WTO law implications of the EU’s proposal to target ‘foreign subsidies’ given to companies in other countries

On two separate occasions last week, the EU showed that it is prepared to target ‘foreign subsidies’ granted by countries to their investors in other countries, including in the EU itself. 

On 15 June, the European Commission imposed countervailing duties (anti-subsidy measures) on imports of glass fibre fabrics produced by a Chinese company located in a special economic zone in Egypt, which was reportedly established with the purpose of targeting the EU market. This company was benefitting from financial subsidies granted by the Chinese government. The Commission reasoned, however, with heavy reliance on the principles of state responsibility under international law, that the Chinese subsidies were in fact Egyptian subsidies because they had been ‘adopted’ by the Egyptian government. This was necessary, the Commission thought, because the WTO Agreement on Subsidies and Countervailing Measures (the SCM Agreement) only applies to subsidies granted by countries to recipients in their own territories. 

Two days later, on 17 June, in a White Paper on levelling the playing field as regards foreign subsidies the European Commission addressed a related issue, namely, how to deal with subsidies granted by countries (such as China) to companies that are located within the EU. The object of the White Paper was to prevent such companies from distorting the single market, unfairly acquiring EU entities, and unfairly outbidding rivals in public tenders, but the predicate, as in the Egyptian case, is that the EU has no WTO rights that can be enforced against countries subsidising companies outside of their own jurisdictions.

In fact, this predicate may not be as clear as the EU asserts [see separate blog post]. But if the EU is correct, this also presents it with a conundrum, because if there is nothing actually legally wrong with such ‘foreign subsidies’, then the EU is limited in the way that it can respond to them. In particular, it cannot take any measures that discriminate against the targeted companies, or against imported products and services that they might use or that they might supply within the EU.

This constraint applies at a general level because the discriminatory effects of a WTO member’s measure are assessed at the time that the measure is adopted. It does not therefore help that this measure might simply address a situation of reverse discrimination by placing the products (or services or service suppliers) of the other WTO member in the same position as its own. This was an issue in US – Tuna II, where it was held to be discriminatory for the US to impose certain restrictions on Mexican tuna fleets notwithstanding the fact that equivalent restrictions had been imposed on US tuna fleets for more than a decade.1  In that case, the US was able to justify its discriminatory measure on the basis that it was necessary to protect dolphins (and, indirectly, consumer information about dolphin protection). But there is no second chance for measures taken for reasons of economic protection.

It may be (though highly unlikely) that this interpretation of WTO law can be overturned. But even if it is, the EU will still need to ensure that, even taken overall, its response to ‘foreign subsidies’ does not discriminate against targeted companies that count as the services and service suppliers of another WTO member, or against imported services or products used by the targeted companies.

One can sympathise with the EU. As will be explained in another blog, ‘foreign subsidies’ are, at best, not clearly addressed by WTO law, either when they are granted to entities in third countries or when they are granted to entities in the country of production. If foreign subsidies are indeed not covered by WTO law, this leaves the European Commission in the difficult position of making use of legal fictions (eg Chinese subsidies were ‘adopted’ by Egypt) which might not always be available, or choosing to adopt measures that, without careful thought, may end up putting the EU itself in breach of WTO law.

Written by Lorand Bartels.

Edited by the Linklaters Trade Practice. The views and opinions expressed here are the personal opinions of the author(s) and do not necessarily represent the views and opinions of Linklaters.
1. WTO Panel Report, US – Tuna II, WT/DS381/R, paras 7.315-7.317; Appellate Body Report, US – Tuna II, WT/DS381/AB/R, adopted 13 June 2012, paras 233-240 (by implication).