EU tools addressing foreign subsidies: a distant cousin rather than State aid sibling

On 17 June 2020, the European Commission published its White Paper on levelling the playing field as regards foreign subsidies. The White Paper rests on the premise that the EU needs "the right tools to ensure that foreign subsidies do not distort our market, just as we do with national subsidies". The EU's system for the control of Member States' subsidies is well established, but the regime described in the White Paper is not an extra-territorial sibling of that system. A distant cousin, perhaps, as we explain in this post, and one that may face some serious growing pains too.

Handling a new-born: instructions not included

Much like a new parent, the EC will need to guide companies through the unknowns. The White Paper is detailed, but to understand the impact of its proposals several key concepts need further development.

  • The notion of a "foreign subsidy" appears largely derived from the EU Anti-subsidy and Airline Sector Regulations (which, in turn, rely on WTO rules). However, it remains unclear how this notion relates to that of "aid" under the EU State aid rules. This must be clarified to avoid conflicting interpretations and legal uncertainty. Clarification is all the more important, since the White Paper envisages that the EC will have concurrent enforcement powers with national authorities. The risk of conflicting interpretations and ultimately diverging outcomes is particularly acute for EU national authorities, a number of which have limited experience in trade disputes, an exclusive jurisdiction of the EU. The White Paper has been framed as "plugging the gap", but divergent interpretations on important concepts call into question whether the aim is to level the playing field or to tilt it towards EU players. Consistency is key for legal certainty as well as the new system's effectiveness.
  • The White Paper proposes new tools to address any "distortion in the internal market", but this notion, too, needs to be clarified. Consistent with the EU State aid rules, the paper lists categories of subsidies that are likely to have distortive effects. However, experience tells us that no such list can be exhaustive. The proposed list of distortive subsidies in the White Paper draws on the experience of the concept of "prohibited subsidies" in the WTO Agreement on Subsidies and Countervailing Measures, but expands and modifies it further, reinforcing the impression of a hybrid approach. If the State aid rules ultimately provide the guidance to follow here, a "distortion" will easily be established - a swathe of subsidies would be susceptible to enforcement action.
  • Any distortive effects would be weighed against the subsidies' possible positive impact under the "EU interest test". Balancing public policy objectives – such as job creation, climate neutrality, environment protection and public safety – is a well-known State aid feature. If the legal notions of "foreign subsidy" and "distortion" will be interpreted as broadly as we believe they might be, then assessment under this "EU interest test" will become critical. This would also mean further politicizing the assessment, beyond the degree of the EU State aid rules. How the EC (and indeed national authorities) exercise their discretion would therefore be subject to intense scrutiny. Any indications of a more lenient treatment of State aid recipients would lead to a flare up of political concerns, with imminent retaliation as a very concrete possibility. Again, with multiple concurrent enforcers, as envisaged in the White Paper, a robust system to ensure consistency and legal certainty would need to be established.
  • The White Paper envisages that foreign subsidies that fall below a de minimis threshold would be beyond the scope of the new tools: a threshold of EUR 200,000, granted over a period of three years is foreseen. This aligns with the general de minimis threshold laid down in the EU State aid rules, but it remains to be seen whether the EC will also mirror its specific de minimis thresholds applicable to loans (up to EUR 1 million) and guarantees (EUR 0.75-1.5 million, depending on duration). In any event, it seems important to analyse further the consequences of employing such threshold values in respect of subsidies granted by non-EU governments all over the world. This is paramount to calibrating enforcement to a meaningful universe of subsidies and avoiding excessive interference.

The State aid rules have opened the door for the EC to dig deeper and unveil new scenarios which do not fit traditional patterns, but have the same effect. Indeed, as part of the EC's efforts to clamp down on sweetheart tax deals, we have seen it expand certain State aid concepts to fit new realities – an approach largely vindicated in the General Court's Starbucks and Fiat judgments. It is unclear how the new regime will strike a balance between the perceived level of organic development needed (and how this might work in practice given the concurrent enforcement powers of national authorities and the EC) and neutrality as regards non-EU players.

The White Paper was not motivated by Covid-19 but was published in the midst of the global pandemic. The EC designed measures to flex the application of EU State aid rules in response to Member States' support. Here we have seen the EC being pragmatic and quick in allowing Member States to support their economies. Governments worldwide have now announced unprecedented recovery support, and the timing of the White Paper means that it is necessary to explain whether there is also scope for flex in the instruments that the paper has outlined. Failure to do so would raise questions about neutrality.

Dealing with difficult children: enforceability challenges

Inevitably, a wide-ranging rulebook with extra-territorial reach will encounter a number of enforcement challenges, in particular with respect to evidence gathering and concurrent enforcement powers.

The effectiveness of the EU's State aid regime is closely linked with the EC's comprehensive powers to demand information from Member States and alleged aid beneficiaries. The EC does not have any such powers of compulsion with respect to non-EU countries, which are likely to be much more circumspect in responding to extensive requests for information. Indeed, some could actively prevent beneficiaries from sharing any information with the EC. Varying degrees of protectionism and confidentiality concerns, especially in relation to strategic sectors, might further weaken the practical effectiveness of the proposed regime.

The White Paper proposes to overcome such challenges by reliance on "facts available", a technique brought in from EU trade remedy investigations. This technique replaces missing or unreliable information, and the replacement may include information "stem[ming] from market operators or Member States". Nonetheless, this technique is based on WTO rules and was designed to achieve more effective protection against third country's competing goods. It may prove to be inadequate for justifying measures designed to ensure a level playing field in the internal market.

Beneficiaries may find themselves between a rock and a hard place. Comply with an EU information request, or with confidentiality demands from the subsidising non-EU State? A cost-benefit analysis - weighting up the risk of fines for failure to supply the information requested against the risk of biting the hand that feeds it - would not always lead to disclosure.

One happy family or too many cats and dogs?

The proposed regime seeks to create a hybrid approach which builds on the strengths of the more-established EU State aid, merger control, antitrust rules as well as trade defence instruments. However, genetic engineering never comes risk-free. Without well-defined building blocks, mixing and matching elements from (sometimes) diverging regimes raises concerns about legal certainty and neutrality vis-à-vis non-EU players. Also, the Brexit negotiations may bring any inconsistencies between State aid and the new proposal into sharp relief, with the risk of a domino effect in other jurisdictions.

cargo ship in docks