July 2020

By Mathilde Defarges, with contribution from Étienne Soula

“Naïve free-traders” no more

On 17 June 2020, the European Commission adopted its “White Paper on levelling the playing field as regards foreign subsidies.” The White Paper comes at a moment when the European Union is doubling down on efforts to reach a global level playing field on trade. In parallel to new rules on foreign subsidies, the EU is carrying out negotiations around the globe to increase reciprocity and lower trade barriers. According to Valdis Dombrovskis, the European Commission’s executive vice-president in charge of economic policy, the EU is now determined to address “a great asymmetry in market access.”

Enter the EU’s new White Paper. While the new rules are not final, and currently open for public consultation, they signal the EU’s intention to ensure that the internal market provides a level playing field as well as fair competition between European companies and foreign subsidized companies. The White Paper also indicates how the European Commission is likely to legislate in order to make this happen.

The White Paper identifies three ways in which foreign subsidies are problematic. Firstly, it finds that certain foreign subsidies create distortions in the European market. European Competition authorities can already control whether European companies benefit from state subsidies and check that those subsidies do not impede competition. But existing legislation only concerns subsidies granted by EU member states. The White Paper proposes to create a broad catch-all instrument to act against any foreign subsidy creating a distortion in the internal market. For instance, the new rules would capture foreign subsidiaries established in the EU benefitting from foreign subsidies from their parent company’s home state, especially if that that support were to undercut competitors in the internal market.

Secondly, building on the catch-all provision, the White Paper highlights the particular danger posed by foreign subsidies used to help a foreign company take over a European competitor. Here, high profile cases of Chinese acquisitions have recently caused concern in several European capitals that Beijing was financing the purchase of European assets in order to siphon know-how and expertise back to China.

The third issue addressed by the White Paper concerns foreign subsidies that enable companies to undercut their competitors in European public procurement processes. In particular, the EU is concerned that foreign subsidies are allowing companies to make bids below market price, or even below cost. There again, Chinese conglomerates pushed into overcapacity thanks to Beijing’s overly generous subsidies have delivered underpriced infrastructure projects in the EU, drawing concern from some Members of the European Parliament.

To address this triple threat posed by foreign subsidies, the White Paper would empower the European Commission, sometimes alone and sometimes in coordination with national authorities, to investigate suspicious foreign subsidies and, where appropriate, to take remedial measures. These measures would range from fines, to the blocking of an acquisition enabled by a distorting foreign subsidy, to the exclusion of bidders who use foreign subsidies to undercut their competitors in a European public procurement process.

The new measures come on the heels of a 2019 regulation on the screening of foreign direct investments (FDI) into the Union. The 2019 regulation approached FDI through the prism of national security, which falls within the purview of member states, and affords only a limited role to the EU. By contrast, the new rules contained in the White Paper would frame the issue of foreign acquisitions in terms of competition law, an area over which European institutions enjoy exclusive competence.

Also relevant to Brussels’ proposal on foreign subsidies is the joint initiative by the EU, United States, and Japan to better address the issue at the WTO. In January 2020, Trade representatives from all three sides issued a joint statement in which they reiterated their common resolve to “to strengthen existing WTO rules on industrial subsidies.”

Notably absent from this group was China. And while the EU White Paper does not specify which countries would be the main targets of the new measures it proposes, the high level of state support Beijing offers to large Chinese corporations would cause many of them to fall foul of Brussels’ proposed rules. Furthermore, as the economic consequences of COVID-19 continue to unfold, the EU has moved to more proactively defend the internal market. This mindset explains Brussels’ decision in June 2020 to slap tariffs on glass fiber produced by Chinese companies based in Egypt – EU rules previously only looked at subsidies provided by the host government. Aware of the changing winds, Beijing has already reacted to the White Paper with the Chinese ambassador to the EU urging the bloc to “refrain from creating new trade barriers under the pretext of subsidies.”

The exact scope and objectives of the proposal are still being debated within European institutions as it makes its way through the European Parliament’s Committee on International Trade. Politico quotes a centrist parliamentarian as well as the head of a Brussels-based think tank warning against the potential negative consequences of an overly restrictive foreign subsidies’ framework, such as reduced investment to Europe or potential retaliation from countries whose companies are targeted by the new rules. By contrast, EU officials like Competition Commissioner Margrethe Vestager and Internal Market Commissioner Thierry Breton are putting their whole weight behind the White Paper.

For now, the havoc wreaked by COVID-19 is giving more momentum to those who would prioritize the recovery of Europe’s economy over all other considerations. The Wall Street Journal is one of several publications warning that the new rules put forward by the White Paper would apply to American companies benefiting from selective tax incentives in the United States, just as they would to Chinese conglomerates benefiting from cheap loans by state-owned banks.

The White Paper on foreign subsidies marks a new step in the EU’s ongoing efforts to better protect its companies and the internal market from unfair competition. With the Trump administration making no secret of its disdain for the WTO and with an assertive Beijing looking to achieve dominance in all key sectors of the world’s economy by 2025, EU legislation seems to be the most reliable way to ensure that European companies enjoy fair competition, at least inside the internal market. And, with proper coordination with allies in Washington, Tokyo, and beyond, the new rules could even set a trend and lead to a more level playing field globally.