“Openness Requires Fairness”

Quentin Heilmann, Junior Legal Advisor

Contrary to what you might think, these wise words were not spoken by Master Yoda but rather by Guillaume Loriot, Deputy Director General of the European Commission’s DG Competition, during his presentation of the proposed regulation on foreign subsidies distorting the internal market. This article will take a deep dive into this regulation and try to explain its ins and outs.

The European Commission strikes back

If the regulation proposed by the Commission on May 5th of last year is adopted, it will be a small revolution in the competition world. Currently, the Commission is the state-aid warden. It carefully scrutinises all aid granted by Member States to undertakings in order to avoid unfair competition. But while no one can deny that the Commission has this implacable authority over state aid, it does not have any similar control over foreign subsidies coming from third countries. Far from being an epiphenomenon, the European Union is the first destination for foreign direct investments, therefore protecting our own companies against unfair competition is a must.

Furthermore, as the Commission says, “there could be several objectives which non-EU authorities pursue by granting foreign subsidies, not necessarily entirely of economic nature.” From FORATOM’s point of view, protecting our economic independence and reinforcing EU strategic value chains is of major importance. Establishing control over foreign subsidies that could ultimately deprave us from our strategic autonomy is long overdue.

According to the Commission, “many foreign subsidies would be problematic if they were granted by EU Member States and assessed under EU State aid rules.” Therefore, the proposal addresses a longstanding regulatory gap that has put European companies at a competitive disadvantage vis-à-vis certain foreign competitors that have benefited from their own countries’ subsidies.

To put it simply, foreign subsidies will no longer fall outside of the European Commission’s scrutiny!

A new hope for the level playing field

One of the legal breakthroughs of the proposed regulation is to provide both a definition and a delimitation of what will constitute a foreign subsidy that distorts the internal market. So, what is a ‘foreign subsidy’? According to the regulation, “a foreign subsidy occurs when a third country provides a financial contribution that confers a benefit to an undertaking engaging in any economic activity in the EU internal market.”

This foreign subsidy could be considered as distorting the EU internal market when this subsidy “is liable to improve the competitive position of the undertaking in the external market and in doing so, potentially, or actually negatively affecting competition on the market.”

To prevent these distorting foreign subsidies from penetrating the EU internal market, the regulation creates three instruments:

1. The first instrument is triggered by an own initiative from the Commission and allows for the gathering of information from the undertakings that received subsidies from a third country. This gathering of information can also be used to launch market investigations for an entire sector.
2. The second instrument forces a mandatory declaration for those foreign undertakings to notify to the Commission of the subsidies received before submitting a tender for public procurement.
3. The third instrument applies a mandatory notification to the Commission before any merger or acquisition above a certain threshold.

Redressive measures are also being created in order to correct the distortions created by unfair competition. They can consist of granting access to certain infrastructures paid via foreign subsidies, diverting subsidies into several structures, repaying the subsidies, preventing the merger, divesting certain assets, etc.

A phantom menace?

Overall, this initiative by the Commission has been much needed. Nevertheless, some improvements to this regulation would still be warmly welcomed. The primary concern regards non-financial support that is also detrimental and may similarly entail distortive effects within the EU Single Market at the expense of EU companies even though this issue is not addressed in the regulation. This is typically the case of advantages resulting from differences in legislation, for instance on the environmental front, which allow foreign companies to benefit from less costly production facilities.

The Commission always had wide powers to control competition rules, and this regulation is no exception. In particular because it creates a test to balance out the negative effects of a foreign subsidy with its positive effects on the development of the relevant economic activity. This seems to be in contradiction with the EU’s objective to develop innovation and ensure energy security of supply in the EU. The sole elements that should be taken into consideration to counterbalance the negative effect of a foreign subsidy are if the subsidy intends to allow the sale in the EU of new, innovative products which are not yet offered for sale in the EU.

Finally, if we are to believe the White Paper drafted on this specific topic by the Commission in 2020, “there is limited information on the actual amount of foreign subsidies being granted. This is mainly due to a lack of transparency and low compliance with the obligation to notify subsidies.” Considering this, some scepticism is hard to repress when it comes to the enforceability of the regulation both regarding the possibility for the Commission to collect relevant information and the effectiveness of the redressive measures. Is the legislative arsenal created by the regulation sufficient or does it need to be further strengthened? The ball is now in the European Parliament and the Council’s court.