On May 5, 2021, the European Commission published a proposal for an EU regulation to impose controls on foreign subsidies, launching an 8-week public consultation. The new rules would allow the Commission to investigate and remedy the potentially distortive effects of foreign subsidies in the EU internal market.

The proposal targets the negative impact on the EU internal market in three areas where distortions are caused by foreign subsidies granted to an undertaking engaging in an economic activity in the internal market, either generally, or in the specific areas of acquisitions and public procurement.

Although the Commission openly acknowledges that there is still a general lack of reliable data on foreign subsidies, it is clearly pointing the finger at non-EU countries such as China, Russia and the sovereign investment funds of the Middle East and Asia. It says that there is a growing number of instances in which foreign subsidies seem to have facilitated the acquisition of EU undertakings, influenced investment decisions, distorted trade in services or otherwise influenced the behavior of the subsidies’ beneficiaries in the EU market, to the detriment of fair competition.

The Commission’s power to investigate will be based on three tools matching these three areas. The first tool gives the Commission a far-reaching general power to investigate on its own initiative all kinds of market situations, including greenfield site investments and concentrations or public procurements below the notification thresholds, without any caps on the amount of subsidies, ex ante or ex post. This will require foreign investors to seek informal guidance from the Commission, in the absence of a formal notification procedure, creating serious legal uncertainty for their planned investments. The two specific tools for concentrations and public procurement require notification with strictly defined thresholds and timetables for approval prior to any implementation.

Before imposing any remedies or accepting commitments proposed by undertakings, the Commission must carry out a balancing test (what was perhaps revealingly called the EU interest test in its 2020 White Paper). This will allow foreign subsidization even if there is some distortion of the internal market.

The balancing test introduces the complexities of politics into what is supposed to be a legal regime to ensure a level playing field in the internal market. It opens the door to legal uncertainties with negative commercial implications for business decisions. The fact that it is borrowed from the EU interest test in EU trade defense instruments, such as the EU Anti-dumping Regulation, suggests that it may be manipulated to protect EU industries whether or not the economic realities justify that intervention.

The Commission justifies the new rules on the grounds that EU state aid law does not apply to subsidies from non-EU states to their businesses established or operating in the EU.

The Commission also highlights the shortcomings of the current WTO rules on subsidies and EU trade defense instruments. These do not cover foreign subsidies relating to services, investment, acquisitions or public procurement bids but are limited to trade in goods and services. It makes it clear that the regulation is intended as a stepping stone to a multilateral solution for the control of foreign subsidies.

One of the first comments after the proposal was published came from the Chinese ambassador to the EU, who expressed his concerns and disappointment. The proposal can be seen as one of a series of measures that aim to counter the global expansion of Chinese-owned businesses.

Ultimately, any new foreign subsidies regulation will have to be compatible with relevant WTO disciplines. This is likely to prompt disputes, within and beyond the WTO forum, and lead to threats of, or actual, retaliation. This will also certainly strengthen the debate as to whether foreign subsidies rules are required at the international level to avoid distortions of global trade in goods, services and capital investments. The question arises, therefore, whether the new proposal is no more than an invitation to other WTO members to negotiate a multilateral agreement on foreign subsidies.

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