This blog post, written by George Peretz Q.C. of Monckton Chambers, assesses the European Commission’s new proposals on levelling the playing field as regards foreign subsidies, and the implications for the United Kingdom.
Summary of the proposals
On 17 June, the Commission published a White Paper on “levelling the playing field as regards foreign subsidies”. The Commission identifies a number of problems that foreign subsidies can cause in the EU internal market:
- foreign subsidies to companies active on the internal market – either directly to a company established in the EU or to its parent located outside the EU – can have the same distortive effects as an equivalent subsidy by a Member State;
- subsidies may assist a foreign company in bidding in EU procurement markets – and, perhaps looking at China, the Commission observes that such subsidies may be used to gain strategic footholds in critical EU infrastructures; and
- subsidies may assist foreign companies in acquiring EU undertakings.
The Commission argues that existing tools do not deal with those issues. State aid rules apply only to EEA Member States (and to some others, such as Turkey, Ukraine and accession states). Merger and anti-trust rules do not directly address the issue. EU public procurement rules do not address the issue either and attach no legal consequences to the existence of a foreign subsidy.
The EU is able to impose countervailing measures under the WTO Subsidies and Countervailing Measures Agreement (“SCM Agreement”). But the Commission argues that those mechanisms suffer from numerous weaknesses and gaps. They do not apply to services or investment flows.
The Commission therefore puts forward three proposals.
The first would address foreign subsidies that benefit undertakings established in the EU, possibly extending to undertakings active in the EU internal market but not established there. There would be a class of subsidies that would be presumed to distort competition in the internal marker (export financing, subsidies to ailing firms, unlimited guarantees, selective tax reliefs, and subsidies directly targeted at acquisitions). Other subsidies would be looked at in more detail to establish a distortive effect. The subsidy would then be evaluated, balancing possible positive impacts on the EU against distortions. There would be powers of investigation, particularly aimed at undertakings with a presence in the EU. But those powers would be supplemented by a power to act on the basis of the facts available if information was not supplied (very likely where the undertaking had no real establishment in the EU): in that regard, the Commission notes that it could draw on its experience of finding foreign subsidies when examining whether to impose countervailing duties under the SCM Agreement (a remark that may not entirely reassure anyone concerned that action under the new regime might not always be based on robust evidence and rigorous economic analysis). If a distorting foreign subsidy were found, “redressive measures” could include not just a requirement to repay the subsidy to the foreign government (which the Commission notes might be difficult to enforce), but also a requirement to pay the subsidy to the EU or Member States affected, or divestment or structural remedies. Both the Commission and Member States would have power to apply the new rules.
On mergers, the Commission suggests a regime under which companies that had received foreign government financing would be required to file an information notice with the enforcing authority (it is suggested that that should be the Commission) before completing an acquisition in which it provided basic information about its financing and the proposed transaction. The authority would consider whether any distortion caused by the financing could be addressed by commitments or whether the transaction should be prohibited.
Finally, on procurement, the Commission suggests that EU procurement rules should require the exclusion of bidders that had received distortive foreign subsidies: bidders would be required to disclose such subsidies under penalty of fines, termination of any contract obtained, or exclusion from bidding for further contracts for a fixed period.
The definition of “subsidy” would be based on the definition in the SCM Agreement, but extended to services.
Comment from a UK perspective
As a non-Member State, the United Kingdom will have no say over the progress of these proposals. But it will be heavily impacted by them. In principle, any subsidy granted by the UK government or any other UK authority to a business with EU operations or an EU subsidiary could give rise to EU action under these provisions – and in some cases the recipient of the UK subsidy could be ordered to pay it to the EU or a Member State. Given the volume of UK exports of goods and services to the EU and the extent of UK ownership of EU businesses, that risk is very real indeed and would be a significant deterrent to any company with interests in the EU that was contemplating receiving UK subsidies.
What policy conclusions follow?
First, these proposals show that the idea, still occasionally floated, that the UK government could, after the end of transition, throw off the State aid rules and freely subsidise as it likes is, ultimately, an illusion: not only will the EU insist (as it has done) that the United Kingdom accept constraints on its ability to subsidise UK industry as part of any free trade agreement, but the EU is showing its determination, even in the absence of such an agreement, to do what it can to protect itself vigorously against any such policy – and the reality is that it can do a lot, given the volume of UK trade with, and investment in, the EU. Whether the United Kingdom thinks that the EU’s position is reasonable or not is ultimately beside the point: if the EU decides to go down this route there is little that the UK Government can do apart from live with the consequences.
Second, the EU is not just showing some stick but also some carrot: thus, at section 6.8, it states that where it enters into a bilateral agreement that includes commitments by the third country to operate rules similar to the State aid rules:
“if during any action under a new instrument it appears more appropriate to address the distortion created by the foreign subsidy under the dispute settlement or consultation provisions of the respective trade agreement, the action under such a new instrument could be suspended. The action could be resumed to impose redressive measures or adopt commitments in two alternative scenarios: (1) the dispute settlement under the trade agreement has been concluded and has led to the finding that there is an infringement, but the infringing party does not take corrective actions; (2) within 12 months from the suspension of the action, the distortion caused by the foreign subsidy has not been eliminated.”
Or, put more crudely, if the United Kingdom commits to operate rules similar to State aid rules, the EU can hold off taking action on UK subsidies if it is able to raise the issue with the United Kingdom and the United Kingdom is able to address the issue under its own rules. That is a further reason for the United Kingdom to have in place an effective anti-subsidy regime.
It would of course be wrong – and somewhat reminiscent of Monty Python’s “News for Parrots” sketch – to read the White Paper solely from a UK perspective. Indeed, as noted above, in many respects its target lies some 8,000 kilometres to the east. But its publication at the present delicate stage of the negotiations between the UK and EU should, and is no doubt intended to, spark some reflection in the current UK government as to whether its stance of refusing to offer any significant commitments in relation to subsidies is at all sustainable.
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