This is a guest post from Csongor Nagy, Professor of Law at the University of Szeged and CICL visiting fellow at the University of Michigan, based on the following paper:
Csongor István Nagy, The EU’s New Regime on Foreign Subsidies: Has the Time Come for a Paradigm-Shift? Journal of World Trade, vol. 57, no. 6 (2023), pp. 889–908.
Available at SSRN: https://ssrn.com/abstract=4609259
In December 2022, the EU introduced a comprehensive regulatory regime for foreign subsidies. The regime’s implementing regulation was published in July 2023. In this paper I offer an analysis of this regime: the regulatory gap the EU regulation reacts to and the new regime’s compliance with international disciplines.
Hybrid beast of EU competition law
The EU Regulation is the first attempt to address foreign subsidies in a comprehensive manner. It identifies the major gaps in the international disciplines and EU law mechanisms and aims to ensure a level playing field in the EU internal market by neutralizing unfair trade practices. The Regulation does not deal with transnational subsidies, where the granting authority, the recipient company and the economic impact are in different states. It applies only if the recipient is “engaging in an economic activity in the internal market.” This is because the European Commission interprets EU (and international) anti-subsidy rules to apply to transnational subsidies (presumably because they are attributable to the state where the recipient enterprise is located). The Regulation applies to services, investments, or other financial flows in relation to the establishment and operation of undertakings in the EU.
The regime introduced by the Regulation features a mixture of the regulatory patterns of EU competition law and makes clear that it has to be applied and interpreted congruently with the EU legislation it draws on. The substantive provisions are, in essence, a WTO-law-translation of EU state aid law. Articles 3-4 of the Regulation use WTO terminology to reproduce Article 107(1) TFEU, which contains the general prohibition of competition-distortive state aids. Article 6 of the Regulation contains a balancing test resembling the exceptions embedded in Article 107(1) TFEU. The procedural provisions, including the rules on sanctions, however, do not coincide with EU state aid procedure but are an eclectic blend of various EU competition law rules (transplanted from stat aid, antitrust and merger control procedure). This divergence is inevitable, given that EU state aid procedure is conducted against a member state, while the procedure under the Regulation, for obvious reasons of sovereign immunity, is conducted again the recipient undertaking.
Compliance with WTO law
The Regulation is a novel and unprecedented attempt to address foreign subsidies and may call for the interpretation of various aspects of WTO law, which so far have simply not been tested in practice.
There are two important WTO law restraints that need to be considered in respect to product subsidies. First, Article VI GATT permits countervailing duties only up-to the amount of the subsidy. Absent the authorization embedded in Article VI GATT, members would not be allowed to adopt countervailing duties, as these may go counter to their tariff-bindings and the Most-Favored Nation (MFN) principle. Second, Article 32.1 of the SCM Agreement rules out unilateral measures against subsidies beyond the ones allowed by the Agreement itself. This provision might, arguably, prevent members from adopting unilateral measures in response to extraterritorial subsidies (unless they can attribute the subsidy, on the basis of international law, to the state where the recipient is located), if the meaning of “subsidy” in Article 32.1 is not equated with the definition in Article 1. According to this line of interpretation, Article 1 defines the subsidies that may be potentially prohibited under the SCM Agreement, implying that subsidies not coming under this definition qualify as permitted subsidies. This is corroborated by the reference of Article 32.1 to the SCM Agreement as an interpretation of the GATT (“in accordance with the provisions of GATT 1994, as interpreted by this Agreement.”). This suggests that the SCM Agreement is an authoritative and binding interpretation of Article VI GATT and, hence, subsidies not covered by the Agreement are not covered by Article VI GATT either. On the other hand, the exhaustive nature of the SCM Agreement is falsified by the fact that, initially, Article 8 of the SCM Agreement also set out non-actionable subsidies. Although this category was in force only until 31 December 1999 and was not extended, its existence questions that member states wanted to permit extraterritorial subsidies by means of a narrow definition of “subsidy” and not by a specific rule, if they really wanted to exempt them. The language and structure of the SCM Agreement suggests that extraterritorial subsidies may have been left out because they did not really exist (or at least they were not widespread) at the time and the drafters’ imagination did not extend to them. This is reinforced by footnote 56 attached to Article 32.1 of the SCM Agreement, which confirms the intention that the Agreement was not meant to be the exhaustive regulation of countervailing measures adopted in response to subsidies and Article 32.1 of the SCM “is not intended to preclude action under other relevant provisions of GATT 1994, where appropriate.”
Taking the above into account, it seems to be more plausible that, by adopting the SCM Agreement, member states did not give up the authorization conferred on them by Article VI, which applies to subsidized products at large, irrespective of whether the source is a domestic or an extraterritorial subsidy. It would be contradictory to argue that Article 32.1 of the SCM Agreement uses the term “subsidy” in a wider sense than Article 1, which sets out the very scope of the Agreement. If the scope of the Agreement does not extend to a subsidy, none of its provisions should apply to it, including Article 32.1.
WTO law contains no specific disciplines on service subsidies, but they have to comply with the general principles of WTO law. The most important question is whether these countervailing measures may go counter to the MFN principle and the principle of National Treatment (NT), and, if they do, whether they can be exonerated under the general exceptions. The EU Regulation does not distinguish on the basis of the recipient undertaking’s identity, hence, it contains no facial discrimination. Nonetheless, it may have an asymmetric impact, on the one hand, between the undertakings of different countries (MFN) and, on the other, between EU and non-EU undertakings (NT).
