies in selected sectors. However, the opacity and unreliability of accounting practices combined with the lack of transparency of state actors will be an important challenge in the deployment of the instrument. The recent experience of DG Trade in identifying foreign subsidies in the field of trade in goods (e.g. recent CVD glass fibre case) will be extremely useful.
- Control of direct foreign investment: the EU introduced last year a new instrument that enables a better coordination of Member State measures to control foreign investment. There is an obvious link between this instrument and the takeover section of the foreign subsidy proposal: both will need to be well articulated, especially in terms of procedures, to minimise administrative burden for companies and authorities, all the while remaining effective.
- Complementary nature of the instrument: the proposal complements the International Procurement Instrument proposal of the Commission, which aims to improve the access of European companies to public procurement markets outside the EU. It is also consistent with EU trade policy and complements existing trade instruments such as the EU anti-subsidy and, to a certain extent, the anti-dumping regulation that allows the EU to react to unfair competition where imported goods have been manufactured with the support of non-EU subsidies. When adopted, EU businesses will benefit from a range of legal tools they can draw on to counter distortions of competition caused by the behaviour of companies receiving foreign subsidies.
- Balance of interests: The proposal states that the negative effects of a foreign subsidy should be balanced “with positive effects on the development of the relevant economic activity” where warranted. This provision is very broad, and somewhat unclear. It is reminiscent of the so-called “Union interest” examined by the Commission in anti-dumping proceedings before deciding to take measures. Special attention will be needed to avoid leaving excessive room for interpretation or discretion if not properly framed.
- Teams: In practice, given the complexity of the investigations and analyses that will need to be carried out abroad, the new instrument would likely gain in efficiency if jointly operated by the Commission departments responsible for Competition and Trade. Officials from DG Trade are experienced in investigating non-market economies, and international public and private accounting practices, which will be crucial to the success of the new instrument, while officials from DG Competition have extensive practice in dealing with State aid and concentration issues.
- Transitional measures: the new instrument will not apply to concentrations realised prior to the date of application; however, transitional periods are provided for, whereby the Regulation could apply to other cases of foreign subsidies granted up to 10 years prior to the start of application of the Regulation.
To conclude, the Commission's proposal is very ambitiousand well-constructed. The change of attitude, of "philosophy", is striking. With the devil always being in the details, it remains to be seen what will come out of negotiations in the Council, and the lobbying of third countries. In any event,the initiative should be unquestionably welcomed as a positive sign that "naivety" is beginning to give way to a better understanding of the new world. The text of the proposal should be strongly supported by the EU Parliament and industry. While adoption and actual implementation will inevitably take some time, the clock is ticking: there is no time to lose, the challenges are already here and will not wait.