The European Commission’s proposed regulation on foreign subsidies consists of two notification-based tools to investigate concentrations and procurement procedures, and a third tool to investigate all other market situations. In this post, we discuss the most important features of this third tool from an antitrust perspective (click here for our views from a State aid perspective). We also explain how this third tool could lead to legal uncertainty for companies, given its wide scope and the fact that important questions remain unanswered.

In short, the tool aims to empower the Commission to investigate the effect of foreign subsidies on its own volition, and to conduct broader market investigations. It allows for investigations of both concentrations or procurement procedures that do not meet the thresholds for mandatory notification. In addition, it applies to any other market situation that is affected by foreign subsidies. In a nutshell, if the Commission considers that foreign subsidies might distort the internal market, it can investigate and impose redressive measures. 

Addressing distortions in the EU internal market

The Proposal suggests, recalling EU State aid rules, that a distortion on the internal market arises when the foreign subsidy is liable to improve the competitive position of the beneficiary in the internal market. The Commission must also demonstrate that this improvement “actually or potentially negatively affects competition”. We highlight three important questions that are left for the Commission and courts to answer if it becomes legislation.

What conduct warrants an intervention? 

Despite mentioning “distortionary behaviour” due to government subsidies, the Proposal fails to delineate the type of conduct that may be distortive. The concept of “aggressive market conduct”, as contemplated in the White Paper, appears to have been left behind. The Proposal mentions anticompetitive pricing on the back of a foreign subsidy as an example. But:

• how will the Commission benchmark anti-competitive pricing and will it utilise existing antitrust benchmarks in its assessment and use the tool to tackle predatory pricing? In situations of dominance, this is possible under competition rules, but this has not been a priority. 

• Without below-cost measures, where will the line be drawn between benign and problematic pricing? The Commission might take inspiration from established WTO rules on dumping and subsidies but these are not mentioned in the Proposal.

Some things are clear though. A directional safe haven for small and medium-sized businesses will be helpful for them, as the Commission considers that subsidies to them are less likely to cause distortions. The Proposal also provides that foreign subsidies below EUR 5 million over a three-year period are unlikely to be distortive.

Is a causal link between a subsidy and conduct required?

The draft suggests that a “distortion” might result from the subsidy alone. However, in order to have effects on the market, there arguably needs to be a relevant market conduct that the subsidy causes or facilitates. It also appears conceivable that the subsidy alone would be seen to distort the internal markets by changing a company’s ability, for example, to offer commercial terms or to survive a crisis successfully and thereby discouraging non-subsidised actors from participating in markets. 

How should positive and negative effects be balanced?

When assessing a foreign subsidy, the Commission must perform a balancing exercise between the positive effects (e.g. the development of the subsidised economic activity) and the negative effects (e.g. increase of foreign market shares conflicting with EU interests) of the foreign subsidy. So far, so clear. However, while the assessment of negative effects from a consumer welfare perspective is well established, the Proposal casts the net more widely, potentially addressing dependencies and other industrial policy consequences, without establishing a clear methodological framework. The Proposal is also silent on what the positive effects of a foreign subsidy might be.

Investigations 

The Proposal provides the Commission with extensive powers to examine alleged distortive foreign subsidies on its own volition. In case of reasonable suspicion of distortive effects, it can conduct a market investigation into a sector, economic activity or into the use of the subsidy concerned. With sufficient indications of distortive effects due to foreign subsidies, this can lead to an in-depth investigation. Powers include those familiar from competition investigations i.e. information requests and inspections. The Commission proposes to investigate subsidies granted up to ten years before the investigation and once it does so, statutory limitation is interrupted.

Redressive measures 

Potential measures against distortive subsidies are far-reaching. They range from accepting commitments to ordering a divestiture of assets and the reduction of capacity or market presence. Of course, measures are subject to proportionality but where such measures are seen to be the only way to avoid distortions, they can be imposed. This threat may well extract the commitments that the Commission wants to see.