While the EU regulatory framework sets clear rules and limits for subsidies granted by EU Member States, subsidies granted by third countries have thus far not been tackled. With this proposal, the Commission aims to tackle unfair competition arising from companies receiving state aid from third countries, which distorts the EU Single Market. This proposal reflects the European Commission’s aim to defend Europe’s ‘open strategic autonomy’, as it seeks a balance between protecting Europe’s industrial capacity, and that of a more outward-looking approach. Whilst the proposal can be seen primarily as part of a broader debate on the EU’s strategic approach to China, it will apply to all foreign companies active in the EU single market.
What does the proposal entail?
As a key element in the EU’s Industrial Strategy, the proposal aims to close the regulatory gap in the Single Market, whereby subsidies granted by non-EU governments currently go largely unchecked, while subsidies granted by Member States are subject to close scrutiny.
The regulation would give the European Commission the power to investigate financial contributions granted by non-EU governments to companies active in the EU. If the Commission finds that such financial contributions constitute distortive subsidies, it can impose measures to redress their distortive effects. In doing this, the regulation proposes the introduction of 3 tools:
- A notification-based tool to investigate concentrations involving a financial contribution by a non-EU government, where the EU turnover of the company to be acquired is €500 million or greater. The Commission would be able to open investigations into foreign state aid granted to companies that are active in the EU internal market and be able to impose a set of measures on them, such as asking them to divest or repay the subsidy.
- A notification-based tool to investigate bids in public procurements involving a financial contribution by a non-EU government, where the estimated value of the procurement is €250 million or more.
- A tool to investigate all other market situations and smaller concentrations and public procurement procedures, which the Commission can start on its own initiative and may request ad-hoc notifications.
What happens now?
Next, the European Parliament and the Council, representing EU Member States, will discuss the proposed regulation. Once they have agreed a position on the file, a joint compromise will be sought before a final text of the regulation is adopted. Once adopted, the regulation will be directly applicable across the EU. Nevertheless, this process may take some time as a number of hurdles still need to be overcome.
What has been the reaction so far?
- Overall, the European Parliament welcome the instrument as a necessary complementary tool to trade defence measures. However, some MEPs have expressed concerns that the proposal is a move by the Commission to strip individual Member States of their ability to protect their own domestic industries as they see fit.
- Similarly, when it comes to Member States, opinions are mixed. Whilst France and Germany are supportive of the tool, advocating for a more protectionist industrial strategy which sees a reshoring of European Industry, there is likely to be resistance from more liberal advocates of open economies in countries such as Sweden and the Netherlands.
- The effectiveness of this proposal has been called into question by some third countries. AmCham EU, representing American business in Europe, warn that the instrument may impose significant additional compliance efforts on companies who already act transparently, while not adequately targeting genuinely distortive practices. The Chinese Chamber of Commerce have reported that China is currently considering a law to allow it to react to foreign sanctions and long-arm jurisdictions, which, if so, could lead to an escalation of trade barriers.
What might this mean for your business?
By targeting third-country investments, UK businesses will be covered in the scope of this regulation.
In theory, this should only have negative consequences for businesses if the overall impact of an investment is distortive. During financial inspection, investments will be subject to a balancing test which intends to conclude if, or not, a foreign subsidy is producing positive effects that outweigh any negative repercussions to the Single Market; when this is the case no redistributive measures will be taken. This is important as this shows that in principle the regulation is not intended to clamp down on foreign subsidies per se or to discourage FDI in and between the economic bloc and third countries.
However, from a third country perspective, the targeting of international companies, many of whom share the same open market principles as the EU, risks undermining the free-flow of investment between the EU and third countries at a time when investment could not be more essential as the global economy recovers from the pandemic.
What are we doing about it?
We are working with BusinessEurope to ensure the voice of CBI members are represented. As we input into BusinessEurope’s position, members views are welcome.
In its draft reaction, BusinessEurope has stressed that clarifying the scope will be a key element to both the efficacy of the regulation and the debate surrounding it. One of the main concerns with the regulation as it stands is that it raises the risk of causing confusion for businesses. References to the principle of proportionality are too vague. Furthermore, there is also no mechanism for companies to notify a financial transaction on their own initiative, which may lead to lengthy investigations into companies from the European Commission.
Whilst there is recognition that China is the main target of the proposal, although the Commission doesn’t explicitly state this, we must be careful of unintended consequences for third countries like the UK. It is vital that the EU remains open to the trade and investment that is necessary to achieve resilience as the world builds back from the pandemic. The EU and UK instead need to work in close partnership on China, in defence of open, and sustainable, trade. Further to this, CBI will stress that the proposal must remain fully compatible with existing international obligations and WTO rules. As the UK introduces the UK Subsidy Control Bill – in addition to the existing provisions in the EU-UK Trade and Cooperation Agreement on state aid and dispute settlements – it will be important that both the EU and UK’s subsidy initiatives are conducive to one another.
CBI is a member of BusinessEurope’s Taskforce on Foreign Subsidies. CBI’s input will shape BusinessEurope’s position ahead of discussions with the European Parliament and EU Member States. If you want to get involved or discuss the proposal in more detail, please contact [email protected].