Competition: EU Commission focuses on China with first investigations under Foreign Subsidies Regulation

Rachael JohnsonTuesday 28 May 2024

In April, the European Commission (the ‘Commission’) launched its first investigations under the EU Foreign Subsidies Regulation (the ‘Regulation’), in force since summer 2023. The investigations target companies operating in the bloc that are alleged to have gained an unfair advantage by receiving subsidies from a non-EU government.

The investigations are predominately into public procurement bids involving Chinese companies or their subsidiaries. According to comments made by the EU Commissioner for Competition, Margrethe Vestager, on 9 April, one investigation into a public tender for trains in Bulgaria resulted ‘in a Chinese state-owned company withdrawing its bid.’ Vestager went on to announce that ‘today, we are launching a new inquiry into Chinese suppliers of wind turbines’ in relation to the development of wind parks in five EU Member States.

The Commission argues that in recent years foreign subsidies have distorted the EU’s internal market by giving their recipients an unfair advantage, either to acquire companies or to win public procurement contracts. It says the Regulation was introduced to address these imbalances and aims to create a level playing field. It also closes a regulatory gap: before it was introduced, subsidies from non-EU governments were not checked while those granted by EU Member States were, and continue to be, closely scrutinised under the bloc’s state aid rules.

Alexandra Rogers, Head of Brussels at Norton Rose Fulbright, says the Regulation’s ‘objective is valid and arguably needed.’ She says that some companies operating outside the EU benefit from subsidies that can create surplus capacity and enable them to sell their goods more easily into the bloc. ‘That can create a distortion in the competitive conditions in the EU and cause harm to EU companies,’ she says, ‘because it’s challenging to compete effectively against any competitor who’s heavily subsidised.’ That’s particularly the case when EU companies can’t benefit from equivalent assistance from their government due to the bloc’s strict state aid rules.

It is too easy for everyone to focus on China as a target. That would be wrong

Peter Alexiadis
Deputy Editor, IBA Business Law International Journal

Peter Alexiadis, Deputy Editor of the IBA’s Business Law International journal and a research fellow at the Center on Regulation in Europe, agrees. ‘In light of the disruptive economic events that have struck the global economy over the past twenty-five years,’ he says, ‘disequilibrium in market entry conditions became something that needed to be addressed.’

Under the Regulation, the Commission can investigate financial contributions granted by non-EU governments to companies active in the EU. It will determine whether these contributions amount to distortive subsidies and act accordingly. If the Commission determines that a distortive subsidy exists, it says it’ll balance the negative and positive effects of this subsidy when deciding on a course of action.

There are two instances in which the Regulation requires a notification to be made to the Commission. One is in the case of concentrations where the acquired company, one of the merging parties, or the joint venture generates an EU turnover of at least €500m and the parties received financial contributions from non-EU governments of more than €50m in the previous three years.

The other relates to bids for public procurement contracts of an estimated value of at least €250m where the bid includes a foreign financial contribution of at least €4m per third country in the previous three years. The Regulation also enables the Commission to start its own review of ‘all other market situations’.

Three of the Commission’s current investigations have followed on from notifications by parties bidding for a public procurement contract. In each case the Commission felt the matter warranted further investigation.

The Regulation is neutral because it applies to all deals or bids that meet the relevant financial thresholds, regardless of sector, country or likelihood of being in receipt of distortive subsidies. As such it captures many European multinationals, which are now required to comply with both this Regulation and EU state aid rules.

To comply with the Regulation, companies are required to collect data relating to all the financial contributions they’ve received from non-EU governments. This data, to date, hasn’t in many cases been held centrally. As such, bringing it together will involve significant work across the business, involving a range of different departments beyond the legal team. This is particularly challenging for large multinational organisations or those with subsidiaries or joint ventures. For M&A deals, the notification must cover three years prior to the date of signing, which means the data collection process will need to be re-run regularly. The scope of what constitutes a financial contribution is also broad, which may cause confusion.

According to Paul Johnson, a partner at Baker McKenzie in Brussels, the notification process ‘makes doing business potentially more difficult or more uncertain.’ However, he says that the mindset companies bring to the process can make a substantial difference. For example, some companies recognise that in the context of an M&A auction process, being on top of the Regulation’s requirements could give them a competitive edge.

Rogers believes the Commission would probably argue that its focus is on ‘cases where there’s credible evidence creating solid grounds for suspicion and where the impact on the market caused by potential distortion would be the most significant’, which in their view makes pursuing those cases worthwhile.

In addition, she says it wouldn’t be surprising to see more investigations into companies based ‘in countries where there are fewer or no state aid controls and possibly a tradition of the state actively giving big subsidies to their home industries.’ She says many of these countries may also have trade restriction measures in place that limit free competition for foreign companies in their home territories, making it difficult for EU companies to compete both at home and abroad. Johnson says that jurisdictions that don’t already have such trade restrictions in place may now consider implementing them in retaliation against the Regulation.

Johnson says that ‘in practice, what we’ve seen to date […] is a real focus on China.’ For him, the investigations centre on areas of strategic importance to China where it may have invested heavily because it recognises the potential for future economic growth, or where there are environmental benefits. He says China may compare what it’s doing with the EU and the US investing in strategically important areas such as semi-conductors.

According to Alexiadis, ‘it is too easy for everyone to focus on China as a target. That would be wrong.’ He says subsidies from the US and the Middle East are just as problematic as those granted by the Chinese government, albeit they’re perhaps more transparent than their Chinese counterparts. Ultimately, he says, the European courts will decide whether the Commission’s interventions are legal.

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