As explained in our previous client alert, on June 17, 2020, the European Commission (EC) issued a White Paper proposing three new regulatory tools to tackle distortive effects that may be caused by foreign subsidies in the EU Single Market (the White Paper).1 After the completion of the consultation stage, on May 5, 2021, the EC has put forward a proposed Regulation on Foreign Subsidies (the Regulation) accompanied by an Impact Assessment Paper. The proposed new Regulation would be the latest in a series of moves by the EU to give itself additional tools to deal with growing geo-economic competition and the perceived risks created by the role of foreign governments in global investment and trade.
The EC is requesting feedback by July 8, 2021. Interested parties and stakeholders should consider actively contributing to the debate. After that, the proposal will be discussed under the ordinary legislative procedure based on Article 207 and Article 114 of the Treaty on the Functioning of the European Union, which do not require a unanimous decision of the Council of the EU. Given the general consensus that has been emerging within the EU on the need for these kinds of measures, it is likely that at least some aspects of the proposal will ultimately come into force.
I. Background
Foreign direct investment (FDI) within the EU amounted to more than ?7 trillion in 2019, approximately 25% of global FDI. The same year, there were 3,254 foreign acquisitions of at least 30% of the equity of European companies.2
While the EU has long expressed an interest in attracting foreign capital, there has been a growing concern that foreign companies may find it easier to buy EU assets because they are not subject back home to the stringent regime applying to State support of companies within the EU. This is because the strict European system of subsidy control (State aid) goes well beyond the World Trade Organization (WTO) subsidies regime in how it regulates the intra-EU impact of State subsidies, and in that sense is unique in the world.3
Indeed, different levels of anti-subsidy discipline can create an uneven playing field between foreign and EU companies when competing in the European internal market. While the EU is particularly concerned about outbound investments from China,4 its worries go beyond that. The bloc's Single Market Commissioner Thierry Breton also specifically mentioned inbound investment into the EU by investors from the Middle Eastern oil-producing countries.5 In addition, Commissioner Breton noted concerns about subsidized foreign investment, "especially when a major partner has decided to leave us" in a clear reference to the United Kingdom.6
The current EU legal landscape-i.e., antitrust, merger control, public procurement and foreign direct investment rules-is not well-suited to address this issue. For example, WTO subsidy rules and EU trade defense instruments apply to the import of subsidized goods, but they do not apply when foreign subsidies support investments, acquisitions or bids in procurement procedures, or where services are concerned (see our previous client alert for further details).7 Similarly, the EU's merger control rules do not envisage a review of the impact of foreign government support on the acquisition.
In response to concerns about subsidized FDI, the EC proposes three different legal tools: (1) an ex ante notification obligation for concentrations, (2) an ex ante notification obligation in relation to public procurement bids and (3) a broader ex post and ad hoc EC power to investigate.8 The EC also proposes strong fact-finding mechanisms and intends to strengthen compliance with these new rules through the threat of enormous fines that are equivalent to those for violations of competition law.
Footnotes
1 European Commission, White Paper of June 17, 2020, on leveling the playing field as regards foreign subsidies, COM(2020) 253 final.
2 While the pandemic has adversely affected FDI inflows, it has increased public awareness about the vulnerability of EU companies to foreign investors ready to come in and buy those undervalued assets.
3 WTO, Agreement on Subsidies and Countervailing Measures (SCM). The WTO General Agreement on Trade in Services (GATS) has a built-in mandate to develop rules for subsidies in the area of trade in services, but no such rules have been developed to date. In that regard, in January 2020, senior trade representatives of the EU, US and Japan agreed on the need to strengthen WTO rules on industrial subsidies (Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union (Washington DC, January 14, 2020)).
4 The Impact Assessment Paper notes that the Chinese industrial strategy "Made in China 2025" aims to make the country an industrial leader by providing favorable conditions for growth to a number of industrial and high-tech sectors such as robotics, electric vehicles, medical equipment, aerospace, maritime and railways. Studies indicate that Chinese direct and indirect subsidies to State-owned enterprises have amounted to 1.3-1.6% of annual gross domestic product in recent years, with the total subsidy figure in fact likely being higher as private firms receive about a third of total direct subsidies (see p. 5).
5 State support from Middle Eastern countries was also the driver behind the EU's new rules on unfair competition in the airline industry; see Regulation (EU) 2019/712 on safeguarding competition in air transport.
6 Florian Eder, Politico Brussels Playbook: Centeno's valedictory interview-High praise for Parliament- Polish "solidarity" (June 18, 2020); Jorge Valero, EU seeks to beef up its defences against foreign subsidies, Euractiv (June 17, 2020).
7 Regulation (EU) 2016/1037 of the European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union.
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