Announced as EU instruments addressing internal market distortions, the tools that the White Paper introduced are likely to raise trade experts’ eyebrows. Those with a ‘trade eye’ can see protectionist instruments that risk running foul of international trade rules. There also appear to be reciprocity-risks for the very EU businesses the instruments are designed to protect.

Calls for instruments of the kind canvassed in the White Paper came after China’s launch of the Belt and Road initiative, and a series of Chinese service mandates, acquisitions and investments across Europe. The White Paper proposals come at an exceptional moment in history, with unprecedented (in scale and scope) subsidy policies in the wake of the Covid-19 pandemic. Such tools, however, must be non-discriminatory (under principles of EU law). They will also apply to other global powers where the State is rich and keen to take the driving seat in the economy.

Meanwhile, reform of World Trade Organisation (WTO) rules on subsidies is very much on the agenda. Only months ago the United States, the EU and Japan issued a Trilateral Statement seeking to close several other loopholes in the WTO’s rules on subsidies, especially in relation to state owned enterprises. Whether there is also broader support for regulating ‘foreign subsidies’, and whether in the longer term this can lead to new international rules remains to be seen. For the moment, the EU clearly thinks the problem sufficiently urgent that it justifies novel unilateral measures.

Trade elements in the White Paper

The White Paper employs the term subsidy, a well-settled concept in trade and WTO law. The core notions and most of the substance come from trade law, but there are also new elements. That combination highlights a regulatory gap:

• the EU is concerned with essentially the same practice of public foreign subsidisation as that which the WTO’s Agreement on subsidies and countervailing measures (SCM Agreement) was designed to discipline; but
• the EU is not satisfied with the scope of subsidies disciplined in the SCM Agreement, as implemented in existing EU trade instruments.

The White Paper makes clear that the proposed instruments will be applied using the experience gained in EU trade remedy investigations (anti-subsidy, countervailing measures). This suggests that investigations will benefit from a broad margin of discretion, and greater tolerance by the EU judicature, than in antitrust or State aid investigations. Having regard to the potential remedies envisaged in the proposals, this dimension may well give rise to pointed questions concerning the rights of defence.

Drawing on EU trade remedy experience also implies the potential use of investigative techniques and sources of evidence that differ from the antitrust or State aid settings. Trade remedy investigations, notably involving China and other regular respondents, have increasingly involved the application of ‘facts available’ to investigated governments and undertakings. This means an authority is entitled to disregard any evidence submitted by the undertaking, and instead use in its findings similar data provided by other participants in the investigation, often complainants. This ‘facts available’ technique often leads to more effective protection for EU competing businesses, at the expense of investigated firms.

A relevant example of such technique is the EU anti-subsidy investigation concerning certain pneumatic tyres used for buses and lorries originating from China, concluded in November 2018. In that investigation, the Commission applied facts available to information on preferential lending, inputs and export credit insurance with respect to the Government of China and certain Chinese exporters which were cooperating parties. This technique was reflected in the final findings on subsidisation, resulting in high subsidy rates. In that investigation the Commission used - also for the purposes of facts available - a Commission staff working document on distortions in China for the purpose of trade remedy investigations. Such country reports, which are meant to be updated regularly, could become relevant for the proposed tools.

Are the proposed tools consistent with trade/WTO law?

The WTO’s SCM Agreement carefully limits WTO members’ ability to discipline subsidisation practices. More specifically, the SCM Agreement requires members to not take any specific action/measure against subsidies – other than as provided in the WTO agreements – and to maintain their laws and regulations so as they stay consistent with the WTO agreements. The question that arises is whether the tools proposed in the White Paper meet these standards? It may well be that only future EU litigation and WTO disputes could provide legal certainty on this issue.

The proposed EU instruments may well be questioned on the basis of WTO rules (see a related article in our TradeLinks blog). There are also other potential trade law issues, in WTO law on services and procurement, or with regard to existing bilateral trade agreements. Potential issues may concern equal treatment of third states (most-favoured nation treatment); equal treatment of investors from third states; equal treatment of undertakings established in the EU (national treatment/non-discrimination). The tools may also lead to barriers for foreign-originating goods and promotion of competing EU goods (e.g. in public procurement).

Could the proposed tools backfire on EU companies?

When considering the White Paper’s intended medium-to-long-term effects, third countries may be concerned with improved competitiveness of EU-controlled companies, their investments, EU products and services in winning service mandates, acquisitions and public tenders. Third states may see the proposed tools as a potential ‘economic boost’ to EU businesses in the single market, and also when EU businesses render services and investments abroad.

If this proves right, third countries will not simply consider retaliating (e.g. raise tariffs, targeted service barriers) against the EU to compensate for their eventual losses in trade in services and investments. Third countries may design similar advanced protection tools in their own jurisdictions, targeting specifically EU companies. This could become a regulatory race ‘to the bottom’ with spill-over effects world-wide. The issue is that EU companies increasingly benefit from various Member States’ authorised aid measures, as well as diversified EU-wide globalisation adjustment, economic recovery, R&D, digitalisation and other assistance. They could then become targets of third country measures aimed at disciplining the effects of EU’s ‘foreign subsidies’ in third countries’ markets.

Should you be interested in a more detailed trade law analysis, please refer to our TradeLinks blog.