China and Brexit influences EU plans on foreign subsidies

Out-Law News | 18 Jun 2020 | 3:21 pm | 3 min. read

Plans to protect the EU single market from the competition-distortive effects of foreign subsidies that bolster the activities of foreign-owned businesses in the EU have been outlined by the European Commission.

The raft of measures proposed in the Commission's new white paper aim at dealing with the risk of foreign subsidies distorting the level playing field in the internal market. That risk arises in particular in the context of state subsidies granted to Chinese companies.  At the same time, the EU is well-aware that this risk could further flare as a consequence of Brexit, said expert in competition, EU and trade law Dr. Totis Kotsonis of Pinsent Masons, the law firm behind Out-Law.

Kotsonis Totis_March 2020

Dr. Totis Kotsonis

Partner, Head of Subsidies, Procurement, Trade Agreements and Trade Remedies

These measures would not only help the EU to protect its single market from the competition-distortive effects of foreign subsidies, they are also likely to strengthen the EU's hand in trade negotiations

"There is no doubt that whilst China might have been at the forefront of minds in the EU at the start of the debate over possible action to deal with the distortive effects of foreign subsidies, the question of the UK’s future relationship with the EU would have added an additional level of significance to these proposals," Kotsonis said.

"The issue of level playing field commitments, including in relation to state aid, has been a sticking point in the context of ongoing UK-EU trade negotiations. The EU has made it clear that it is concerned about the risk of unfair competition in EU-UK trade as a result of the UK adopting less stringent anti-subsidy rules, in the light of the UK’s proximity to the single market and interconnectedness of the EU-UK economies," he said.

"Irrespective of whether or not the negotiations lead to a trade deal or indeed, a trade deal which incorporates substantive level playing field commitments, these measures would provide an additional lever in the EU’s trade defence armour. From an EU perspective this would limit the risk that, in the event of the UK adopting a less stringent anti-subsidies regime, UK businesses could 'export' any selective advantage they might acquire as a result of State subsidies in the EU’s single market," Kotsonis said.

The proposals target distortions of competition that foreign subsidies can cause on markets in the EU generally, as well as more specifically in the context of facilitating the acquisition of EU businesses or which may lead to an unfair advantage in bidding for public contracts or competing for the grant of EU funding.

More specifically, one measure being considered by the EU to combat this include giving the Commission and national authorities within the EU greater power to "remedy the likely distortive impact" in cases where there is an indication that companies benefit from foreign subsidies. Remedies might include "redressive payments" or other structural and behavioural measures.

A further proposal includes requiring companies benefitting from financial support from non-EU governments to notify the Commission of their plans to acquire EU businesses. The Commission would review the planned transactions and could prohibit the deals from completing if it identifies that foreign subsidies facilitate the acquisition and give rise to a distortion of the single market that cannot be remedied with commitments.

In relation to the public procurement regime, the Commission has said that bidders should have to notify contracting authorities "of financial contributions received from non-EU countries". If authorities consider the foreign subsidy would make the company's involvement in the procurement procedure unfair, then the company could be excluded from the competition.

Kotsonis said the paper makes it clear that any measures would have to be consistent with existing EU processes and international commitments, including the WTO’s Agreement on Subsidies and Countervailing Measures, the plurilateral Agreement on Government Procurement and any bilateral trade agreements.

In a statement issued alongside its white paper, the Commission said: "Subsidies by member states have always been subject to EU state aid rules to avoid distortions. Subsidies granted by non-EU governments to companies in the EU appear to have an increasing negative impact on competition in the single market, but fall outside EU state aid control. There is a growing number of instances in which foreign subsidies seem to have facilitated the acquisition of EU companies or distorted the investment decisions, market operations or pricing policies of their beneficiaries, or distorted bidding in public procurement, to the detriment of non-subsidised companies."

"Moreover, the existing trade defence rules relate only to exports of goods from third countries and thus do not address all distortions caused by foreign subsidies granted by non-EU countries. Where foreign subsidies take the form of financial flows facilitating acquisitions of EU companies or where they directly support the operation of a company in the EU, or facilitate bidding in a public procurement procedure, there appears to be a regulatory gap," it said.

According to Kotsonis, the Commission's proposals merit careful consideration: "Ultimately, these measures would not only help the EU to protect its single market from the competition-distortive effects of foreign subsidies, they are also likely to strengthen the EU's hand in trade negotiations, whether with the UK or other trade partners which might be incentivised to strengthen their domestic anti-subsidies laws to limit the extent to which authorities in the EU restrict or otherwise penalise the activities of their businesses in the world's largest single market."