EU tools addressing foreign subsidies: the trade law nexus, and could they backfire?

Announced as EU instruments addressing internal market distortions, the tools in the proposed regulation are likely to raise trade experts’ eyebrows. Those with a ‘trade eye’ can see protectionist instruments that risk running foul of international trade rules. There also appear to be reciprocity risks for the very EU businesses the instruments are designed to protect.

Calls for instruments of this kind have been heard for years in the context of China’s Belt and Road Initiative, and a series of Chinese service mandates, acquisitions and investments across Europe. The White Paper foreshadowing this proposal also came at an exceptional moment in history, with subsidy policies unprecedented in scale and scope in the wake of the Covid-19 pandemic.

Meanwhile, reform of World Trade Organization (WTO) rules on subsidies is very much on the agenda. Last year the United States, the EU and Japan issued a Trilateral Statement seeking to close several other loopholes in the WTO’s rules on subsidies, especially in relation to state owned enterprises. Whether there is also broader support for regulating ‘foreign subsidies’, and whether in the longer term this can lead to new international rules remains to be seen. For the moment, the EU clearly thinks the problem sufficiently urgent to press on with novel unilateral measures.

Trade elements in the proposed regulation

The proposal employs the term ‘subsidy’, a well-settled concept in WTO law (see here how the term relates to the EU State aid regime). Most of the substance come from trade law, but there are also new elements, reflecting a perceived regulatory gap:

  • the EU is concerned with the same kinds of foreign subsidisation as are disciplined by the WTO’s Agreement on subsidies and countervailing measures (the SCM Agreement); but
  • the EU does not think that the tools provided by the SCM Agreement (used to prevent subsidised imported goods from harming domestic industry) provide cover against the full range of harms that may be associated with foreign subsidisation.

More precisely, the EU worries that the SCM Agreement provides no protection against foreign subsidisation relating to the establishment and operation of undertakings in the EU (see our TradeLinks blogpost for a possible counterargument) Such foreign subsidisation could plausibly be used to undermine domestically owned industry.

The proposal also draws upon trade law in that it makes use of the experience gained in EU trade remedy investigations (anti-subsidy countervailing measures). It is likely that investigations will benefit from a broad margin of discretion, and greater tolerance by the EU judicature, than in antitrust or state aid investigations. Having regard to the potential remedies, this dimension may well give rise to pointed questions concerning the rights of defence.

Drawing on EU trade remedy experience also means the use of investigative techniques and sources of evidence that differ from the antitrust or state aid settings. Trade remedy investigations, notably involving China and other regular respondents, have increasingly involved the application of ‘facts available’ to investigated governments and undertakings. This means an authority is entitled to disregard evidence submitted by the undertaking, and instead use in its findings similar data provided by other participants in the investigation, often complainants. This ‘facts available’ technique often leads to more effective protection for EU competing businesses, at the expense of investigated firms, and has been written in the proposed regulation.

An example of this technique in practice is the EU anti-subsidy investigation concerning certain pneumatic tyres used for buses and lorries originating from China, concluded in November 2018. In that investigation, the Commission applied facts available to information on preferential lending, inputs and export credit insurance by China in respect of certain Chinese exporters, even though they were cooperating with the Commission. This technique was reflected in the final findings on subsidisation and resulted in high subsidy rates. In that investigation the Commission also used, for the purposes of ‘facts available’, its own staff working document on distortions in China for the purpose of trade remedy investigations. Such country reports, which are meant to be updated regularly, could become relevant for the proposed tools.

Are the proposed tools consistent with trade/WTO law?

The WTO’s SCM Agreement carefully limits WTO members’ ability to discipline subsidisation practices. More specifically, the SCM Agreement requires members to not take any specific action/measure against subsidies – other than as provided in the WTO agreements – and to maintain their laws and regulations so as they stay consistent with the WTO agreements. Does the proposed regulation pass the test? It may well be that only future EU litigation and WTO disputes could provide legal certainty on this issue.

Quite aside from this fundamental question, the proposed EU instruments may well be questioned on the basis of other rules including WTO law on services and procurement and existing bilateral agreements. Potential issues concern:

  • equal treatment of services and service suppliers established in the EU but with owners of different third country nationalities (most favoured nation treatment);
  • equal treatment of services and service suppliers established in the EU but with EU and foreign owners, where the EU has made national treatment commitments under WTO law;
  • equal treatment of investors under bilateral investment treaties; and
  • greater barriers for foreign-originating goods in public procurement.
Could the proposed tools backfire on EU companies?

When considering the proposed regulation’s intended medium-to-long-term effects, third countries may be concerned with improved competitiveness of EU-controlled companies, their investments, EU products and services in winning service mandates, acquisitions and public tenders. Third states may see the proposed tools as a potential ‘economic boost’ to EU businesses in the single market, and also when EU businesses render services and investments abroad.

If this proves right, third countries may go further than simple retaliation against the EU to compensate for their eventual losses in trade in services and investments (e.g. raising tariffs or creating barriers to services trade and investment). They may design similar advanced protection tools in their own jurisdictions, even ones specifically targeting EU companies. This could become a regulatory race ‘to the bottom’ with spill-over effects world-wide. The issue is that EU companies increasingly benefit from various Member States’ authorised aid measures, as well as diversified EU-wide globalisation adjustment, economic recovery, R&D, digitalisation and other assistance. They could then become targets of third country measures aimed at disciplining the effects of EU’s ‘foreign subsidies’ in third countries’ markets.

Should you be interested in a more detailed trade law analysis, please refer to our TradeLinks blog.