EU’s new anti-foreign-subsidies tool likely to invoke new wave of protectionism
July 13, 2020
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_ Yuri Kofner, research assistant, International Institute for Applied Systems Analysis (IIASA); non-residential research fellow, Skolkovo Institute for Emerging Market Studies; editor-in-chief analytical media “Eurasian Studies”. Munich, 13 July 2020.*In June 2020, the European Commission presented a white paper on how to effectively prevent and counteract potential unfair competitive advantages, which extra-EU companies might have on the European market by receiving state subsidies from foreign governments. This move came largely as a reaction to fears over Chinese state-aided companies, but it could also affect exporters and investors from other regions. And they, in turn, are likely to react with “an eye for an eye”.
The EU’s new instrument (hammer)The European Commission’s directorate for competition ensures that public support granted by EU member states does not lead to competitive distortions in the union’s common market. However, so far there is no international or European instrument sufficiently addressing unfair advantages caused by extra-EU state aid. For this reason, the commission proposed three new instruments to complement existing tools and fill the regulatory gap.The new instruments to counteract market distortions caused by foreign subsidies cover three specific areas - takeovers, public tenders and more generally when European companies are threatened by price dumping in the EU:Module 1. A screening mechanism for foreign subsidies facilitating the acquisition of EU companies, prescribes a compulsory notification for subsidised acquisitions triggered by a threshold EUR 200 thousand; a preliminary review; if needed – an in-depth investigation if a market distortion is suspected; and finally - should the supervisory authority find that the acquisition is facilitated by the foreign subsidy and distorts the common market, it could either accept commitments by the notifying party that effectively remedy the distortion or, as a last resort, it could prohibit the acquisition.Module 2. A screening tool for foreign subsidies in public procurement procedures, includes a compulsory notification mechanism of potential foreign subsidies for bidders; then a preliminary review; an in-depth review where necessary to establish the existence of a foreign subsidy with a decision on a potential distortion of the procurement procedure; and finally redressive measures: exclusion from the procurement procedure and possibly even from future procedures.Module 3. A general instrument to capture distortive effects of foreign subsidies, also includes a preliminary review; an in-depth investigation if a market distortion is suspected; and, if a market distortion is confirmed, then measures such as redressive payments and structural or behavioural remedies can be applied. However, the supervisory body could also consider that the subsidised activity or investment has a positive impact, which outweighs the distortion, and thus not pursue the investigation further. This would be the so-called “EU Interest Test”.Jürgen Matthes, head, Research Unit International Economics and Economic Outlook, IW Cologne, supports the commission’s initiative, also for the following reasons:
*Disclaimer: Views expressed in the article belong solely to the author and not necessarily represent that of the author's employers or organizations.
Box 1. Foreign subsidies According to the white paper, a foreign subsidy is any financial contribution by a government or public body of a non-EU State to an undertaking in the EU: · An interest-free loan · Unlimited guarantees · Capital injections · Preferential tax treatment · Tax credits · Grants |
- In theory, the rules should apply equally to subsidies granted by all non-EU countries and ought not to be discriminatory towards any specific country
- Contrary to the previous proposal, the new proposal is not only targeting state-owned companies. It generally focuses on all subsidies from third countries with which, in addition to state-owned companies, also private companies can undercut competition in the EU.
- The proposal enables complaints from market participants themselves. This will enable the commission to have a more detailed understanding about the market situation.
- A low subsidy threshold of EUR 200 thousand is planned over three years, so that small and medium-sized companies can also be protected.
*Disclaimer: Views expressed in the article belong solely to the author and not necessarily represent that of the author's employers or organizations.
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