The European Commission releases a White Paper on foreign subsidies in the Single Market

On 17 June, the European Commission released its White Paper “on levelling the playing field as regards foreign subsidies." The White Paper is built on the conclusion that foreign subsidies can undermine competition and distort the EU internal market. It aims at introduction of new EU legislation to address the regulatory “gap” between the EU state aid rules applying to subsidies granted by the EU Member States to EU entities and the current lack of rules to redress the behavior of corporate actors in the EU whose market actions are unfairly facilitated by unregulated foreign subsidies. Beyond mergers in the EU involving foreign subsidized companies, the legislation would also address concerns about foreign subsidized actors in the context of EU public procurement and access to EU funding. At the start of her mandate, Commission President Ursula von der Leyen had announced her wish to develop tools and policies to better tackle the distortive effects of foreign state ownership and subsidies in the internal market. The COVID-19 crisis encouraged a swift move on this initiative, as pointed out by Executive Vice-President Margrethe Vestager and Commissioner Thierry Breton, who are co-responsible for this dossier. No third country is directly mentioned in the White Paper and Commissioner Thierry Breton insisted that “these tools are for everyone." It is also clear that, legally, the new instrument would have to be applied non-discriminatorily as regards subsidies granted in all third countries, including big players such as Russia, the US or Middle Eastern countries.  However, it is also clear from recent trends that the EU is looking in particular at Chinese-subsidized actors in the Single Market. Further, and although the Commission when drafting the White Paper probably did not have the UK in their sights at the time, the suggested new legislation might also provide a convenient EU regulatory back-stop in the event that the on-going negotiations with London do not deliver the desired UK commitment to maintain respect of the EU state aid rules when granting subsidies to UK entities that will be active in the EU market in future. While the EU has a number of pre-existing tools to address possible market distortions caused by foreign subsidies, this current set of instruments seems no longer sufficient to properly address the issue of foreign subsidies. Most notably, subsidies by EU Member States have always been subject to EU state aid rules while subsidies granted by non-EU governments to companies with operations in the EU fall outside the EU state aid framework. The EU is therefore proposing a new regulatory framework built around three “modules," which could be implemented autonomously or in combination.

• Module 1 is a general instrument addressing foreign subsidies causing distortions in the internal market. It could target solely entities established in the EU or all entities active in the Single Market (thus also including e.g. online companies which sell into the EU market but have no legal establishment within the EU) and would apply as soon as an entity is entitled to receive a foreign subsidy. The Module would put in place a system of review that could lead to an in-depth investigation if a market distortion is suspected. This investigation would be carried out on the basis of a series of factors (e.g. size of the subsidy, situation of the beneficiary, situation of the market concerned). Redressive measures could be imposed to compensate distortions (e.g. divestment of certain assets, prohibition of certain investments, prohibition of the subsidized acquisition, redressive payments). Supervisory competences would be shared between the Commission and the EU Member States.
• Module 2 addresses specifically distortions caused by foreign subsidies facilitating the acquisition of EU companies. In this case, the competent supervisory authority would carry out an ex ante review of a planned acquisition involving possible foreign subsidies. This would imply the introduction of a compulsory notification mechanism for subsidized acquisitions, triggered by a monetary threshold amount. As part of this mechanism, an in-depth investigation could be launched if sufficient evidence is gathered that the acquiring company is benefiting from foreign subsidies. If the competent supervisory authority concludes that an acquisition is facilitated by foreign subsidies and distorts the Single Market, it could require commitments to remedy the distortion or even block the acquisition. The White Paper suggests that the Commission could be exclusively responsible for enforcing this Module.
• Module 3 focuses on foreign subsidies in the context of EU public procurement procedures. It would introduce a compulsory notification mechanism of foreign subsidy for bidders as well as a similar system of preliminary review mechanism and possible in-depth investigations. Redressive measures could include the exclusion from the procurement procedure and from future procedures for a maximum of three years. Similar to Module 1, the Commission and EU Member States would coordinate supervision.

On the issue of foreign subsidies in the context of EU funding, the White Paper proposes to adapt the exclusion criteria for EU procurements and grants. It also argues that EU funding indirectly managed, notably by international financial institutions, should adopt the same approach to foreign subsidies. The foreign subsidy measures proposed in the White Paper are open for public consultation until 23 September 2020. On this basis and assuming a positive public response, the Commission would aim to put forward concrete legislative proposals in 2021. Potential concerns might include the great complexity and resultant market operation implications of merely the proposed investigative procedures. As the White Paper indicates, the grant and notification of government subsidies are not well respected under existing international disciplines and hence subsidy practice in many parts of the world, developed and not, can be quite non-transparent. Even when traditional anti-subsidy investigations take place in the trade remedy field subject to long-established WTO rules, the investigations are long and contentious, including on whether the alleged unfair subsidies in question fall within prohibited categories and on the determination of actual benefits that the allegedly prohibited subsidies confer to an undertaking. In the context of fast-moving EU merger negotiations or a public procurement procedure under strict deadlines, introduction of the proposed subsidy investigations might become too problematic in that undertakings would be scrutinized under multiple, long-lasting, possibly overlapping and redundant proceedings, and especially where the conclusions are subject to subsequent legal appeal.  Adaptation of the EU’s existing merger control criteria and procurement rules in order for the competent authorities to specifically take account of the effects of alleged foreign subsidies may also be simpler to accomplish than introduction of whole new legislation to address just this one potential aspect of EU mergers and procurement bids.