The MFN principle requires that the products, services and service suppliers of a member have to be accorded “treatment no less favorable” than accorded to the “like” products, services and service suppliers of another member. Although the Regulation applies the same rules to all members, it may have an asymmetric impact, given that certain members may be more prone to subsidization than others. Subsidization is, however, neither inherently linked to national origin, nor an inherent feature. Subsidized and not subsidized foreign services and service providers are not in the same situation and the regulatory distinction turns on a characteristic that is under the undertaking’s control. The Regulation on Foreign Subsidies reacts to the conduct and not the status of the undertaking. Recipients are free not to receive a subsidy. The regulatory distinction used by the Regulation would be a case of first impression under the MFN principle, but, as expanded below, the decisional practice developed under the NT principle may provide appropriate guidance.
It also has to be noted that the Regulation is anticipated to lift the very asymmetric impact that may be used as an argument against it. The Regulation’s prohibition is expected to effectively reduce foreign subsidies and, thereby, to eliminate the differences between subsidizing and non-subsidizing countries.
National treatment requires that foreign products, services and service suppliers be afforded “treatment no less favorable” than accorded to domestic products, services and service suppliers. Although the Regulation equally applies to domestic and foreign entities, it may have an asymmetric impact, given that foreign subsidies may usually be granted to foreign or foreign-owned undertakings. It is an important difference to the MFN analysis that foreign subsidies are subject to the same treatment, while intra-EU and extra-EU subsidies are subject to separate regimes. Accordingly, the relevant question is whether the treatment afforded by the Regulation to foreign subsidies is “less favorable” than the treatment afforded by EU state aid law to intra-EU subsidies.
In the decisional practice of the WTO Dispute Settlement Body (DSB), asymmetric impact does not equal discrimination and, hence, in itself, does not violate the requirement of NT. The complainant needs to prove that the distinction is based on national origin and asymmetric impact, in itself, does not corroborate that. For instance, the DSB’s decision in Dominican Republic – Measures Affecting the Importation and Internal Sale of Cigarettes suggests that asymmetric impact, at least in itself, may not be sufficient to establish discrimination: it needs to accrue from national origin. Furthermore, legitimate regulatory distinctions in themselves may not violate the NT principle. As to both of these arguments it should be decisive that the EU has a very comprehensive and rigorous state aid regime in place and the treatment of foreign subsidies is modelled after this regime. In fact, the Regulation abolished an inverse discrimination: EU member states have been prohibited from granting subsidies restrictive of competition in the internal market, while foreign states have not.
As demonstrated above, intra-EU and extra-EU subsidies are governed by the same substantive principles, while the differences in terms of procedure and sanctions are warranted by legitimate regulatory considerations that emerge from objective differences between the two categories. The defendant of the EU state aid procedure is the granting state, while the Regulation on Foreign Subsidies, for reasons of sovereign immunity, applies to the recipient undertaking. Hence, the Regulation draws heavily on the regulatory patterns of EU antitrust and merger procedure. The equal treatment of intra-EU and extra-EU state subsidies is reinforced by the provision that both the substantive and procedural rules of the Regulation have to be applied and interpreted congruently with the EU legislation it draws on.
The question whether the differences between EU state aid and foreign subsidies procedure entail asymmetric burdens can be answered only by way of a comprehensive assessment. The Regulation involves a lighter administrative burden than EU state aid law, although this lighter burden is placed on the recipient undertaking and not on the grating state. Furthermore, EU state aid law is based on a notification duty: all state aids coming under Article 107 TFEU are notifiable to the Commission in an ex ante system. The Regulation sets up no general notification duty, except for mergers and public tenders exceeding a certain threshold, and in cases where there is a notification duty, the ex ante procedure operates under shorter and stricter deadlines. The Regulation is more favorable to recipients in terms of procedural rights and remedies. The administrative burden of being the defendant in the investigation comes with the benefit of being the master of the case and vested with the right of defense (contrary to the EU state aid procedure, where the recipient is only an interested third party). In the same vein, EU state aid law’s repayment sanction is non-negotiable, while the Regulation enables the undertaking to avoid repayment, if the competition problem can be tackled by a redressive measure and a commitment.
The Regulation envisages extending to foreign subsidies the rules that applied solely to member state subsidies. This circumstance justifies a reference to the General Exceptions. Article XX(d) GATT and Article XIV(c) GATS exempt measures aimed to secure compliance with internal regulations. EU state aid law may be regarded as such and there is a general presumption for the WTO-compliance of domestic regulation. As EU state aid law applies to intra-EU subsidies and the Regulation extends this regime mutatis mutandis to extra-EU ones, no arbitrary or unjustifiable discrimination or disguised restriction on trade may emerge.
It has to be noted that while the Regulation levels out the status of EU member state and foreign subsidies, no specific restrictions apply to the aids provided by the EU itself, although a major part of the European budget is made up of agricultural subsidies and various cohesion, recovery, infrastructure and R&D funds. This is, however, an aspect that can be judged only on the basis of the EU’s funding practice. Nonetheless, as a general principle, EU funding programs do not discriminate against foreign and foreign-owned undertakings, which can participate in these programs as long as they can contribute to the European development aims.
