The EU foreign subsidies regulation from the trade perspective

Introduction

The EU Foreign Subsidies Regulation (hereafter “FSR”) entered into force on 12^th January 2023 and its provisions will generally apply from 12^th July 2023 (please see our News Alerts concerning the completion of the legislative procedure and the draft Implementing Regulation here and here and for the public procurement aspects here).

Trade Instruments do not Adequately Address Foreign Subsidies

The focus of this News Alert is the interaction between existing trade instruments and the FSR.

Prior to adoption of the FSR, the EU had at its disposal the WTO Agreement on Subsidies and Countervailing Measures (hereafter “SCM Agreement”), trade defence instruments (i.e., anti-dumping and anti-subsidy investigations) and specific provisions in Free Trade Agreements (“FTAs”) to tackle distortions caused by third countries’ trade actions. The Commission does not, however, consider that the available trade instruments adequately address foreign subsidies. For example:

• The EU trade defence instruments, notably the EU’s anti-subsidy rules, only apply to the import of subsidised goods into the Union but not when foreign subsidies take the form of services, investments or other financial flows in relation to the establishment and operation of undertakings in the EU. The scope of the SCM Agreement is also limited to trade in goods.
• As regards FTAs, there are significant differences on the provisions on subsidies; the majority of the agreements in place simply provide for consultations in case of distortive subsidies, and only some of them foresee specific provisions prohibiting subsidies that are particularly detrimental.

Although the EU has reaffirmed its commitment to modernising WTO rules on industrial subsidies to enhance the proper functioning of the SCM Agreement, and although the WTO General Agreement on Trade in Services (hereafter “GATS”) contains a mandate to establish rules for subsidies relating to trade in services, this process has not yet been initiated by WTO Members.

The Commission therefore also justifies the need for the FSR with the “regulatory” gap left by available trade instruments. The FSR will thus act as a complementary tool to the established EU trade rules to improve the multilateral legal framework addressing distortive subsidies.

Closer Look at Trade Aspects of the FSR

The FSR, to a certain extent, details the envisaged relationship between trade instruments and the FSR.

The FSR, for example, provides for the compliance of the implementation of the FSR with Union law, the WTO Agreement and other commitments made under other EU and Member State trade and investment agreements. This idea is underlined in Art. 44 para. 9 FSR, which determines that the FSR does not prevent the Union from exercising its rights or fulfilling its obligations under international (trade) agreements.

In particular, no action can be taken under the FSR which would amount to a specific action against a subsidy as defined in the SCM Agreement and granted by a third country which is a member of the WTO. The FSR thus provides for precedence of the provisions of the SCM Agreement. Nonetheless, the word “specific” must be highlighted, as the SCM Agreement is only applicable to specific subsidies, i.e., subsidies specific to an enterprise or industry or group of enterprises or industries. The manner in which the Commission aims to resolve uncertainty in cases of conflict between the FSR and the SCM Agreement, particularly if the presence of a specific subsidy is uncertain, remains to be seen.

The draft Implementing Regulation on practical and procedural aspects of the FSR published by the Commission on 6 February 2023 and under consultation until 6 March (please see our News Alert on the Implementing Regulation for more information) fails to further examine the relationship between the application of the FSR and available trade instruments. In particular, there is no mention of possible derogations as regards comprehensive FTAs with substantive provisions on distortive subsidies.

Lastly, not explicitly mentioned in the FSR but inherent to the interconnection between the FSR and trade rules, is the fact that the Commission, as the competent authority to enforce the FSR, will look to make use of the experience gained in EU trade remedy investigations, for example when investigating sources available to examine the subsidy.

What Companies Need to Do Next

Companies should now focus on internally identifying the financial contributions they have received from non-EU countries and setting up internal reporting processes.

The Commission’s power to start a review on its own initiative (ex officio) should be taken into consideration by those companies operating in higher-risk / specific sectors or that have received financial contributions from certain non-EU countries.

Companies that fail to comply with notification obligations will be liable for a fine of up to 10% of their annual turnover.