This is a guest post is from Victor Crochet and Marcus Gustafsson, trade lawyers with Van Bael & Bellis
Cross-border subsidies have become a growing source of concern as states increasingly ‘globalize’ the use of subsidies for their commercial or wider strategic advantage. On 17 June 2020, the European Commission (Commission) made its intention to rein in China’s Going Global Strategy clear when, as previously discussed on this blog, it published a White Paper aimed at levelling the playing field in the European Union internal market as regards ‘foreign subsidies’ (i.e. a financial contribution by a government or any public body of a non-EU country or a private body entrusted and directed by a non-EU country government, which confers a benefit to a recipient and is limited to an industry, individual company or group of companies). The Commission notes that ‘foreign subsidies appear to have facilitated the acquisition of EU undertakings, influenced other investment decisions or have distorted the market behaviour of their beneficiaries’. It also adds that, ‘[m]any foreign subsidies would be problematic if they were granted by EU Member States and assessed under EU State aid. EU State aid rules however apply only to public support granted by EU Member States. In contrast, subsidies granted by non-EU authorities fall outside EU State aid control.’ To remedy this imbalance, the Commission proposes three ‘Modules’ to tackle foreign subsidies. Module 1 envisages a general instrument to capture distortive effects caused from foreign subsidies. Module 2 focuses on distortions caused by foreign subsidies facilitating the acquisition of EU companies, while Module 3 concentrates on harmful effects caused from foreign subsidies on EU public procurement procedures. The scope of these Modules would be very broad as they would tackle subsidies benefitting the production of goods and the provision of services as well as subsidies granted to entities established within the EU and abroad.
In this regard, we identify two main concerns with the WTO conformity of these modules.
First, with regard to foreign production subsidies, the Modules may run afoul of Article 32.1 of the SCM Agreement, which prohibit WTO Members from taking any specific action against a subsidy of another Member not provided for under the SCM Agreement and the GATT. The interesting question in this respect is whether the SCM Agreement covers a situation in which a subsidy is granted by a foreign government to a production entity located in the EU. The White Paper appears to suggest that the SCM Agreement would not apply in this situation since no goods are crossing a border. In this regard, the panel in Canada – Aircraft suggested that the SCM Agreement only regulate subsidies that ‘distort or may distort international trade’ (at para. 9.119). However, this would seem to add a requirement to Article 1.1 of the SCM Agreement that, as compared to Article 1.1 of the SPS Agreement, was not included in the text. Furthermore, the Appellate Body in US – Offset Act (Byrd Amendment), explained that the SCM Agreement regulates subsidization of production, and not only the importation of subsidized products. This was confirmed ‘by the contextual consideration that the SCM Agreement authorizes multilaterally-sanctioned countermeasures “against” a subsidy’ (at para. 251). In this sense, Article 1.1 of the SCM Agreement does not impose any territorial limitation on the location of the recipient of the financial contribution, or the benefit. In other words, the recipient does not have to be in the territory of the subsidizing Member for a measure to constitute a subsidy under the SCM Agreement. Therefore, insofar as these Modules would allow the EU to take unilateral action against production subsidies, it seems that they may violate Article 32.1 of the SCM Agreement.
Second, with regard to foreign subsidies granted for the provision of services and for the participation in government procurement bids, the main question is whether these measures could lead to a national treatment discrimination under the GATS or the GPA. Under the GATS, since the proposed Modules target subsidies granted by foreign governments, they are likely to constitute a de facto national treatment discrimination, as foreign-owned or foreign companies will presumably be more affected than EU companies. The Modules may also violate the EU’s market access commitments under the GATS. In response, the EU could claim, under Article XIV(c) of the GATS, that the proposed measures are justified because they are necessary to secure compliance with EU competition law, state aid law and the functioning of the internal market under the Treaty of the Functioning of the EU (TFEU). Furthermore, they would not be a means of arbitrary or unjustifiable discrimination as the EU has in place similar rules for subsidies granted by its own Member States. Under the GPA, there are no general exceptions to a violation of the national treatment obligations. However, such an exception could possibly be read into the GPA, similar to the “legitimate regulatory distinction” test that has been read into Article 2.1 of the TBT.
At this stage, we have two principal concerns with this type of defence. First, there appears to be possible discrepancies between the EU’s State Aid regime and the foreign subsidies Modules. For example, the block exemptions, under which certain forms of State Aid are allowed, are not mentioned in the White Paper. Similarly, the net cast by the Modules would appear to catch more forms of subsidies than that of the State Aid regime (for example, by including actions by private bodies, or potential raw material distortions). Second, there would be differences in the administration of the State Aid regime and the foreign subsidies regime, which could render the latter much more burdensome to foreign companies. In particular, the State Aid regime is mostly ex ante and focuses on the Member State government, which has to notify and obtain approval from the Commission before any state aid may be granted. Illegal state aid must be repaid to the subsidising government. In contrast, the foreign subsidy Modules would in many instances entail a two-stage ex post investigation and will focus on the recipient of the subsidy. Similar to countervailing duty investigations, this could impose a significant burden on recipient companies. Furthermore, because it may be difficult ‘to establish that the foreign subsidy has been actually and irreversibly paid back’, the White Paper foresees that structural or behavioural remedies may be necessary.
On this basis, we have doubts that these Modules, if adopted as currently proposed, would be in line with WTO rules. Although the White Paper raises many pertinent questions concerning how the rules on WTO subsidies may have to be reformed, and how the EU can ensure a level playing field in its own market in light of its strict State Aid regime, the significant extra-territorial effects of the envisaged measures raise legitimate concerns and are likely to spark tit-for-tat retaliation from other WTO Members.
